Withholding tax when you pay foreign suppliers
The withholding tax rates KRA lists for payments to non-residents for fees, royalties and contracts, when it is final, and how to plan the payment.
By Achekam · · 4 min read · For Running a business businesses in Kenya
The invoice from the overseas consultant says one figure. Your finance team pays a smaller one. The consultant e-mails to ask where the rest went, and someone has to explain Kenyan withholding tax to a person who has never heard of KRA.
That conversation is much easier if it happens before the contract is signed. When a Kenyan business pays a non-resident for services or for the use of intellectual property, KRA expects tax to be withheld from the payment, and the rates for non-residents are considerably higher than for local suppliers. This article sets out the rates KRA lists, when the tax is final, the VAT that sits alongside it, and how to write contracts that avoid the awkward e-mail.
Rates for non-residents
KRA lists withholding tax rates side by side for residents and non-residents. At the time of writing, the main categories that matter for foreign suppliers are:
| Payment | Resident rate | Non-resident rate |
|---|---|---|
| Management, professional and training fees | 5% | 20% |
| Contractual payments | 3% | 20% |
| Royalties | 5% | 20% |
| Rent for buildings | not covered here | 30% |
The gap is the point to notice. A Kenyan consultant's fee attracts 5%; the same work by a consultant abroad attracts 20%. Rent for buildings paid to a non-resident landlord is listed at 30%. KRA's withholding tax page sets out these rates in full with the other categories, and is the page to check before each new kind of foreign payment, since rates change. Your adviser can tell you whether anything alters the rate for a particular supplier's country.
For the resident side of the same rules, see withholding tax on supplier payments.
A final tax where there is no permanent establishment
KRA says withholding tax is a final tax for payments to non-residents with no permanent establishment in Kenya. For most payments to residents, by contrast, it is not final: the resident payee declares the income and the withholding certificates in its annual return and pays any balance.
For the non-resident supplier with no Kenyan presence, then, the amount withheld is the end of its Kenyan tax on that payment. For your business, it means getting the rate and the amount right first time matters, because there is no later return in which the supplier will settle the difference. A foreign company that does have a Kenyan branch is in a different position, covered in taxing a foreign company's Kenyan branch.
No eTIMS invoice needed for these services
Kenyan businesses are used to insisting on eTIMS invoices for their costs. KRA's list of business costs excluded from the eTIMS invoice requirement includes services from a non-resident without a permanent establishment in Kenya, and expenses subject to a final withholding tax.
So the overseas consultant's ordinary invoice is acceptable for that cost; there is no point asking them for an eTIMS invoice they cannot issue. Keep the invoice, the contract and the withholding records together instead.
Reverse VAT on the same payment
Withholding tax is not the only Kenyan tax on a payment for foreign services. KRA says any importer of an imported service is liable to pay VAT on it, reverse VAT, whatever its VAT registration status, at the earliest of receiving the service, receiving the invoice or paying for it. KRA adds that VAT paid on imported services used in a registered person's taxable business may be deducted as input tax in later returns.
The two taxes work differently. Withholding tax comes out of what you pay the supplier. Reverse VAT is an amount your business accounts for itself, on top. A single invoice from abroad can therefore involve both, and each has its own timing. The VAT side is explained in VAT on services you buy from abroad.
What Achekam computes once the rules are approved
Once the Kenyan rules in the workspace are approved, Achekam computes Kenyan withholding tax, along with VAT and the other Kenyan taxes it covers. Some specialist profiles are refused as assessment required: extractive, petroleum and non-resident digital profiles are not computed.
On the bills side, the business records the supplier's bill line by line, and a bill without a purchase order waits for approval before it posts. It can then be paid in full or in parts from the bank account you choose. Agree with your accountant how the withheld portion is recorded, so that the supplier's balance shows as settled and the tax owed to KRA shows as a liability until it is remitted.
Contract terms on who bears the tax
Most disputes with foreign suppliers come from contracts that are silent on tax. Settle it in writing before work starts:
- State whether the fee is gross, with Kenyan withholding tax deducted from it, or net, with your business bearing the tax on top.
- Name the category of payment, such as professional fees or royalties, so both sides know which rate applies.
- Record that any Kenyan VAT on the service is accounted for by your business under the reverse VAT rule.
- Agree that you will provide evidence of the tax withheld.
- Record the supplier's residence and whether it has any permanent establishment in Kenya.
A "net" fee looks simpler for the supplier, but it leaves the tax cost with your business, so it costs you more than the same headline fee agreed gross. Run both versions past your adviser before you agree a price, and attach the tax clause to every foreign service contract from now on.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
