Taxation Of Commercial Properties

Commercial property is “Land or buildings not occupied or not capable of being occupied as residential premises”

Filing the tax returns and payments

The landlords falling in the above categories are required to account for tax on rental income received and are allowed to take a deduction of all the expenses that were incurred in generating the rental income. The taxable rental income is then taxed at the graduated rates for individuals or at 30% and 37.5% for resident companies and non-resident companies respectively. The tax on rent income is to be paid in advance in quarterly instalments. The instalment tax is calculated as the lesser of:

• Prior year basis– Prior year tax payments are multiplied by 110%
• Current Year basis– By estimating the current year profit and tax payable thereon.

The instalment taxes are due for payment on the 20^th day of the 4^th, 6^th, 9^th and 12^th months after the year end. The balance of tax is payable by the end of the 4^th month after the year end. For individuals and December year end companies, the balance of tax is due for payment by 30^th April of the following year. The landlord is required to account for tax on rental income in the annual return alongside other sources of income by 30^th day of June of the following year for individuals and December year end companies. Other companies are required to file the annual return by the end of the 6^th month after their year-end. The penalty for late filing of the annual return is the higher of 5% of the tax due or KES 2,000 (individuals) or KES 20,000 (company) The penalty for late payment of tax is 5% of the tax due and accrues interest at 1% per month outstanding. Any withholding tax certificates received on rent payments can be utilized as tax credits while filing the annual return. There are other taxes that must be accounted for alongside rental taxes. These include;

Value Added Tax

Landlords who earn commercial rent that exceeds KES 5 million per annum are required to register for Value Added Tax (VAT) obligation. VAT is chargeable on commercial rent by the registered landlords. VAT is also chargeable on short stays at serviced and furnished rentals. The landlord will be required to file a monthly return and make payment by the 20^th day of the subsequent month. The penalty for late filing of the VAT return is higher of 5% of the tax due or KES 10,000 while the penalty for late payment of VAT is 5% of the tax due and accrues interest at 1% per month outstanding.

Tourism levy

Tourism Levy is chargeable at the rate of 2% on the gross revenue on the sale of accommodation, food, drinks and all other services offered by hotels, restaurants and serviced and furnished rentals. Tourism levy is payable to the Tourism Fund by the 10^th day of the subsequent month of sale. It is important to note that late payment attracts an instant penalty of KES 5,000.00 and an additional penalty of 3% per month outstanding.

Voluntary Tax Disclosure Program

It is important to ensure that tax on rental income is accounted for properly. In the event of non-compliance in the past, the Kenya Revenue Authority (KRA) introduced a Voluntary Tax Disclosure Program (VTDP) with effect from 1^st January 2021. A taxpayer qualifies for the VTDP for tax liabilities that were accrued by the taxpayer within the period 1 July 2015 to 1 July 2020.  Under the VTDP, the taxpayers stand to benefit with up to 25% relief from penalties and interest, if the principal tax is disclosed and paid in 2023.

How can we assist

At CM Advocates LLP, we have a team of experienced tax lawyers that offer tax law advisory and tax dispute resolution services. For more information, you can go to our website www.cmadvocates.com or email us at taxteam@cmadvocates.com.

Contact Persons & Contribuors

Jane Mugo- Partner & Head of Unit Angela Ndolo-  Associate

Disclaimer

This article is for informational purposes only and should not be construed as legal advice.