Getting an expatriate’s taxes wrong can leave an employer with backdated tax assessments and unexpected tax bills.
And under the Tax Procedures Act (Cap. 469B), it can also attract a penalty of 25% of the tax involved or KSh 10,000, whichever is higher. Things become even more complicated when the employee receives benefits, remains on an overseas payroll, or is seconded to Kenya.
To help you understand your obligations and remain compliant, this guide explains what employers need to know when hiring an expatriate.
How Tax Residency Affects How Expatriates Are Taxed
An expatriate’s immigration status and tax residency are separate matters. Having a Kenyan work permit does not, by itself, make someone a tax resident.
Under Section 2 of the Income Tax Act (Cap. 470), an individual is treated as a tax resident if they meet any of the following conditions:
- 183-day test: Present in Kenya for 183 days or more during the relevant year of income.
- 122-day average test: Present in Kenya during the year of income and each of the two preceding years of income, averaging more than 122 days in each year.
- Permanent home test: Maintains a permanent home in Kenya and is present in Kenya for any duration during the year of income.
Why Residency Matters for Employers
Residency matters because it affects how an expatriate is taxed in Kenya and which tax reliefs they can claim. We’ll look at the specific tax implications of being a resident or non-resident in the next section.
When Tax Residency Changes
An expatriate’s tax status can change during an assignment. For example, an employee who initially comes to Kenya for a short project may become a tax resident if their stay is extended and they subsequently meet one of the statutory residency tests.
Employers should therefore track an expatriate’s time in Kenya from the start of the assignment and review their tax position if the assignment is extended or their circumstances change. It’ll ensure they apply the correct PAYE treatment.
How Should Expatriate Pay Be Taxed?
Like other employees in Kenya, expatriates are generally taxed on their employment income and taxable benefits. Their tax treatment, however, depends on their residency and the source of their income.
Taxing Expatriate Payroll: PAYE and Statutory Contributions
As we mentioned earlier, resident and non-resident expatriates are taxed differently in Kenya.
- Resident expatriates: Taxed on their worldwide employment income using the progressive individual tax rates of 10% to 35%. They’re also entitled to personal relief of KSh 2,400 per month and insurance relief if they meet the relevant conditions.
- Non-resident expatriates: Taxed using the same progressive individual tax rates of 10% to 35%, but only on employment income sourced in Kenya. They’re not entitled to personal relief or insurance relief.
Both must have a KRA Personal Identification Number (PIN) before the employer processes their income.
Statutory Deductions
In addition to PAYE, employers must also apply the following statutory deductions:
| Deduction | Amount |
| Affordable Housing Levy (AHL) | 1.5% employee and 1.5% employer contribution |
| Social Health Insurance Fund (SHIF) | 2.75% of gross monthly income |
| National Social Security Fund (NSSF) | 12% of pensionable earnings (6% from employee and 6% from employer) |
Taxing Benefits and Allowances
Expatriate compensation often includes more than basic salary. Under Section 5 of the Income Tax Act (Cap. 470), gains or profits from employment, including taxable benefits and allowances, are subject to PAYE unless the law specifically exempts them. These include:
Housing and Accommodation
When an employer provides housing or pays rent directly for an expatriate, the taxable housing benefit is calculated as the higher of:
- The actual rent paid by the employer
- The fair market rental value of the accommodation (for directors and whole-time service directors)
- 15% of the employee’s total employment income
Employers should therefore include the taxable value of employer-provided accommodation when calculating the employee’s PAYE.
Company Motor Vehicles
Where an expatriate is provided with a company vehicle for personal use, including commuting, the taxable benefit is calculated at 2% per month of the vehicle’s initial capital cost, or the applicable prescribed KRA rate, whichever is higher.
School Fees and Education
School fees paid or reimbursed by an employer are taxable unless the amount has already been subjected to tax on the employee in an earlier period.
Relocation and Other Allowances
A relocation allowance paid as part of an employee’s compensation is generally taxable, while a genuine reimbursement of qualifying employment expenses may not be.
Airfare and Passages
Employer-paid airfare for an expatriate and their family is exempt from PAYE where the statutory conditions are met. These include cases where the employee:
- Is not a Kenyan citizen.
