Permanent Establishment Risk When a Foreign Company’s Employee Works Remotely From Kenya

A U.S. company that lets one employee work from Nairobi has not set up a Kenyan business, but Kenyan tax law may treat it as if it had. The question is whether the employee’s presence creates a permanent establishment, which gives Kenya the right to tax the foreign company’s profits and changes how the employee is taxed. This article explains the permanent establishment risk when a foreign company’s employee works remotely from Kenya, what the Income Tax Act actually says, and what it leaves open.

What counts as a permanent establishment

Section 2 of the Income Tax Act defines “permanent establishment” in a list of limbs. Three matter for a remote employee. The first is a fixed place of business through which business is wholly or partly carried on, which includes a place of management, a branch and an office. The second is the provision of services, including consultancy services, by a person through employees or other personnel engaged for that purpose, but only where the services or the connected business in Kenya continue for periods exceeding 91 days in aggregate in any twelve-month period commencing or ending in the year of income. The third is a dependent agent who acts on the person’s behalf in Kenya, including by habitually concluding contracts or playing the principal role leading to contracts that are routinely concluded without material modification.

The definition also carves out activities of a preparatory or auxiliary character. That carve-out is unlikely to help an employee who does ordinary day-to-day work for the business.

Applying the test to one remote employee

The Act does not say whether an employee’s home is a “fixed place of business” of the employer, and we have not found a Kenyan decision that settles it. The 91-day services limb is also not written for this situation. It speaks of services provided “through employees”, which reads most naturally as a business that earns fees from clients by sending staff to Kenya. Whether an employer whose Kenya-based employee does internal or customer-facing work for a business run elsewhere is within it is untested.

The role is what moves the risk. An employee who only does back-office or engineering work for a business managed abroad sits at the lower end. An employee who negotiates and signs customer contracts, or who routinely closes deals that the employer then rubber-stamps, sits close to the dependent agent limb. A manager who runs a team, hires, or makes the company’s decisions from Kenya raises a different problem, discussed next. The 91-day period is short enough that an employee who stays in Kenya for a full year will exceed it on any reading, so the debate is about the nature of the work, not the length of stay.

A company is resident in Kenya under section 2 if it is incorporated in Kenya or if the management and control of its affairs was exercised in Kenya in the year of income. A single remote employee will rarely amount to management and control of a foreign company. A founder, chief executive or finance head who takes the company’s strategic decisions while living in Kenya is a different case, and that is the situation in which an employer should take advice before the move, not after.

How a permanent establishment changes the employee’s tax

Section 5(1) deems certain employment income to have accrued in or been derived from Kenya. It covers amounts paid to a person who is, or was at the time of the employment or when the services were rendered, a resident person, for employment or services rendered in Kenya or outside Kenya. It also covers amounts paid to a non-resident person for employment with, or services rendered to, an employer resident in Kenya or the permanent establishment in Kenya of an employer who is not resident. An employee who spends 183 days or more in Kenya will usually be resident and caught by the first limb regardless of any permanent establishment. The second limb matters for a non-resident visitor, and it shows why the permanent establishment question affects individuals as well as the company.

Where treaties fit, and why the United States is different

Where Kenya has an effective double taxation agreement, the treaty has its own permanent establishment article and must be read alongside the Act, because section 41 gives effect to special arrangements for relief from double taxation. The National Treasury’s table of Kenya’s double taxation agreements does not list the United States. For a U.S. employer, that means there is no treaty threshold to rely on, and the domestic definition in section 2 is the test. Treaty status changes, so check the current list.

Reducing the risk in practice

These steps follow from the definition and are practical measures, not statutory requirements. Keep the employee’s duties internal and operational, and do not give authority to negotiate or sign contracts for the company in Kenya. Do not lease an office or co-working space in the company’s name for her. Keep a record of the days she works in Kenya. Decide who takes the company’s management decisions, and where. If the role cannot be kept low-risk, the alternatives are an employer of record arrangement or a Kenyan subsidiary, which our guide to branch or subsidiary taxation compares.