Kenya

The Finance Act, 2026

The Finance Act, 2026 has introduced some significant amendments. Some of these include: 

• Expansion of the definition of ‘royalty’ to include payments for the use of, or right to use, a proprietary digital payment card network or platform. 

• Expansion of the definition of ‘management or professional fee’ to include interchange fees and merchant service fees arising from card transactions. 
• Introduction of an exemption for certain employment income earned by non-resident individuals employed by, or engaged on behalf of, a resident air transport operator designated as a national carrier, to the extent that the income relates to duties performed outside Kenya and connected to the operator’s international transport operations. 
• Introduction of an exemption for gratuity contributions in respect of employment or services rendered, to the extent that the gratuity relates to a contract of service of at least three years, or a renewal or extension of such contract beyond three years, and the gratuity paid does not exceed 31% of the employee’s emoluments for the period of the contract. 
• Exemption of pension death benefits from tax, with pension benefits paid to dependants or beneficiaries upon the death of a member now expressly exempt from income tax. 
• Reintroduction of withholding tax on winnings at 20% and introduction of withholding tax on the sale of scrap metal at 1.5%. 
• Deletion of the preferential 5% withholding tax rate on dividends paid to citizens of East African Community (EAC) Partner States, which now attract the standard non-resident rate of 15%. 
• Clarification that bad debts of money lenders, banks and licensed financial institutions include the principal, interest and any other amount relating to the debt. 
• Indefinite carry-forward of tax losses incurred before 1 July 2025 for taxpayers that had invested at least KES 10 billion before that date, until the losses are fully utilised. 
• Introduction of a 100% first-year investment allowance for petroleum or gas storage facilities where the investment exceeds KES 10 billion. 
• Introduction of a final non-resident rental income tax on income derived from the use or occupation of immovable property situated in Kenya. 
• Extension of capital gains tax to gains derived by non-residents from the alienation of shares that derive their value from Kenya. 
• Repeal of the section 23 anti-avoidance rule in the Income Tax Act, with a broader general anti-avoidance rule introduced under section 18A of the Tax Procedures Act. 
• Reduction of the non-resident contractor income tax rate in the extractive sector from 37.5% to 30%, and a 15% rate on repatriated income of licensees and contractors, with effect from 1 January 2027. 
• Introduction of new excise duties, including on antique and classic vehicles, imported sugar, imported wood and timber products, plastic sheeting and sanitary fittings, and smokeless tobacco. 
• Extension of the tax amnesty to cover tax debts accrued up to 31 December 2025, with settlement of the outstanding principal tax required by 31 December 2026. 
• Introduction of Commissioner-originated assessments (section 29A), pre-populated tax returns (section 75) and virtual asset reporting obligations (sections 6C and 6D) under the Tax Procedures Act. 

Turnover tax

The rate of turnover tax has been increased from 1% to 3%. This is applicable to micro, small, and medium enterprises (MSMEs) if their business turnover is between 1 million and 25 million Kenya shillings (KES). 

MSMEs earning below KES 1 million are exempt from turnover tax. However, MSMEs exempted from turnover tax will still be required to declare and file their corporate tax returns. 

The Finance Act, 2023 has decreased the upper threshold in respect of the turnover tax from KES 50 million to KES 25 million. 

Significant economic presence (SEP) tax

The Tax Laws (Amendment) Act, (TLAA) 2024 repealed the digital service tax (DST), which was applicable at the rate of 1.5%, and replaced it with the SEP tax, which has an effective rate of 3%.

The Finance Act, 2025 has expanded the scope of SEP tax. SEP tax now applies to all income derived by non-residents from services provided through the Internet or any electronic network, not just through a digital marketplace.

Additionally, the Act removed the turnover threshold eliminating the de minimis exemption, meaning all qualifying non-residents will now be liable, regardless of size. Previously non-residents with an annual turnover of less than KES 5 million were exempted from SEP tax.

Minimum top-up tax

The Tax Laws (Amendment) Act, (TLAA) 2024 introduced a domestic minimum top-up tax, allowing Kenya to impose an additional amount of tax on the profits of entities that are part of an in-scope multinational group. This ensures the effective tax rate on those profits is 15%.

The proposed domestic minimum top-up tax is derived from the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar Two framework, which seeks to ensure an effective tax rate of at least 15% in every jurisdiction where an in-scope multinational group operates.

For the purposes of the Kenya Income Tax Act (ITA), an in-scope multinational is defined as a resident person or a person with a permanent establishment (PE) in Kenya who is a member of a multinational group with a consolidated annual turnover of at least 750 million euros (EUR) in the consolidated financial statements of the ultimate parent entity in at least two of the four years immediately preceding the tested year of income.