- Was recruited outside Kenya solely to serve the employer.
- Was brought to Kenya solely for employment purposes.
Where these conditions are not met, employer-paid passages can be treated as taxable employment income.
Split Payrolls and Offshore Payments
Multinational employers sometimes pay expatriates through both Kenyan and overseas payrolls. Paying part of an employee’s remuneration into an offshore account does not, by itself, take that income outside Kenya’s tax rules.
Where the remuneration relates to employment taxable in Kenya, employers must consider the full remuneration package, regardless of where the payment is made or the currency used.
Double Taxation Agreements (DTAs) and Foreign Tax Credits
Expatriates often face potential tax obligations in both Kenya and their home country. To eliminate double taxation, Kenya relies on bilateral Double Taxation Agreements (DTAs) alongside domestic relief provisions under the Income Tax Act (Cap. 470).
The 183-Day Exemption Rule
Many of Kenya’s DTAs provide an exemption from Kenyan tax if these three conditions are met:
- Presence: The employee is present in Kenya for less than 183 days in the relevant tax year or 12-month period.
- Non-resident employer: The remuneration is paid by, or on behalf of, an employer who is not a resident of Kenya.
- No permanent establishment: The remuneration cost is not borne by a Permanent Establishment (PE) or fixed base of the employer in Kenya.
Foreign Tax Credits (FTC)
Foreign tax credits can help reduce double taxation of expatriates where the same income is taxed in Kenya and another country. The relief available depends on whether Kenya has a DTA with the other country and the specific rules that apply to the credit.
- Section 42 relief: Where income is taxed in Kenya and a treaty partner state, Section 42 allows foreign tax paid on that income to be credited against the Kenyan tax payable, subject to the applicable rules.
- Unilateral relief: Where no DTA applies, Section 16(2)(c) allows foreign income tax paid on income derived abroad to be treated as a deduction from gross income, subject to the applicable conditions.
What Happens When an Expatriate Is Seconded to Kenya?
A secondment occurs when a foreign parent company or affiliate temporarily assigns an employee to work for a Kenyan entity, while the primary employment contract remains with the home entity.
Which Company Handles PAYE?
The PAYE obligation generally depends on who pays the expatriate’s employment income and how the secondment is structured.
- Kenyan host pays the salary: The Kenyan host would generally handle the PAYE.
- Foreign employer pays the salary: The foreign employer may still be responsible for PAYE if the expatriate’s employment income is subject to Kenyan tax.
- Host pays on behalf of the foreign employer: The Kenyan host may have the PAYE obligation because it’s making the payment.
- The foreign employer pays the salary, then recovers the cost from the Kenyan company: The Kenyan company is responsible for the expatriate’s PAYE because it’s effectively bearing the employment cost.
Can a Secondment Create a Permanent Establishment in Kenya?
A Permanent Establishment (PE) is a fixed place of business or other business presence through which a foreign company carries out business in Kenya. Where a PE is created, the foreign company may become liable for Kenyan corporate income tax on the profits attributable to that PE.
A secondment can create PE exposure where employees are sent to Kenya to carry out business activities. Whether a PE arises depends on the nature of the work, how long it continues, and the provisions of any applicable DTA.
- Providing services in Kenya: Some DTAs create a PE when employees provide services in Kenya for more than a specified period. The threshold varies by treaty and can range from 90 to 183 days.
- Construction and installation: Construction, installation, or related supervisory work can create a PE if it continues beyond the period specified under Kenyan law or the applicable DTA.
- Contract-signing authority: A PE may also arise where an employee in Kenya habitually exercises authority to conclude contracts on behalf of the foreign company, subject to the applicable rules.
For employers, a long-term secondment can therefore have tax implications for both the employee and the foreign company.
When a Secondment Becomes Permanent
A secondment can start as a temporary assignment but eventually become a permanent role in Kenya. This can happen when an assignment is repeatedly extended, or the employee takes on an ongoing position with the Kenyan business.
There is no single number of days that automatically makes a secondment permanent. However, employers should reassess the arrangement when it changes, including:
- Tax residency: Whether the employee has become a Kenyan tax resident and whether this changes their tax position.
