Deductions not Allowed.
(1)
Save as otherwise expressly provided, for purposes of ascertaining the total income of a person for a year of income, no deduction shall be allowed in respect of –- (a) expenditure or loss which is not wholly and exclusively incurred by him in the production of the income;
- (b) capital expenditure, or any loss, diminution or exhaustion of capital.
- (c) any expenditure or loss where the invoices of the transactions are not generated from an electronic tax invoice management system except where the transactions have been exempted in accordance with the Tax Procedures Act, 2015 (Finance Act 2023 wef 1st-January-2024 s12)
(2)
Notwithstanding any other provision of this Act, no deduction shall be allowed in respect of –(a) expenditure incurred by a person in the maintenance of himself, his family or establishment or for any other personal or domestic purpose including the following –
- (i) entertainment expenses for personal purposes; or
- (ii) hotel, restaurant or catering expenses other than for meals or accommodation expenses incurred on business trips or during training courses or work related conventions or conferences, or meals provided to employees on the employer's premises;
- (iii) vacation trip expenses except those customarily made on home leave as provided in the proviso to section 5(4)(a) and aa; Finance Act, 2014 effective 13 June 2014
- (iv) educational fees of employee's dependents or relatives; or
- (v)
club fees including entrance and subscription fees except as provided in section 15(2)(v)Deleted by (Finance Act 2023 wef 1st-January-2024 s12)
(c) income tax or tax of a similar nature,
(d) sums contributed to a registered or unregistered pension, savings, or provident scheme or fund, except as provided in section 15(2)(o), or any sum paid to another person as a pension;
(e) a premium paid under an annuity contract;
(f) expenditure incurred in the production of income deemed under section 10 to have accrued in or to have been derived from Kenya where that expenditure was incurred by a non-resident person not having a permanent establishment within Kenya;
(fa) any expenditure incurred in the production of dividend income deemed under paragraph (a) of subsection (1), of section 7 to have been derived from Kenya where such expenditure was incurred by a non-resident person not having a permanent establishment within Kenya;**
(g) (Deleted by 8 of 1978 s. 9);
(h) a loss incurred in a business which, having regard to the nature of the business, to the principal occupation of the owner, partners, shareholders or other persons having a beneficial interest therein, to the relationship between those persons or to any other relevant factor, the Commissioner considers it reasonable to regard as not being carried on mainly with a view to the realization of profits; and, without prejudice to the generality of the foregoing, a business shall be deemed not to be carried on for any year of income with a view to the realization of profits where more than one quarter of the amount of the revenue expenditure incurred in that business in that year relates to goods, services, amenities or benefits, or to the production of goods, services amenities or benefits, which are of a personal or domestic nature enjoyed by the owner, partners, shareholders or other persons having a beneficial interest in the business or a member of the family or the domestic establishment of any such person;
(i)
(j*)
(j*) gross interest paid or payable to related persons and third parties*** a non-resident in excess of thirty per cent of earnings before interest, taxes, depreciation and amortization of the borrower in any financial year:
Provided that—
- (i) any income which is exempt from tax shall be excluded from the calculation of earnings before interest, taxes, depreciation and amortization; and
- (ii) this paragraph shall apply to—
- (A) interest on all loans;
- (B) payments that are economically equivalent to interest; and
- (C) expenses incurred in connection with raising the finance.
- (iii) this paragraph shall not apply to —
- (A) banks or financial institutions licensed under the Banking Act; and
- (B) micro and small enterprises registered under the Micro and Small Enterprises Act, 2012;
- (C**) microfinance institutions licensed and non-deposit taking microfinance businesses under the Microfinance Act, 2006;
- (D**) entities licensed under the Hire Purchase Act;
- (E**) non-deposit taking institutions involved in lending and leasing business;
- (F**) companies undertaking the manufacture of human vaccines;
- (G**)
companies engaged in manufacturing whose cumulative investment in the preceding five years from the commencement of this provision is at least five billion shillings;*** - (H**)
companies engaged in manufacturing whose cumulative investment is at least five billion shillings:Provided that the investment shall have been made outside Nairobi City County and Mombasa County; ***and
- (I**) holding companies that are regulated under the Capital Markets Act.
- (iv) any interest in excess of thirty per cent of earnings before interest, taxes, depreciation and amortization shall be an allowable deduction in ascertaining the total income of a person in the subsequent three years of income to the extent that the deduction of interest on loans from non-resident persons does not exceed the thirty percent threshold provided under this section; *** and
- (v) this provision shall not apply where the interest is exempt from tax under this Act.*** (Finance Act 2021- wef-01Jan2022*), (Finance Act 2022-wef-01-July-2022**) (Finance Act 2023 wef 1st-January-2024 s12***)
(ja) an amount of deemed interest where the person is controlled by a non-resident person alone or together with not more than four other persons and where the company is not a bank or a financial institution licensed under the Banking Act. (Finance Act 2021- wef-01Jan2022)
(k) (Deleted by 8 of 1997, s. 33);
(l) (Deleted by Finance Act 2009, s. 23)
(3)
For the purpose of subsection (2), the expression“all loans” means loans, overdrafts, ordinary trade debts, overdrawn current accounts or any other form of indebtedness for which the company is paying a financial charge, interest, discount or premium but shall not include local loans* ; (Finance Act 2023 wef 1st-January-2024 s12*)
(4)
(5)
The Commissioner shall prescribe the form and manner in which the deemed interest shall be computed and the period for which it shall be applicable. Finance Act 2012 09 June 2011
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