How foreign earned income is taxed in Kenya
is your Foreign Earned Income Taxed in Kenya: A Freelancer's Guide
As the world becomes more connected, an increasing number of Kenyans are thriving as freelancers and consultants, providing services to clients all over the globe. If this is you, a key question likely on your mind is: “All my clients are overseas. I don’t earn even a cent from Kenya. What business does KRA have taxing me?”
It’s a question I’ve heard countless times especially from Kenyan freelancers, consultants, and remote workers. And honestly, it is a genuine question.
The short and simple answer is yes. But don't let that be a cause for alarm. Understanding why and how this works is the first step toward staying compliant and managing your finances effectively. In this article, I will break down the rules in a simple, straightforward way.
Your Citizenship Doesn't Determine Your Tax Bill
This is a common point of confusion. Many countries, like the United States, tax their citizens regardless of where they live in the world. Kenya, however, operates differently. The KRA does not tax you based on your Kenyan citizenship. Instead, your tax obligation is determined by your tax residency, that is, where you sat while you earned that income.
If you are a Kenyan citizen but live and work permanently abroad, you are generally not a Kenyan tax resident, and your foreign-earned income is not taxable in Kenya. The reverse is also true: you can be a foreign national living in Kenya and still be considered a tax resident of Kenya.
The Golden Rule: It's All About "Tax Residency"
The most important concept for you to grasp is tax residency. It is the sole basis on which your foreign earned income is taxed in Kenya.
KRA considers you a Kenyan tax resident if you meet any of the three legal tests below. If you satisfy just one of these conditions, you are a resident for that tax year.
The Permanent Home Test: You have a permanent home in Kenya and were present in the country for any period during the year. A "permanent home" doesn't just mean a house you own or rent; it's a place that is continuously available for your residential use. So, even if you travel a lot, a single day's visit to your permanent home in Kenya could make you a tax resident.
The 183-Day Test: You were physically present in Kenya for a total of 183 days or more in a calendar year. This is a simple count. If your travel records show you were in Kenya for six months or more, you automatically pass this test.
The 122-Day Rolling Test: You were present in Kenya for an average of 122 days or more in the tax year and the two preceding years. This test is designed to catch individuals who spend a significant amount of time in Kenya over a three-year period, even if they don't meet the 183-day rule in a single year.
If you are living and working in Kenya, you undoubtedly meet one, if not all, of these tests. This is why you are a Kenyan tax resident, and your income is subject to taxation in Kenya.
The Principle of "Worldwide Income"
As a Kenyan tax resident, you are required to declare and pay tax on your worldwide income. This means that all the money you earn from your freelance work, whether from a Kenyan client or an international one, must be included when you file your annual tax return.
The KRA's reasoning is that while you are living in Kenya, you are benefiting from the country's public infrastructure, security, and services. You therefore must contribute to funding it.
The fact that your clients are based abroad and you receive your payment in a foreign currency does not change your obligation as a Kenyan resident.
An Example to Make It Crystal Clear
Let's imagine a scenario to illustrate this.
Let's follow Shisabula, after my former classmate: Shisabula is a freelance developer living and working from his home office in Nairobi. He is a Kenyan citizen. All of his clients are from the United States, and they pay him in US dollars. He earns an average of Kshs. 150,000 per month.
Tax Residency: Because Shisabula lives in Nairobi year-round, he meets the 183-Day Test (and likely the other two as well). He is a Kenyan tax resident. The fact that he is a citizen is irrelevant to his tax obligation. His tax is based on where he earned the income: in Kenya.
Worldwide Income: The Kshs. 1.8 million (Kshs. 150,000 x 12 months) he earns from his American clients is considered his worldwide income.
His Tax Obligation: Shisabula must declare this entire Kshs. 1.8 million as his self employment business income on his annual tax return, even though it was earned from foreign clients. He will then be taxed based on the progressive Kenyan income tax rates for individuals.
What About Double Taxation?
"But what if I also paid tax in my client's country?" This is a valid concern, and it's a situation known as "double taxation." Fortunately, Kenyan tax law provides solutions to this problem.
Double Taxation Agreements (DTAs): Kenya has tax treaties with several countries to prevent double taxation. These agreements determine which country has the primary right to tax a specific type of income. If your client is in a country with a DTA with Kenya, you may be able to claim a foreign tax credit. This credit allows you to deduct any tax you have already paid abroad from your Kenyan tax liability.
Unilateral Relief: Even if there is no DTA with the country your client is in, the KRA's tax law may still offer relief. You can deduct the foreign tax paid on your foreign income from your taxable income in Kenya.10 You must, however, provide proof of the taxes you paid in the other country.
Key Takeaways and Practical Steps
Your Tax Residency is Key: Your tax obligation as a freelancer is determined by your status as a Kenyan tax resident, not by your citizenship or the location of your clients.
Declare Everything: Always declare all your income, both local and foreign, in your annual KRA tax returns.
Keep Meticulous Records: This is essential. Keep clear records of your invoices, payments received, and any taxes paid in other countries. This documentation will be crucial if you need to claim foreign tax credits or relief.
Consider Professional Advice: Tax can be complex, especially when dealing with foreign income and international regulations. If you're unsure, it's wise to consult a qualified cross border tax professional in Kenya. They can help you understand your taxes, ensure you're compliant, and help you take advantage of any available deductions.
By understanding these fundamental principles, you can confidently manage your taxes and focus on what you do best: building a successful freelance business with a global reach.
Written by CPA Joseph Wachira
The author is a Tax Director at ClearTax Consultancy
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