Remote Workers and Permanent Establishment Risk for Foreign Employers in Kenya

A foreign company that allows an employee to work remotely from Kenya may think it has simply approved a change of address. For Kenyan tax purposes it may have done more. Under the Income Tax Act, Cap. 470, a permanent establishment in Kenya brings consequences for the company and for the employee. This article sets out the rules employers should check before approving a Kenyan base for a remote worker.

Why permanent establishment matters

Two things turn on it. A permanent establishment gives a non-resident company a taxable presence in Kenya. And under section 5(1)(b), amounts paid to a non-resident employee are deemed Kenyan where the employer is resident in Kenya or is the non-resident owner of a permanent establishment in Kenya. Where the employee is themselves resident, section 5(1)(a) applies regardless; see our article on section 5.

How the Act defines the term

Section 2 defines a permanent establishment to include a fixed place of business through which business is wholly or partly carried on, such as an office or branch. It also includes the provision of services, including consultancy services, by a person through employees or other personnel engaged for that purpose, where the services or connected business in Kenya continue for periods exceeding in the aggregate 91 days in any 12 month period commencing or ending in the year of income. A dependent agent is caught where it habitually concludes contracts, or plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification. The definition carves out some preparatory or auxiliary activities. Read the full definition for the year in question.

Where remote working creates exposure

Three situations carry most of the risk. The first is duration: an employee who works from Kenya for most of a year can cross the 91-day service threshold if the employee’s activities amount to services provided by the company in Kenya. The second is authority: an employee who habitually concludes contracts for the company in Kenya, or plays the principal role in contracts that are routinely concluded without material modification, may be treated as a dependent agent. The third is a fixed place: a home office that the company treats as its base, pays for or requires the employee to use, is a candidate for a fixed place of business.

None of these is automatic. Each turns on facts, and we have not found a published position from the Revenue Authority on home-based remote workers. That absence is a reason for caution, not comfort.

Treaty protection

Where a treaty applies, its own permanent establishment article may set a higher threshold than the Act. The National Treasury list of double taxation agreements identifies the agreements; see which treaties are in force. The employer’s home country determines which treaty, if any, helps.

What employers can do

Limit what the Kenyan-based employee does: no authority to conclude contracts, no client-facing selling in Kenya if avoidable, and no company-provided office. Track days. Document the working arrangement in a policy. Review payroll and social security for the employee in both countries. Consider whether a Kenyan entity or an employer of record is a cleaner structure for longer stays.

Class N holders

A Class N permit requires the holder to work for an employer outside Kenya and not for a Kenya-domiciled employer; see the Class N guide. That fits the premise of a foreign employer, but the permit does not protect the employer from a permanent establishment finding. For the employee, see Does a Class N permit exempt your foreign income?.

A worked scenario

These facts are invented. A technology company in Europe allows a product manager to work from Nairobi for ten months. The manager has no authority to sign contracts, but works with customers and the company’s team daily, and the company pays the manager’s co-working fees. The services are provided through personnel engaged for that purpose, and the work continues in Kenya for more than 91 days in the 12 month period, so the permanent establishment definition may be met unless a treaty provides otherwise. If the company also reimburses a flat used as the manager’s office, the fixed place of business limb is also in play. The company should address both before approving the arrangement.

Contract and policy points

Put the arrangement in writing. A remote-work policy should say where the employee may work, for how long, what authority the employee has, and that the employee must not conclude contracts for the company while in Kenya. The employment contract should record that the employee works for the foreign employer and not for any Kenyan entity, which also matches the Class N undertaking. Keep records of days spent working in Kenya, so that the 91-day threshold can be monitored rather than guessed at.

Alternatives to a permanent establishment

Where a longer stay is likely, the employer can consider establishing a Kenyan subsidiary or branch, or using an employer of record. Each has costs and consequences of its own, including registration, payroll and, for an employee who wants a different permit class, the work permit position. Our guides on work permit classes and work permit fees set out the options. The choice should follow a view on how long the employee will stay and what they will do.