The Kenyan law provides for a simplified tax regime on residential rental income ranging from Kenya Shillings Two Hundred and Eighty-Eight Thousand (Kshs. 288,000.00) to Kenya Shillings Fifteen Million (Kshs. 15,000,000.00) per annum. Under this regime, tax is calculated as 10% on gross rent received and is a final tax.
However, the simplified tax regime on rental income does not apply to:
- Non-resident taxpayers;
- Landlords earning more than Kenya Shillings Fifteen (Kshs. 15,000,000.00) per annum in residential rental income;
- Landlords earning commercial rent income. Commercial property is“Land or buildings not occupied or not capable of being occupied as residential premises”; and
- Taxpayers who qualify for the simplified tax regime on residential rental income but wish to remain in other tax regimes on rental income upon writing to the Kenya Revenue Authority (KRA).
Filing of rental tax returns and payments
Landlords that do not fall within the simplified tax regime are required to account for tax on rental income received and are allowed to take a deduction of all the expenses that were incurred in generating the rental income. The taxable rental income is then taxed at the graduated rates for individuals or at 30% and 37.5% for resident companies and non-resident companies respectively.
The tax on rental income is to be paid in advance in quarterly instalments. The instalment tax is calculated as the lesser of:
- Prior year basis– Prior year tax payments are multiplied by 110%
- Current Year basis– By estimating the current year profit and tax payable thereon.
The instalment taxes are due for payment on the 20th day of the 4th, 6th, 9th and 12th months after the year end.
The balance of tax is payable by the end of the 4th month after the year end. For individuals and December year end companies, the balance of tax is due for payment by 30th April of the following year.
Landlords are required to account for tax on rental income in the annual return alongside other sources of income by 30th day of June of the following year for individuals and December year end companies. Other companies are required to file the annual return by the end of the 6th month after their year-end.
The penalty for late filing of the annual return is the higher of 5% of the tax due or Kenya Shillings Two Thousand (Kshs. 2,000.00) for individuals or Kenya Shillings Twenty Thousand (Kshs. 20,000.00) for company.
The penalty for late payment of tax is 5% of the tax due and accrues interest at 1% per month outstanding.
Any withholding tax certificates received on rent payments can be utilized as tax credits while filing the annual return.
There are other taxes that must be accounted for alongside rental taxes. These include;
Value Added Tax
Landlords who earn commercial rent that exceeds Kenya Shillings Five Million (Kshs. 5,000,000.00) per annum are required to register with the KRA for Value Added Tax (VAT) obligation.
VAT is chargeable on commercial rent by the registered landlords. VAT is also chargeable on short stays at serviced and furnished rentals.
The landlord will be required to file a monthly return and make payment by the 20th day of the subsequent month.
The penalty for late filing of the VAT return is higher of 5% of the tax due or Kenya Shillings Ten Thousand (Kshs. 10,000.00) while the penalty for late payment of VAT is 5% of the tax due and accrues interest at 1% per month outstanding.
Tourism Levy is chargeable at the rate of 2% on the gross revenue on the sale of accommodation, food, drinks and all other services offered by hotels, restaurants and serviced and furnished rentals.
Tourism levy is payable to the Tourism Fund by the 10th day of the subsequent month of sale. It is important to note that late payment attracts an instant penalty of Kenya Shillings Five Thousand (5,000.00) and an additional penalty of 3% per month outstanding.
Voluntary Tax Disclosure Program
It is important to ensure that tax on rental income is accounted for properly. In the event of non-compliance in the past, the Kenya Revenue Authority (KRA) introduced a Voluntary Tax Disclosure Program (VTDP) with effect from 1st January 2021.
A taxpayer qualifies for the VTDP for tax liabilities that were accrued by the taxpayer within the period 1st July 2015 to 1st July 2020. Under the VTDP, the taxpayers stand to benefit with up to 100% relief from penalties and interest, if the principal tax is disclosed and paid in 2021.