KENYA REVENUE AUTHORITY
TAX COMPLIANCE
FOR
REAL ESTATE DEVELOPERS
&
RENTAL INCOME EARNERS

۩ Introduction
۩ Types of Income Chargeable to Tax
۩ Taxpayer Obligations
۩ Tax Relief
۩ Tax Incentives
۩ Conclusion

Taxation of income in Kenya is governed by the provisions of the
Income Tax Act (Cap. 470), which became effective on 1 st January
1974.

Income Tax is a direct tax on income and is charged for each year of income upon all the income of a person, whether resident or nonresident, which accrued in or was derived from Kenya (Section 3(1)).

Types of Income Chargeable to Tax
 Business Income from any trade or profession.
 Income from employment or services rendered.
 Rent Income.
 Pensions Income.
 Investment income - dividends and interest among other incomes.
(For Others please see Section 3 (2) of Income tax Act, Cap 470).

Real Estate Development
 This is a business of developing and selling property.
 Tax chargeable on the net profit after deducting allowable expenses under
Section 15 of the Income Tax Act,
Cap 470.

Examples of the allowable expenses include:
 Cost of acquisition of land
 Professional fees paid to Quantity
Surveyors, Architects, Civil engineers,
Electrical engineers, e.t.c
 Cost of building material
 Labour

 Advertising/marketing and other administrative costs.
 Bad debts written off or specific provisions.
 Interest on money borrowed to earn investment income.
 Hire expenses for equipment and commercial vehicles

Disallowable expenses are specified under
Section 16 of the Income Tax Act.
 Depreciation
 Cost of maintaining self and family
 Capital expenditure
 General provisions for bad debts
 Tax paid to the government
 Hire of non-commercial vehicles

 Rental Income is taxable under section
3(2)(a)(iii) of the Income Tax Act, Cap 470
Laws of Kenya .
 In addition, rent on non-residential buildings (Commercial) is taxable under section 5 & 6 of the VAT Act, Cap 476
Laws of Kenya .

 What is Taxable?
All rent, premium or any other consideration for use or occupation of property.
 Who is Taxable/assessable?
All persons in receipt of rental income unless exempted specifically under any laws.

What income period is the tax assessable?

Assessment of Rental income may be made at any time prior to the expiry of seven years after the year of which the income relates;
( Section 79(1) of the
Income Tax Act, Cap 470).
 Taxpayers are however advised to declare income and pay the principal tax and submit application for waiver of penalties and interest to the
Commissioner.

1.
Income Tax on Rental Income
 Prepare rent schedule for all let properties showing;
۩ Land Reference number and location of the property
۩ Gross rent received per property
۩ Total gross rent received for all property
۩ All expenses incurred per property

 Deduct only allowable expenses (incurred wholly and exclusively in the production of rental income.
 Complete tax return and attach rent schedule in support thereof.
 Submit self-assessment return within six months after the end of the accounting period or year of income.

2. VAT on Commercial Rent
Who qualifies to register for VAT?
 Taxpayers with a turnover of Kshs.5 million and above per annum on commercial buildings.
 NB: –Rental income on commercial buildings earned by VAT registered persons should form part of the taxable supply.

2. VAT on Commercial Rent…Cont.
 Prepare VAT Account showing the VAT charged to tenants (output VAT) and
Allowable VAT on purchases (input VAT) incurred in the month.
 The taxable value includes service charge and other incidental costs passed on to the tenants.
 Note: Receipts/invoices issued to tenants and receipts/invoices on purchases shall be ETR generated .

1.
2.
3.
Voluntary registration for appropriate tax obligation.
Voluntary disclosure of income earned by real estate developers and rental income earners;
(Section 52B of the Income tax Act, Cap
470)
Keeping of proper records and any other relevant information for tax purposes;
(Section 54A(1) of the Income tax Act, Cap 470).

1.
Timely filing and payment of the self assessed installment taxes by real estate developers and rental income earners;
(Section 12 of the Income tax Act, Cap 470).
2.
Deduction of withholding tax at source from payments due to certain payees and remitting the tax so deducted to the
Commissioner ;
(Section 35(1) & 35(3) of the
Income tax Act, Cap 470).

Records and Information to be Maintained
 Proper records should be maintained for all rental property indicating the following:
• Land reference (L.R.) number
• Year of construction
• Date of purchase of buildings rented out
• When first let and certificate of occupation
• Cost of construction
• Building plans

Records and Information to be
Maintained…Cont.
• Loan agreements
• Number of rentable units and rent per unit
• Related expenses (invoices and receipts to support expenses)
• Lease/tenancy agreements
• Bank and loan statements

Records and Information to be
Maintained…Cont.
• Rent schedules (income and expenditure account)
• Any other relevant documents/records

Filing of Returns and Payment of Tax
 Taxpayers can file their returns either manually and on line through www.kra.go.ke/portal
 For manual filers, fill in the appropriate tax return and make payments to National
Bank of Kenya (NBK), Kenya Commercial
Bank (KCB) or Co-operative Bank of Kenya on or before the 20 th day following the month.

