INTRODUCTION
This advice provides an overview of the tax obligations for a sole proprietorship law practice in Kenya that has received over Kshs. 5 million in legal fees from clients. It addresses the various types of taxes applicable, the processes for compliance, and the relevant tax regulations under Kenyan law.
1. INCOME TAX (CORPORATE AND PERSONAL)
As a Sole Proprietorship, the business and the owner are considered a single legal entity for tax purposes. Therefore, the legal fees collected by the practice are considered part of the personal income of the business owner, and the tax obligations are assessed on the individual rather than the business.
a) Taxable Income: All payments invoiced as Legal Fees and received by the Firm will form part of the total taxable income for the owner.
The total income is subject to tax based on the Kenyan progressive individual income tax rates, which are applied to the total annual income.
b) Income Tax Rates: for Individuals Under the Income Tax Act, the applicable individual income tax rates are as follows (as of the 2024/2025 tax year):
✓Kshs. 0 - Kshs. 288,000: 10%
✓Kshs. 288,001 - Kshs. 388,000: 15%
✓Kshs. 388,001 - Kshs. 488,000: 20%
✓Kshs. 488,001 - Kshs. 688,000: 25%
✓Kshs. 688,001 and above: 30%
c) Deductions and Allowable Expenses: As a sole proprietor, you are entitled to deduct business expenses that are wholly and exclusively related to the practice of law. These may include:
✓Office rent, utilities, and maintenance costs
✓Salaries and wages paid to employees (if any)
✓Legal research materials and subscriptions
✓Professional development and training costs
✓Travel and transportation expenses for business purposes
✓Legal and accounting fees
✓Other overheads related to the business of the practice
These deductions will reduce the taxable income, thus lowering the tax liability.
d) Filing and Payment: Income tax must be filed and paid annually. The deadlines for filing and payment are as follows:
✓Preliminary tax (installments): Paid in quarterly installments. The tax due is divided into four equal installments paid on or before the 20th of each of the following months: April, July, October, and January.
✓Annual Return: The final return for the year must be filed by 30th June of the following year. All taxes due must be paid at this time.
2. VALUE ADDED TAX (VAT)
VAT is a tax on the supply of goods and services in Kenya, and it may apply to a law practice if certain conditions are met.
a) Registration for VAT: A sole proprietorship law practice is required to register for VAT if its annual taxable turnover exceeds Kshs. 5 million. Since your practice has received more than Kshs. 5 million in legal fees, which exceeds VAT threshold, you are obligated to register for VAT with the Kenya Revenue Authority (KRA).
b) VAT Rate: The current VAT rate in Kenya is 16%. This applies to most taxable supplies, including legal services provided to local clients. However, legal services provided to foreign clients may be exempt from VAT under certain circumstances (e.g., if the services are considered "exported services").
c) Filing and Payment of VAT: Once registered, VAT must be filed and paid on a monthly basis, with returns due by the 20th day of the following month. The law practice will need to:
✓Collect VAT on taxable services (e.g., legal fees from local clients)
✓Remit the VAT collected to KRA after deducting any VAT paid on allowable business expenses (input VAT)
d) VAT Returns: VAT returns are filed using the KRA’s online portal, iTax. Any VAT payable should be settled by the filing deadline.
3. WITHHOLDING TAX ON LEGAL FEES (FOR LOCAL CLIENTS)
Withholding tax may apply to legal fees earned from local clients, especially if the client is a corporate entity or another person subject to withholding tax provisions. The applicable withholding tax rates are as follows:
✓Corporate Clients: Withholding tax which corporate clients may charge on legal fees billed is typically 5% for payments made by corporate clients. This means the client can withhold 5% of the value of the Legal Fee and remit the same to KRA, subject to issuing the Firm with a Withholding Tax Certificate in respect to each and every such deductions.
✓Individual Clients: No withholding tax is usually applied on legal fees paid by individuals unless the payment is made for specific types of legal services under other provisions.
It is the responsibility of the client to deduct and remit the withholding tax to KRA. However, the sole proprietor must ensure that the withholding tax deducted is accounted for when filing their income tax return.
4. PAY AS YOU EARN (PAYE) ON EMPLOYEES
If your law practice has employees, you are obligated to deduct PAYE from their wages or salaries and remit this tax to KRA.
a) PAYE Rates: PAYE rates are the same as the individual income tax rates. Employers are required to:
✓Deduct PAYE from the employees’ salaries
✓Remit these deductions to KRA monthly
✓File monthly PAYE returns with KRA
b) Filing and Payment: PAYE returns are due by the 9th of each month, and payment must be made by the same date.
5. STAMP DUTY
Stamp duty may be applicable in the case of legal documents executed by the sole proprietor as part of the business. Stamp duty is calculated based on the value of the transaction, such as property agreements or contracts.
For instance, if a sale or lease agreement is entered into by the law practice, stamp duty on the transaction value would apply.
6. OTHER TAX OBLIGATIONS
Import Duties and Excise Tax: If the law practice imports goods (e.g., office supplies, legal resources, etc.), it may be liable to pay import duties and excise tax.
NSSF and NHIF Contributions: If the practice has employees, it is required to make monthly contributions to the National Social Security Fund (NSSF) and National Hospital Insurance Fund (NHIF), which are statutory requirements for social security and health coverage.
CONCLUSION
Where your law practice has received substantial Legal Fees in millions of Kenya Shillings, it is critical to comply with all relevant tax obligations in Kenya.
This includes paying income tax based on your net income, registering for and paying VAT, adhering to withholding tax requirements, filing PAYE for any employees, and fulfilling any other applicable duties such as stamp duty, NSSF, and NHIF contributions.
To ensure full compliance, it is advisable to:
1. Engage a professional tax advisor or accountant familiar with Kenyan tax laws;
2. Regularly monitor your tax filing deadlines; and
3. Keep thorough records of all business expenses, income, and tax payments.
By adhering to these tax obligations, you will avoid penalties and ensure that your law practice operates in full compliance with Kenyan tax laws.
We trust the above advice canvasses key concerns you may have regarding taxation of Sole Proper Law Practice. We remain at your service should you require any further clarification.
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Taxlex Consulting Group - a participating consultancy within the SLS Group
