Branch or Subsidiary? How Kenya Taxes a Foreign Investor’s Kenyan Operation Differently

A foreign investor choosing between a Kenyan branch and a Kenyan subsidiary is usually focused on liability and control. Tax belongs in that conversation from the start, but not for the reason many older guides give. Since 1 January 2024, Kenya taxes a branch and a subsidiary at the same 30% corporate rate, and both face a second 15% layer when profit leaves Kenya. The real tax differences now sit in how that second layer is triggered, what can be deducted, and how the investment is eventually exited.

The Headline Rate: Now the Same

A Kenyan-resident subsidiary, a locally incorporated company, pays corporate income tax at 30%. Kenya taxes income that accrued in or was derived from Kenya (section 3(1) of the Income Tax Act), and where a resident carries on business partly within and partly outside Kenya, the whole of that business profit is treated as Kenyan (section 4(a)).

A branch of a foreign company is a non-resident with a permanent establishment in Kenya. Its rate was 37.5% for many years, and you will still see that figure in older guides. The Finance Act, 2023 reduced it to 30% for the year of income 2024 and every year after (Third Schedule, Head B, paragraph 2(b) of the Income Tax Act). The headline gap is gone.

What Happens When Profit Leaves Kenya

A subsidiary’s profits leave Kenya when it declares a dividend. A dividend paid to a non-resident attracts withholding tax at 15% under Kenya’s domestic rate, reduced where a tax treaty in force applies.

A branch cannot declare a dividend, because it is not a separate entity. Until 2024 that meant branch profits could be sent home with no further Kenyan tax. The Finance Act, 2023 closed that gap by inserting section 7B into the Income Tax Act, effective 1 January 2024. A non-resident carrying on business through a permanent establishment now pays tax on its “repatriated income” at 15%, in addition to the 30% tax on the branch’s profits.

Repatriated income is not measured by what the branch labels as a remittance. It is computed by formula: net assets at the start of the year, plus the year’s accounting profit less the tax on it, minus net assets at the end of the year. In practice, any fall in the branch’s net assets beyond what its after-tax profit would explain counts as repatriated, whatever the transfer is called. Asset revaluations are excluded from net assets.

Deducting Payments to Head Office

A subsidiary can generally deduct interest, royalties and management fees paid to its foreign parent, subject to withholding tax and Kenya’s transfer pricing rules. A branch cannot. Section 18(5) of the Income Tax Act requires a permanent establishment’s profits to be calculated without any deduction for interest, royalties, or management or professional fees paid to its own non-resident head office. Exchange gains and losses on balances between the branch and head office are also disregarded. A business that expects to push significant intra-group charges into Kenya will usually find the subsidiary structure more efficient on this point alone.

Registration and Ongoing Compliance

A subsidiary is a new Kenyan company, incorporated under the Companies Act, 2015, with its own board, statutory registers, and filing obligations. A branch is a foreign company registered under Part XXXVII of the Companies Act. It is not a separate legal person, and its Kenyan registration sits on top of the foreign parent’s own existence. This affects more than tax: a subsidiary holds assets, contracts, sues and is sued in its own name, while a branch’s liabilities are, in substance, the foreign parent’s liabilities. Sector regulators also generally license locally incorporated companies, which can decide the question for regulated businesses before tax is considered at all.

Exit: Selling the Business Later

A subsidiary can be sold by selling its shares. Capital gains tax applies at 15% as a final tax (Third Schedule, Head B, paragraph 14). Kenya also taxes gains on the disposal of an interest in a person, including an offshore holding company, where that interest derives 20% or more of its value from immovable property in Kenya (section 3(2)(g)). A branch has no shares to sell, so exiting usually means an asset sale or a wind-down, each with its own tax consequences that should be modelled separately.

Work Permits and Staffing

The choice also affects immigration and staffing, though this sits outside tax law. A subsidiary is a Kenyan employer in its own right and applies for work permits for foreign staff in the ordinary way. A registered branch with local staff is also treated as an employer, so the permit process is broadly similar either way. The structures differ more on secondments: staff sent to a branch remain with the same legal employer, while a secondment to a subsidiary usually needs a secondment or intercompany services agreement to support the arrangement and any recharge of costs.

A Worked Comparison

Take a foreign investor expecting KES 50 million of annual profit in Kenya, with accounting profit equal to taxable profit, planning to send half of the after-tax profit home each year and reinvest the rest.

As a subsidiary: corporate tax at 30% is KES 15 million, leaving KES 35 million. A dividend of KES 17.5 million attracts 15% withholding tax of KES 2.625 million. Total Kenyan tax: KES 17.625 million.

As a branch: tax at 30% is KES 15 million, leaving KES 35 million. The branch retains KES 17.5 million, so its net assets rise by that amount, and the section 7B formula gives repatriated income of KES 17.5 million. Tax at 15% is KES 2.625 million. Total Kenyan tax: KES 17.625 million.

On these simple facts the result is identical. The structures diverge in the details: the branch cannot deduct head-office interest, royalties or fees; the section 7B formula can capture movements in net assets that are not profit distributions; and a treaty may reduce dividend withholding tax for a subsidiary without necessarily treating the branch charge the same way. That is why the choice needs modelling against the investor’s actual plans rather than the headline rates.