Kenya introduces Finance Bill 2025

• On 30 April 2025, the Kenyan Cabinet Secretary presented the Finance Bill 2025 to Parliament, proposing amendments to various tax laws, including the Income Tax Act, VAT Act and Excise Duty Act, with expected implementation on 1 July 2025.
• The Bill seeks to repeal the tax exemption for medium-sized enterprises, expand the definition of royalties, and introduce a five-year cap on the carryforward of tax losses, affecting tax planning for businesses.
• New provisions include the introduction of advance pricing agreements (APAs) to mitigate transfer pricing risks and the expansion of value-added tax (VAT) to include digital services provided by nonresident suppliers, requiring compliance from a broader range of businesses.
• The Bill also proposes increased tax rates on certain goods, the removal of preferential tax rates for specific sector, and changes to the taxation of digital assets, necessitating a review by affected entities.

On 30 April 2025, the Cabinet Secretary to the National Treasury presented the Finance Bill, 2025 (the Bill) to Parliament. Parliament will seek stakeholder and public comments before the Bill becomes an Act. The Bill seeks to amend various tax laws, including the Income Tax Act (ITA), VAT Act, 2013 (VAT Act), Excise Duty Act, Tax Procedures Act, 2015 (TPA), and Miscellaneous Fees and Levies Act. The Bill also provides for other miscellaneous amendments to the Stamp Duty Act.

Once the Finance Bill, 2025 has been subjected to public participation, it will be tabled before Parliament for debate before it is signed into law by end of June 2025.

This Alert summarizes the key proposals contained in the Finance Bill, 2025. Unless specifically mentioned, the changes contained in this analysis are expected to take effect on 1 July 2025 after assent by the President.

Business and personal tax

Business tax

Definition of individual retirement fund

The Bill seeks to amend the definition of the term "individual retirement fund" by deleting the requirement to abide with the Income Tax (Retirement Benefit) Rules. The Rules require individual retirement funds to be registered with the Commissioner — i.e. the Kenya Revenue Authority (KRA). This amendment aims to align the treatment of retirement funds with other retirement funds, as outlined by the Tax Laws (Amendment) Act, 2024, which removed the requirement to register with the KRA.

Expanded definition of the term royalty

The Bill seeks to expand the definition of the term "royalty" to include distribution of software where regular payments are made for the use of the software through the distributor. The amendment appears to emanate from historical tax controversy on the withholding tax status of payments to distributors of software.

Definition of the term related person

The Bill would streamline the definition of "related person" across the ITA. Currently, the term is defined in Section 2 and the Eighth Schedule to the Act. The proposed definition refers a related person, in the case of two persons, as a case where either person participates directly or indirectly in the management, control or capital of the other's business. When more than two persons are involved, a "related person" includes any other person who participates directly or indirectly in the management, control or capital of the business of the two persons. Additionally, it encompasses an individual who participates directly or indirectly in the management, control, or capital of the business of the two persons; an individual who is associated with the two persons by marriage, consanguinity or affinity, and where the two persons participate in the management, control or capital of the individual's business.

Expanded scope of Significant Economic Presence Tax

The Bill seeks to expand the scope of Significant Economic Presence Tax (SEPT) by including income derived or accrued from Kenya through a business carried out via the internet or an electronic network. The current proviso only covers supplies over a digital marketplace. Additionally, the Bill seeks to do repeal the exemption from SEPT for nonresident persons with an annual turnover of less than five million Kenya shillings (KES5m). The Tax Laws (Amendment) Act, 2024 introduced SEPT in place of Digital Service Tax (DST). The definition of the in-scope businesses, however, created uncertainty over whether SEPT applied to all activities carried out over the internet or an electronic network.

Minimum top-up tax due date

The Bill seeks to introduce a due date for payment of minimum top-up tax, being the last day of the fourth month after the end of the year of income. This will align it with the due date for payment of balance of tax. The Tax Laws (Amendment) Act, 2024 introduced a domestic minimum top-up tax to align with the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two. It, however, did not indicate the due date and thus the proposed amendment is meant to cure this deficiency.

Deductibility of expenditure incurred on public sports facilities

The Bill proposes to expressly provide that expenditures incurred in the construction of a public sports facility are deductible in the determination of taxable income. In addition, the Bill proposes to repeal the provision that allowed the deductibility of expenditure incurred on sports sponsorship with the prior approval by the Cabinet Secretary responsible for sports.

Limitation on tax-loss carryforwards

The Bill seeks to introduce a five-year cap on deductibility of tax losses. Currently, the law permits taxpayers to carry forward tax losses indefinitely. The Bill has not provided a transition clause for existing tax losses, thereby leading to uncertainty on the utilization of historical tax losses.

