Introduction
As the world grows more interconnected, people and businesses operating across borders often risk being taxed twice on the same income. Double Taxation Agreements (DTAs) help solve this issue. DTAs are international treaties that set rules for dividing taxing rights between two participating countries
What is Double Taxation
When the same income is taxed by two countries. It can occur in two ways:
i. Economic Double Taxation
Same income taxed twice by different taxpayers. Example;
A company pays tax on its profits, and then when those profits are shared with shareholders as dividends, the shareholders are taxed.
ii. Juridical Double Taxation
When the same person is taxed on the same income by more than one country. Example;
A person living in country A earns income from country B and both countries tax the income.
Role of DTAs
i. Prevents income from being taxed twice
ii. Promotes fairness and predictability for cross border investments.
Who benefits from DTAs?
a) An expatriate working in Kenya
If you have recently relocated to Kenya, this information helps you understand how Double Tax Agreements (DTAs) affect your income and tax obligations.
b) Residents and Non resident Investors
Anyone looking to invest in Kenya will learn how DTAs works and how to minimize double tax on same income.
Non residents from countries with DTAs, will be able to understand how double taxation provides relief through credits or exemption and stay compliant with Kenyan tax laws.
Double Tax Agreements (DTAs)
Purpose of DTAs
DTAs aim to allocate taxing rights fairly between residence country(where the recipient of the income is normally based) and source country(where the income is earned).
Scope and Treaty Benefits
The agreement states that the treaty only applies to residents of one or both countries. The benefits include, tax exclusion/exemption, preferential tax rates, and relief from double taxation.
How DTAs Work
When an investor from a country that has a DTA with Kenya invests in Kenya, starts a business, or is deployed to Kenya as an employee, the income is subject to taxation in Kenya. However, the DTA ensures that the same income is not taxed again in their home country, preventing double taxation.
The DTA reduces the tax burden by offering either a credit or exemption. Businesses or employees can deduct taxes paid in Kenya from their home country tax or have their income exempt from taxation in their home country.
For companies earning royalties, management fees, or dividends from Kenyan entities, the withholding tax rate is lowered from the usual 20% for non-residents to a reduced rate under the DTA.
Kenya has double tax agreements in place with the following countries:
* Terminated effective 01/01/2018
Withholding tax rates under DTAs
Methods of Double Tax Relief
Countries use different methods to ensure individuals are not paying taxes twice on the same income. These include:
a) Exemption method
The country where you live (residence country) does not tax income already taxed in another country (source country).
There are two approaches
i. Full exemption method – The foreign income is completely ignored.
ii. Exemption with progression method – The foreign income is not directly taxed in your home country but is factored in to determine your overall tax rate. This means the foreign income affects how much tax you pay on your other income, as the home country applies higher tax rates for higher total income levels.
b)Credit method
Your home/residence country calculates tax on all income but subtracts the amount paid in the foreign country.
There are two approaches:
i. Full credit method – A credit is given to the entire tax paid in the source country
ii. Ordinary credit method – The tax credit cannot be greater than the amount your home or resident country would charge on the same income.
c) Tax-sparing credits
The residence country ensures that tax incentives from the source country are not lost by offering a corresponding tax credit.
Key Takeaways
• Double taxation occurs when the same income is taxed twice—economically or juridically.
• Double Tax Agreements (DTAs) mitigate the burden of double taxation.
• Relief methods include exemption, credit, and tax-sparing provisions.
• DTAs promote fairness and foster cross-border investments.