9 Ways to Legally Avoid Tax in a Tough Economy

Are you cash strapped? Looking for a solution to increase your assets? Tax avoidance is a legal way of reducing the amount one has to pay to the Kenya Revenue Authority (KRA).

Tax evasion is an illegal offense of intentionally not paying due taxes. During an economic crisis, taxes may not be what most formal businesses and informal businesses enjoy paying.

Kenyan Enterprise has compiled a list of strategies to avoid paying taxes legally, using methods that are in line with the KRA guidelines.

Running a home-based businesses

The beauty of having a home-based business is that as long as it is registered, you can reduce operational costs such as utility bills and transport costs.

Dividends

Individuals who are not willing to shoulder the burden that accompanies owning a business can opt for dividends. Dividends are payments made by corporations to shareholders to distribute profits. SACCOs and listed companies on the Nairobi Securities Exchange are recommended options. Dividends attract a withholding tax of 5%.

Capital gains

Investors who choose to realize their profits on their non-inventory assets such as shares in listed companies, real estate, and bonds will attract a capital gains tax of 15 percent.

Tax treaties

The Kenyan government has signed double taxation treaties with countries such as Mauritius which have a lower corporate tax in comparison to Kenya. The use of tactics such as profit shifting which shifts profits from a high tax jurisdiction to a low tax jurisdiction will be considered tax evasion according to the Kenya Revenue Authority.

Fixed rates bonds

The treasury floats bonds that have different periods of maturity and will attract different tax rates. For example, infrastructure bonds that were floated in February 2022 were tax-exempt but had a 20 year maturity period with an option to withdraw half of the principal amount after 10 years. The terms and conditions of bonds are non-negotiable.

Cash-out refinance

Do you have a mortgage plan already? An individual can exploit the cash-out refinance option which allows the borrower to acquire cash from their home mortgage.

The cash can be used for investment opportunities and the profits can be used to direct payment to the mortgage. Individuals should be timely when they want to refinance their loan such as when the lending rates are low.

Mortgage interest deduction

When you use your profits to offset the interests of your mortgage it allows the individual to acquire assets and avoid paying taxes legally. The individual must keep the financial records in case the taxman needs clarity on her finances.

Rental income

Landlords in Kenya enjoy a landlord rate of 10 percent if they choose to venture into real estate. The taxes can be paid to KRA  monthly or annually depending on the individual’s preference.

Tax credits

Investors can take advantage of lower tax rates by utilizing the tax credits that the government offers. Investing in Special Economic Zones will attract a tax rate of 10 percent for the first decade and 15 percent for the next 15 years. Tatu city has such special economic zones which have attracted investors in large numbers.