Mandatory requirement to submit country-by-country reports

The Bill proposes to lift the exemption granted to constituent entities of a Multinational Enterprise (MNE) Group from filing a country-by-country report (CbCR) where there is a competent authority agreement on exchange of information between Kenya and the ultimate parent entity of the MNE Group — e.g. the Multilateral Competent Authority Agreement on the Exchange of Country-By-Country Reports (CbC MCAA). It is noteworthy that Kenya is a signatory to this agreement and has activated a number of relationships for exchange of these reports.

Introduction of advance pricing arrangements

The Bill proposes to introduce an advance pricing agreement (APA) framework. This will enable taxpayers to enter an arrangement with the KRA on specific related-party transactions and thus mitigate transfer pricing controversy risks. The validity of an APA will be restricted to five consecutive years, but the KRA will have the right to revoke it through written notice of declaration in case of misrepresentation of facts.

The introduction of APAs is long overdue, particularly considering that Kenya is a hub for MNEs. The change will provide taxpayers with complex international transactions to enter into APAs, thus promoting tax certainty.

• Effective date: 1 January 2026

Taxation of life insurance business

The Bill seeks to replace the term "life fund" and replace it with "life insurance fund" in relation to the taxation of long-term insurance companies. The taxation of long-term insurance companies is premised on certain aspects of their funds. The proposal implies that the taxation of long-term insurance companies will be made only in reference to life insurance funds.

Taxation of gains or profits derived by a nonresident ship owner or charterer

The Bill seeks to include gains or profits derived from the business of a ship owner or charterer by a nonresident person under the withholding tax regime. Gains or profits derived by a nonresident ship owner or charterer are subject to income tax. The declaration of the tax is currently based on a self-assessment regime. The inclusion of the same in section 35 of the ITA implies that the tax will be withheld by the payer as opposed to the nonresident person making a self-declaration.

Extension of timeline for determination of an income tax exemption application

The Bill seeks to extend the timeframe for processing income tax exemption applications from 60 days to 90 days. Although the proposed change will provide the KRA with additional time to review the applications it is a disadvantage to taxpayers who will have to wait for a longer period before receiving a response on their application for income tax exemptions.

Exemption of gains on the transfer of property in a Special Economic Zones

The Bill seeks to amend the provision concerning gains from the transfer of property within a Special Economic Zone (SEZ), specifying that the exemption will only apply to the transfer of property within a SEZ by licensed developers, enterprises, or operators. The current proviso provides for exemption of gains on the transfer of property within a SEZ enterprise, developer and operator.

New incentives targeting entities certified by the Nairobi International Financial Centre Authority

The Bill has proposed incentives to stimulate growth of the Nairobi International Financial Centre Authority (NIFCA) regime as follows:

• Dividends tax exemption: The Bill proposes to exempt dividends paid by companies certified by NIFCA from taxation provided that the company reinvests at least 250 million Kenya Shillings in Kenya within the year of income. This proposal aims to encourage investment and economic growth by motivating certified entities under NIFCA to reinvest part of their returns into the local economy.
• Reduced corporate income tax (CIT) rate: The Bill proposes to introduce a preferential CIT regime for certified Nairobi International Financial Centre (NIFC) companies with a 15% CIT rate for the first 10 years and 20% for the subsequent 10 years of operations. To qualify for the reduced corporate tax rate, the NIFC certified company ought to meet three conditions:
  1. Invest at least KES3b in Kenya in the first three years
  2. Require, if it is a holding company, that at least 70% of its employees in senior management are citizens of Kenya
  3. Require, if the regional headquarters of the company is in Kenya, that at least 60% of its employees in senior management are citizens of Kenya
• NIFC start-up regime: The Bill further proposes that certified NIFC start-ups will enjoy a CIT rate of 15% for the first 3 years and 20% for the succeeding 4 years. An NIFC start-up has not been defined neither in the Bill nor the NIFC Act.

This is a welcome move as the Government seeks to promote the NIFC considering that it has remained largely dormant since it was established several years ago. The exemption of start-ups from CIT may, however, not crystallize into real benefits since most start-ups are not profitable in their initial years of operation. The Government may need to reconsider the incentives that are granted to start-ups.

Repeal of accelerated investment allowances for hotels and manufacturing businesses.

The Bill proposes to repeal the accelerated capital allowances of 100% that are granted to hotel buildings, buildings used for manufacture, machinery used for manufacture, and investments in a special economic zone. Accelerated capital allowances are also granted to such investments where those investments are located outside Nairobi or Mombasa County. The affected organizations will be granted capital allowances at the standard capital allowances that are available qualifying capital expenditure. The proposal aims to harmonize investment allowances.

