Is Foreign Employment Income Taxable in Kenya? Section 5 Explained

A common question from people relocating to Kenya is whether salary paid by a foreign employer is taxable here. Section 5 of the Income Tax Act, Cap. 470, answers it, and the answer depends on whether you are resident. This article explains the two limbs of section 5(1) that govern employment income and where each one bites.

The general rule for residents

Section 5(1)(a) provides that an amount paid to a person who is, or was when the services were rendered, a resident, in respect of any employment or services rendered by that person in Kenya or outside Kenya, is deemed to have accrued in or been derived from Kenya. The effect is that a resident is taxed on employment income by reference to residence, not by reference to where the work is done or where the employer sits.

So a resident remote worker employed by a Swiss, British or American company is within the charge on that salary. That the employer has no presence in Kenya, pays into a foreign account, or has already withheld foreign tax, does not remove the income from the charge. It affects relief, not liability. Residence itself is explained in our article on the three residence tests.

The rule for non-residents

Section 5(1)(b) deals with non-residents. An amount paid to a non-resident in respect of employment with, or services rendered to, an employer who is resident in Kenya or the permanent establishment in Kenya of a non-resident employer, is deemed to have accrued in or been derived from Kenya. A non-resident working in Kenya for a purely foreign employer with no Kenyan permanent establishment is therefore not caught by this limb.

That conclusion is narrow. We have not found authority on how the Revenue Authority treats a non-resident who physically works in Kenya for a short period for a foreign employer, and we would not advise a client to rely on that reading without a closer look at the other charging provisions and any treaty. Employers should read our article on permanent establishment risk before sending staff.

A permit does not change the answer

A Class N holder is in the same position as any other individual. The permit is an immigration status; see Does a Class N permit exempt your foreign income?. Residence decides which limb of section 5(1) applies.

Relief for foreign tax

If section 5(1)(a) brings foreign salary into Kenyan tax, the question becomes how to avoid paying twice. A credit arises under a double taxation agreement through sections 41 and 42. Without one, section 16(2)(c) allows a deduction, not a credit. Our article on credit versus deduction sets out the difference. The National Treasury publishes a list of double taxation agreements; see also which treaties are in force.

Compliance points

A resident with foreign employment income needs to consider how it is reported and whether any tax has been paid by deduction at source. Employers abroad typically do not operate Kenyan payroll deductions, so the individual may need to account for the tax directly. We would confirm the mechanics for your situation rather than assume them, since the practical route depends on how the income is paid and by whom.

Practical steps

Establish your residence position for the year. Identify the paying entity and where it is resident. Check for a treaty with that country. Keep records of foreign tax paid. If the position is uncertain and material, a written ruling may be worth seeking; see private rulings under the Tax Procedures Act.

A worked example for each limb

These facts are invented. A resident employee works from Nairobi for a Swiss company and is paid into a Swiss bank account. Section 5(1)(a) deems the amount paid to have accrued in or been derived from Kenya, because the employee is a resident and the services are rendered in Kenya or outside it. The place of payment is not the test.

A non-resident employee of the same company spends two months in Kenya working remotely. Section 5(1)(b) asks whether the employer is resident in Kenya or is the non-resident owner of a permanent establishment in Kenya. If neither, the limb does not apply on its face. If the employee’s activity here brings a permanent establishment into being, the answer changes, which is why the employer’s position must be checked as well as the employee’s.

Freelancers and consultants

Class N is open to freelancers working for clients outside Kenya as well as to employees. Section 5(1) speaks of amounts paid in respect of employment or services rendered, so fees for services rendered by a resident may fall within it, and business income is also subject to the general charge in section 3. The classification affects deductions and the way the income is reported, so we would look at the contract and the pattern of work before advising. Do not assume that being self-employed moves foreign fees outside the Kenyan charge.

Employment benefits and allowances

Foreign employers often provide housing, relocation payments, share awards or other benefits. Whether and how these are taxed in Kenya is a separate analysis from the base salary. Tell your adviser about all of them at the start, because a relocation package can create a larger Kenyan exposure than the salary alone.