- Payroll obligations: Whether the existing offshore or recharge arrangement still reflects how the employee works and is paid.
- Corporate exposure: Whether the employee’s continued activities in Kenya affect the foreign company’s Permanent Establishment and corporate tax position.
The key is to review the arrangement when the employee’s role, duration, or reporting structure changes instead of treating a long-term assignment as a temporary secondment.
Employees vs. Independent Consultants: Which Tax Rules Apply?
A foreign national providing services to a Kenyan business is not necessarily an employee. The tax treatment depends on whether the arrangement is a contract of service or a contract for service.
Contract of Service vs. Contract for Service
An employee working under a contract of service is generally subject to PAYE, while an independent consultant working under a contract for service may be subject to Withholding Tax (WHT) on payments for their services.
The distinction is based on the substance of the working relationship, not simply the label used in the contract.
Contract of Service
In a contract of service, the individual works as an employee and is typically integrated into the organisation, works under the direction and control of the employer, and receives employment remuneration. PAYE applies to taxable employment income.
Contract for Service
Here, the consultant operates independently and is engaged to provide specific services or deliverables. Payments may be subject to WHT, with the applicable rate depending on the nature of the service, the consultant’s residence, and any applicable DTA.
The Risk of Misclassification
If a KRA audit determines that a foreign consultant was actually an employee, the arrangement may be treated as employment for PAYE purposes. KRA can then assess the PAYE that should have been deducted and apply the relevant penalties and interest.
- Backdated PAYE: KRA can assess PAYE on the employment income that should have been taxed.
- Failure to deduct: A penalty of 25% of the tax involved or KSh 10,000, whichever is higher, may apply.
- Late payment: A 5% late-payment penalty and 1% monthly interest can apply to unpaid tax.
- WHT already paid: Any WHT already remitted should be reviewed separately rather than assuming it automatically offsets the PAYE liability.
To avoid this risk, employers must evaluate working arrangements before engagement and ensure contracts accurately reflect operational realities.
Employer Compliance Checklist
Before onboarding an expatriate, employers should:
- Confirm tax residency: Establish the employee’s expected time in Kenya and tax residency status.
- Classify the engagement: Determine whether the person is an employee, secondee, or independent consultant.
- Review compensation: Identify salary, allowances, benefits, and any offshore payments that may affect PAYE.
- Set up payroll: Apply the correct PAYE treatment and statutory deductions.
- Keep records: Maintain contracts, travel records, payroll records, and supporting documents for benefits and reimbursements.
- Review cross-border arrangements: Check secondments, intercompany charges, and any applicable DTA or foreign tax relief.
- Reassess when circumstances change: Review the tax position if the assignment is extended or the employee’s role changes.
Keeping these checks in place from the start makes it easier to apply the correct tax treatment and address changes before they become payroll or compliance issues.
Taxation of Expatriates: Key Takeaways
Taxing expatriates in Kenya requires employers to get several things right, from tax residency and PAYE to taxable benefits, secondments, and double taxation relief. Reviewing these issues before an expatriate joins the payroll can help prevent avoidable tax liabilities and compliance problems.
Hiring expatriates in Kenya? Talk to Bridge Talent Group about your hiring plans. We can help you navigate the employment and workforce considerations involved in bringing foreign talent into your business.
FAQs
Are expatriates taxed in Kenya?
Yes. Expatriates can be subject to Kenyan tax on employment income derived from work performed in Kenya.
Do expatriates pay PAYE in Kenya?
Yes, where their employment income is taxable in Kenya. Employers generally deduct and remit PAYE to KRA.
Are expatriates entitled to personal relief?
Tax-resident expatriates may qualify for personal relief. Non-resident expatriates are not entitled to it.
Is an expatriate’s overseas salary taxable in Kenya?
It can be if the salary relates to work performed in Kenya. Paying it into an overseas account does not, by itself, make the income exempt from Kenyan tax.
Can an expatriate be taxed in both Kenya and their home country?
Yes, but a DTA or domestic foreign-tax relief may help prevent the same income from being taxed twice.