Repeal of preferential tax rates granted to the housing sector and local motor vehicle assembly

The Bill proposes to repeal the preferential CIT rate of 15% for companies that construct at least 100 residential units annually and companies whose business is local assembling of motor vehicles (for the first five years). These preferential tax regimes were introduced to encourage investment into the real estate and local assembly industry sectors. This appears to be in line with the general move to rationalize tax expenditure.

Clarity on tax rate for qualifying interest and qualifying dividends

The Bill seeks to expressly provide that the resident withholding tax rates of 5% and 15% on the gross amount payable for qualifying dividends and qualifying interest, respectively, shall be a final tax. This proposal is welcome, as it provides clarity that there will be no further taxation on qualifying interest and qualifying dividends. The Tax Laws (Amendment) Act, 2024 deleted this provision, likely inadvertently.

Reduced tax rate on income earned from digital assets

The Bill proposes to reduce the rate of digital asset tax from 3% to 1.5% of the transfer or exchange value of the digital asset. Digital assets include token codes, cryptocurrency and non-fungible tokens (NFTs). The proposed reduction will be a welcome move as the Government seeks to spur the growth of the digital economy particularly given that the tax is imposed on the value of the asset rather than the gain on disposal.

Personal tax

Increase in the allowable per-diem limit

The Bill seeks to increase the amount of tax free per-diem amount from the current KES2k per day to KES10k per day. It is noteworthy that this benefit only applies where an employee is granted these amounts when on official duties, outside their usual place of work.

Deduction of mortgage interest on construction of residential premises

The Bill seeks to allow deduction of interest incurred on a mortgage facility taken to construct residential premises. Currently, the mortgage interest deduction only applies for mortgages taken to purchase or improve residential premises occupied by an individual during a year of income.

Taxation of withdrawals from registered schemes

The Bill proposes to repeal specific exemptions that are granted on qualifying lumpsum or periodic withdrawals from registered retirement schemes. The proposals would give full effect to the taxation of income on withdrawal from registered schemes, as per the tax exemption provided for under Paragraph 53 of the First Schedule to the ITA upon meeting the prerequisite conditions for exemption therein at the tax rates provided for under Paragraph 5 (d) of the Act.

Tax exemption on payment of gratuity

The Tax Laws (Amendment) Act, 2024 introduced an income tax exemption for gratuities or other allowances paid under a public pension scheme. However, the provision limits the exemption to payouts from public schemes. The Bill proposes a general exemption on all gratuities. This implies that payment of gratuities from both private and public schemes would be exempt from income tax.

Clarity on tax rate for fringe benefits provided by employers

The Bill proposes to include a tax rate of 30% on fringe benefits provided by an employer. The Tax Laws (Amendment) Act, 2024 deleted this provision, likely inadvertently.

Tax Procedures Act, 2015

Exclusions from electronic tax invoicing requirements

The Bill proposes to amend Section 23A of the TPA to provide that payments subject to a withholding tax that is a final tax are excluded from the electronic tax invoicing requirements. Withholding tax is a final tax if (1) a payment subject to withholding tax is made to a nonresident, or (2) qualifying dividends, qualifying interest or winnings are paid to a resident. Other transactions exempted from electronic tax invoicing are payments of emoluments, payments for imports, payments of interest, transactions for investment allowances and airline passenger ticketing.

Commissioner to provide reasons for an amended assessment

The Bill seeks to introduce a provision under Section 31 of the TPA to require the Commissioner to issue reasons for amending an assessment if the Commissioner makes an amendment or further amendment to a taxpayer's self-assessment return. This provision aims to promote the right to fair administrative action enshrined in the Constitution of Kenya by ensuring that assessments are not arbitrarily issued to taxpayers without a basis, as well as to give taxpayers more clarity when responding to the Commissioner.

Relief from penalty for failure to deduct or withhold tax

The Bill seeks to amend Section 39A of the TPA to exclude from liability a person who fails to remit or deduct withholding tax on a payment, if the recipient of the payment has fully paid and accounted for the principal tax. This proposal would offer a reprieve to taxpayers who have been penalized by paying the entire principal sum of tax not withheld, even if the recipient has accounted for the income tax, resulting in unjust enrichment of the tax collector. The current provision has, on several occasions, been challenged by taxpayers on the basis that it results in double taxation of the same income.

