Residential Rent VS Hotel accommodation for Tax purposes

Residential Rent VS Hotel accommodation for Tax purposes

The real estate industry has, in recent years, experienced rapid growth in Kenya. Residential apartments and hotel properties have cropped up in every corner of our republic .Apart from the traditional residential and hotel properties, serviced apartments, serviced flats, Airbnb et al. have also emerged . The emerging business models in the industry come with new challenges with regard to tax compliance .

Residential rent and hotel accommodation are treated differently in Kenya for tax purposes, while accommodation is subjected to Tourism Levy and VAT, residential rent is not.

The Tourism Act defines a hotel as:

“hotel” includes a facility used for the reception of guests and travelers desirous of dwelling or sleeping therein;

The VAT Act defines a hotel as :

“hotel” includes premises commonly referred to as “service flats”, “service apartments”, “beach cottages”, “holiday cottages”, “game lodges”, “safari camps”, “bandas” or “holiday villas” and other premises or establishments used for similar purposes, but does not include—

(i) premises on which the only supply is under a lease or license of not less than one month, unless the agreement relating thereto provides that by prior arrangement the occupier may, without penalty, terminate the lease or license on less than one month’s notice; or

(ii) premises operated by an educational or training institution approved by the Cabinet Secretary for the time being responsible for education for the use of the staff and students of that institution; or

(iii) premises operated by a medical institution approved by the Cabinet Secretary for the time being responsible for health, for the use of the staff and students of that institution;

A normal apartment that offers accommodation for a duration of less than a month will therefore be treated as a hotel.

It is also important to note that the wording of the tenancy agreement makes the difference. In this case, if a tenancy agreement gives a leeway for termination of tenancy agreement before the end of one month, without a tenant incurring a penalty, the same will be treated as a hotel, notwithstanding the length of tenancy

In addition to the above, the Income Tax Act entitles registered hotel buildings to investment allowance. This is not the case for residential properties.

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