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HomeTechKenya is planning a special tax regime for first-time workers

Kenya is planning a special tax regime for first-time workers


Kenya is proposing a special tax regime on startups’ Employee Share Ownership Plans (ESOPs), as it aligns with its plan to drive innovation.

The 2023 Finance Act proposes tax deferrals on employee-allocated shares, recommending that they be applied after the expiration of five years from the time shares are awarded, or when an employee sells them or leaves the company.

The taxable benefit will be based on the fair market value of the startup’s shares at the end of the five years or at the time of the sale, and if not available, the tax commissioner will make the decision based on the startup’s financial statements . If the changes are adopted, the special tax regime will take effect on 1 July.

Currently, employees immediately pay tax on the gains accrued between their eligibility date and when they exercise the stock option.

“The way our income tax law works is that anything an employee gains as a result of employment falls into taxable benefits. Also one of the benefits is getting shares in a company(s) under the current Income Tax Act, that benefit becomes immediately taxable. Now they are proposing to defer payment of that,” Daniel Ngumy, corporate law expert and partner at Anjarwalla & Khanna told TechCrunch.

“The wording of the provision, in my opinion, generally captures almost the rationale, with the exception of provisions three and four (see paragraph three) because the fair market value of the taxable benefit could be high in five years…I think that it doesn’t give them any real benefit and will probably be changed because it gives a worse outcome,” Ngumy said.

Startups provide equity to employees as a way to retain talent, reward teams, and instill an ownership culture to ensure shareholder prospects match those of the workforce.

The special tax regime applies to startups incorporated in Kenya, with an annual turnover of less than Sh100 million ($731,255), in existence for less than five years, and not established as a result of splitting or restructuring of another or an existing company. Startups in management, professional or training matters are excluded.

The new tax follows comments by Kenyan President William Ruto, at the US Chamber of Commerce regional business summit earlier in March, where he alluded to the change by saying he had received complaints about the imposition of distribution tax “even before any value is realized.”

The shift, he said, is part of the government’s plan to make Kenya an attractive business destination and Africa’s leading innovation hub.

Kenya remains one of the top four market destinations in Africa in terms of VC investment.

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