Filing of Returns and Payment of Tax
 Note to attach the necessary accounts and the rent schedule for the respective period or year of income.

Filing of Returns and Payment of Tax…Cont.
Note: If Real Time Gross Settlement (RTGS) method is used to effect payment, the taxpayer should visit KRA (Finance office) for a reflection of the tax paid on the respective ledger with;
• Swift copy (obtained from the bank)
• Pay-in-slip (downloaded from www.kra.go.ke)
A receipt will be issued for the taxpayer’s retention.

 Tax due on rental income is payable in quarterly installments, also known as
‘Installment Tax’.
 The installment payments are spread evenly
@ 25% of the tax due and payable on or before the 20 th day of the 4 th , 6 th , 9 th and 12 th month of the accounting period or year of income.
 Installment tax is paid by all corporate bodies and individuals whose tax liability for the accounting period exceeds Kshs.40,000.

 However if tax liability does not exceed
Kshs.40,000 the tax is payable by 30 th of the fourth month after the accounting period.
 The balance of tax is payable on or before the last working day of the fourth month following the end of the year of income or accounting period.

 The payer of certain incomes is responsible for deducting tax at source from payments due to certain payees and remitting the tax so deducted to the Commissioner, on or before the 20 th day of the following month.
 This includes payments made to Quantity
Surveyors, Architects, Civil engineers,
Electrical engineers, e.t.c
 The payees should be issued with WHT Cert.

 Management or Professional or Training fees:
• @ 5% for Residents.
• @ 20% for Non-Residents.
 Contractual fee (in respect of building, civil or engineering works):
• @ 3% for Residents.
• @ 20% for Non-Residents.
 Rents received by Non-Residents @ 30%

 Personal relief for Resident Individuals @
KShs.13,944 per annum.
 Relief on premiums paid for Life, education and Health policies for Resident
Individuals.@ 15% of premiums paid subject to a maximum of KShs.60,000 per annum.

 Note: -Life or education policies-whose term commences on or after 1 st January
2003.
- Health policy whose term commences on or after 1 st January, 2007.

 Deduction of interest paid on mortgage for owner-occupied property, subject to a maximum of Kshs.150, 000 per year.
Note: Interest paid on mortgage during the construction period is treated as capital deduction and thus forms part of the cost of construction. The interest on mortgage incurred after issuance of
Certificate of Occupation is deducted as an allowable expense.
 Deduction of funds deposited under a
Registered Home Ownership Savings Plan, subject to a maximum of Kshs.48,000 per annum.

1. Industrial Building Allowance on:
 Cost of construction of Normal Industrial
Buildings - at the rate of 10% w.e.f 1 st
January, 2010.
 Residential buildings constructed in a planned development area approved by the
Minister for Housing - at the rate of 5% w.e.f 1 st January 2008.

2.
Commercial Building Allowance on the cost of construction of commercial building - at the rate of 25% (w.e.f 1 st January 2010) where roads, power, water, sewer and social infrastructure are provided by the investor.
3. Wear and Tear allowance on machinery and equipment as per the Second
Schedule of the Income Tax Act, Cap 470.

INCENTIVES TO REAL ESTATE
DEVELOPERS

Incentives To Real Estate Developers
 Section 20C of the Income Tax Act exempts income of Real Estate Investment Trusts
(REITs) from taxation.
 A REIT is a vehicle which allows investors to pool resources together and invest in
Real Estate. The shareholders of REITs acquire units which are tradable at the stock market.
(
This incentive is available effective 1 st January, 2012)

Incentives to Real Estate Developers
 Under the VAT Act, investors in low income housing projects qualify to apply for VAT remission
(effective from 15 th June
2007).
 Introduced in 2008 by Finance Act 2007.
 Regulations are contained in Legal Notice
No 115 of 5th September, 2008.

Incentives to Real Estate
Developers...Cont.
 A low income is Kshs.35,000 or less.
 A low income house - construction cost not more than Kshs.1.6M with a plinth area of not less than 30 sq metres.
 A low income housing project - not less than 20 housing units.

 Taxpayers are encouraged to comply with the provisions of the relevant laws to avoid penalties and interest that may accrue due to non compliance.
 Taxpayers are encouraged to get relevant assistance from KRA.
 For professional advice Taxpayers are encouraged to contact ICPAK
(www.icpak.com).