By Faith Mwende
Loan facilities are a common workplace benefit that help employees access quick financial support when they need extra cash. However, when employers provide loans to staff at interest rates below the prevailing market rate, the difference is treated as a taxable benefit under Kenyan law.
This tax, known as Fringe Benefit Tax (FBT), is payable by the employer.
Fringe Benefit Tax was introduced under Section 12B of the Income Tax Act and became effective on June 12, 1998. It applies to any loan given by an employer to an employee, company director, or their relatives at an interest rate lower than the market rate. The law views the reduced interest as a form of income benefit to the employee, hence subject to taxation.
The taxable value of the fringe benefit is the difference between the market interest rate and the rate charged by the employer. The market rate is set quarterly by the Commissioner of Domestic Taxes. The tax is calculated every month and must be paid by the employer on or before the 9th day of the following month.
Importantly, even if the employee leaves the company, the FBT continues to apply until the loan is fully repaid.
FBT applies to loans issued after June 11, 1998, or earlier loans whose terms were revised after that date. Employers with PAYE obligations are required to remit the tax on time to avoid penalties. Failure to remit the tax attracts a 25% penalty on the amount due, while late payment incurs an additional 5% penalty.
These penalties are meant to encourage compliance and timely remittance.
According to the Kenya Revenue Authority (KRA), the purpose of Fringe Benefit Tax is to ensure fairness in the taxation system by capturing non-cash benefits that employees receive. It also prevents misuse of employer-funded loans as a tax-free form of compensation.
In essence, while employer-issued loans are a welcome financial cushion for workers, both employers and employees must understand their tax implications. FBT ensures that all employment-related benefits whether monetary or not are treated equitably under Kenya’s income tax laws.
