Kenya is taking proactive measures to fuel innovation in its startup ecosystem by proposing a specialized tax regime for Employee Share Ownership Plans (ESOPs).
The finance bill for 2023 introduces a deferred tax approach, suggesting that taxes on shares allocated to employees be postponed until specific triggering events occur. These events include the passage of five years from the share award, the sale of shares by the employee, or the departure of the employee from the company.
Under the proposed regime, the taxable benefit will be calculated based on either the fair market value of the startup's shares at the end of the five-year period or at the time the shares are sold.
In cases where the fair market value is not readily available, the tax commissioner will determine it by examining the startup's financial statements. The anticipated commencement date for these new tax rules is July 1.
Currently, employees in Kenya are required to immediately pay taxes on gains from share options, even before exercising the option. The proposed changes aim to alleviate this burden by deferring the payment of taxes until specific triggering events occur.
This move is expected to provide a boost to startups incorporated in Kenya with an annual turnover of less than KES 100 million ($731,255), operating for less than five years, and not formed through the splitting or restructuring of another business. It's worth noting that startups in management, professional, or training sectors will not be eligible for this regime.