The rate of taxation significantly influences the propensity of individuals to start, operate, invest in, and expand a business. Kenyan enterprises operating within Special Economic Zones (SEZs) are poised to benefit from various tax incentives articulated in the Special Economic Zones Act, No. 15 of 2016 (the ‘SEZs Act’), along with related tax laws and regulations. These incentives, which manifest as exemptions, zero ratings, and/or reduced tax rates, are strategically designed to encourage market entry and stimulate the growth of businesses within the SEZs.
This analysis aims to clarify the specific tax incentives available to Small and Medium Enterprises (SMEs) operating under the SEZ framework.
Key Tax Advantages for SEZ-Based SMEs
Exemption from Stamp Duty
The SEZs Act, under Section 38, grants an exemption from the payment of stamp duty. This provision applies to enterprises, operators, and developers within the SEZs, covering the execution of any legal instrument related to their operational activities. For SMEs, this exemption offers considerable cost savings when securing financing against property or when making property purchases.
Reduced Corporate Income Tax Rate
The Income Tax Act, Cap 470 establishes favorable, lower corporate tax rates for SEZ-licensed enterprises. These businesses are required to pay corporate taxes at a rate of ten percent (10%) for the initial ten years of operation. This rate subsequently rises to fifteen percent (15%) for the following ten-year period. This contrasts sharply with the standard corporate income tax rate of thirty percent (30%) applicable to other resident companies. Consequently, SMEs are enabled to reinvest a larger portion of their earnings, thereby boosting their overall productive investments.
Preferential Withholding Tax Rates
SEZ enterprises benefit from a preferential withholding tax rate of five percent (5%) on all payments made to non-residents. This includes payments such as interest, management and professional fees, and royalties. Furthermore, dividends distributed by SEZ enterprises, operators, and developers that are licensed under the SEZs Act are fully exempt from withholding tax.
Zero-Rated Value Added Tax (VAT)
The Value Added Tax Act stipulates that the supply of goods and/or taxable services to SEZ-based enterprises is zero-rated. This classification means the goods or services are taxable, but the applicable rate is set at zero percent (0%). This incentive allows SMEs operating within SEZs to significantly reduce their cost of production, which in turn enhances their profit margins.
Investment Deduction Allowance
Enterprises within the SEZs that incur capital expenditure for the construction of buildings or the acquisition and installation of machinery are entitled to a one hundred percent (100%) investment deduction. This deduction directly reduces the taxable income of the enterprise. SMEs can effectively utilize this incentive to support and accelerate productive capital investments.
