June 20, 2024
Kenya Proposes Tax Breaks for Startup ESOPs in New Finance Bill

Kenya is proactively promoting innovation in its startup ecosystem by proposing a specialized tax regime for Employee Share Ownership Plans (ESOPs).

The finance bill for 2023 puts forward a deferred tax approach, suggesting that taxes on shares given to employees be delayed until specific triggering events occur.

These events include the passage of five years from the share award, the employee selling their shares, or the employee leaving the company.

The proposed regime calculates the taxable benefit based on either the fair market value of the startup’s shares at the end of the five-year period or at the time of share sale.

This move by Kenya aims to encourage startups to offer ESOPs as an incentive for employees to work toward the growth of the company.

The tax commissioner will establish the fair market value of startups without readily available information by scrutinizing their financial statements.

The new tax rules will become effective on July 1.

Currently, employees in Kenya are obligated to pay taxes on gains from share options immediately, even before the option is exercised. The proposed modifications aim to ease this responsibility by postponing tax payments until specified triggering events occur.

This change is expected to provide a stimulus to startups incorporated in Kenya, with a yearly turnover of less than KES 100 million ($731,255), operating for a duration of less than five years, and not created by dividing or reorganizing another business.

It is important to note that startups in management, professional, or training industries will not be eligible for this policy.

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