Security on property for unpaid tax

The Bill proposes to amend Section 40(2) of the TPA to allow a Registrar to register a notification from the Commissioner to hold a defaulting taxpayer's property as security for unpaid tax without charging stamp duty. Currently, the law allows the Registrar to register a notification from the Commissioner as a restraint on property for unpaid taxes without levying or charging a fee, but does not specify whether stamp duty, as prescribed in the Stamp Duty Act, is payable on the registration such securities. Further, the Bill seeks to amend Section 40(5) by exempting from stamp duty the transfer of charged property by the Commissioner where the taxpayer fails to pay the tax liability.

Recovery of tax from nonresident taxpayers

The Bill proposes to amend Section 42 of the TPA to extend the Commissioner's powers to collect unpaid taxes from persons holding or owing money to nonresident taxpayers.

Extension of timelines for review and audit of tax refund applications

The Bill proposes to amend Section 47(2) of the TPA by extending the timeline for the Commissioner to ascertain and determine an application for a refund from 90 days to 120 days. Additionally, the Bill proposes to amend Section 47(4A) to extend the audit period for refund applications from 120 days to 180 days. The extension of these periods provides the Commissioner with more time to review and audit tax refund applications. The proposed provision would result in longer waiting times for taxpayers seeking refunds.

Timelines for late objections

The Bill proposes to amend Section 51 of the TPA to introduce a new subsection 7A, which clarifies that where a taxpayer is granted leave by the Commissioner to lodge a late objection, the period within which the Commissioner is required to make an objection decision commences from the date the objection is lodged. This proposal aims to provide clarity on the basis of starting the computation of time for decision-making by the Commissioner when a late objection is accepted by the Commissioner thus eliminating ambiguity and controversy.

The right to privacy vis-à-vis data management and reporting systems

The Bill proposes to amend Section 59A by deleting subsection 1B, which protects persons from being required to integrate or share data related to trade secrets and private or personal data held on behalf of customers or collected in the course of business. This proposal would grant the Commissioner the unrestricted authority to access personal and other private data for tax compliance purposes.

Determination of time for lodgement of objections and appeals

The Bill proposes to delete Section 77(2) introduced by the Tax Procedures (Amendment) Act 2024, which excluded Saturdays, Sundays, and public holidays from the computation of time for lodging objections and appeals. This means that if the proposal is passed, Saturdays, Sundays and public holidays would be included in the computation of time for lodging objections and appeals reverting to previous status.

Penalties for late submission and failure to submit returns

The Bill proposes to clean up Section 83(1) of the TPA to broaden the scope of penalties to apply to late submission of tax returns as well as failure to submit the tax return altogether, in line with the amendments introduced in marginal heading of the Section by the Tax Procedures (Amendment) Act. As a result, taxpayers who fail to file a return will now face the prescribed penalties.

Waiver of penalties and interest arising from electronic system errors

The Bill proposes to empower the Cabinet Secretary, upon the recommendation of the Commissioner, to waive all or part of any penalty or interest if the liability arose due to:

• An error generated by an electronic tax system (hereinafter "the system")
• Delays in updating the system
• Duplication of penalties or interest caused by system malfunction
• Incorrect registration of a taxpayer's obligations
• Effective date: 1 January 2026

Indirect Taxes

Value Added Tax Act

Expansion of the scope of taxable electronic services

The Bill proposes to expand the scope of taxable electronic services by nonresident suppliers to include internet, radio or television broadcasting. This implies that nonresident persons providing internet, radio or television broadcasting services will be required to register and account for VAT in Kenya.

Proposal to reduce the timeline to lodge VAT refunds

The Bill proposes to amend Section 17(5)(d) to reduce the time frame for lodging VAT refunds from the current 24 months to 12 months from the date the tax became due and payable. This proposal is aimed at harmonizing the time limit for applying VAT refunds with the 12-month period contained in Section 47(1)(b) of the Tax Procedures Act, 2015.

Enhancement of VAT refund on bad debts

The Bill proposes to reduce the time limit for lodging a refund of VAT on bad debts from three years to two years from the date of the supply. The Bill further proposes to allow offset of any approved VAT refund on bad debts on future/outstanding VAT liabilities.

Issuance of valid tax Invoice

The Bill proposes to amend Section 42(1) of the Act to broaden the requirement to issue a valid tax invoice by all registered persons making supplies. The proposal aims at ensuring a valid tax invoice issued for both taxable and exempt supplies made by a VAT registered person.

Liability to pay VAT for exempt and zero-rated supplies

The Bill proposes to subject to VAT any prior conditionally approved exempt or zero-rated purchases disposed or used in a manner inconsistent with their intended purpose.

Amendment of VAT status of various supplies

The Bill proposes to amend the VAT status of the following products from Exempt to Taxable: