Kenya

The Finance Act, 2025 introduced various tax changes. These include limitation of carry-over of tax losses to 5 years with an option for extension for a further 5 years subject to the approval of the Cabinet Secretary for Finance, introduction of capital allowances on expenditure incurred on purchase or acquisition of spectrum license by telecommunication operators, introduction of Advance Pricing Agreements (APAs), repeal of the digital asset tax, and introduction of reduced corporation tax rates for start-ups certified by the Nairobi International Financial Centre Act (“NIFCA”)

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)

The Tax Laws (Amendment) Act, (TLAA) 2024 repealed the DST, which was applicable at the rate of 1.5%, and replaced it with the SEP tax, which has an effective rate of 3%.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

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. 

Proposed tax reforms

On 8 July 2022, the National Treasury developed a draft National Tax Policy for guiding tax administration and revenue collection. The policy sets out broad parameters on tax policy and related tax matters in Kenya, with the objectives of providing:

• policy guidance on the collection, enforcement, and administration of tax laws
• the basis for review and development of tax laws
• guidelines to stakeholders, including investors, on tax policy matters
• guiding principles for the Kenyan tax system, and
• a legal framework for granting tax incentives to various sectors of the economy. 

Further on 23 November 2023, the National Treasury tabled the National Tax Policy to the Parliament. The overall objective of this Policy is to guide progressive development and administration of the Kenya tax system.

The National Tax Policy is intended to bring certainty in the Kenya tax regime and congruence between the economic and tax policy.

In September 2023, the Government of Kenya published the draft Medium-Term Revenue Strategy (MTRS) for the financial years from 2024/25 to 2026/27. 

According to the MTRS for 2024/25 to 2026/27, tax expenditure in Kenya is estimated to be about 6% of gross domestic product (GDP), which is higher than the average of 5% for sub-Saharan Africa. The MTRS also noted a rise in the corporate tax revenue collection gap, which is attributed to low compliance and tax expenditures.

The MTRS outlines various tax policy and administrative measures to be implemented gradually over the strategy period, such as:

• Reviewing and rationalising exemptions and preferential rates on corporate income tax (CIT), personal income tax (PIT), value-added tax (VAT), excise duty, and customs duty. 
• Developing a Tax Expenditure Governance Framework to guide the introduction, monitoring, evaluation, and reporting of tax expenditure and to improve transparency and accountability. 
• Strengthening the capacity and coordination of the National Treasury, the Kenya Revenue Authority (KRA), and other stakeholders in tax expenditure management and analysis. 
• Aligning the tax expenditure regime with the regional and international commitments and best practises, such as the East African Community (EAC) Common External Tariff and the OECD/G20 Base Erosion and Profit Shifting (BEPS) framework. 

By implementing the above measures, the MTRS aims to raise the tax-revenue-to-GDP ratio from 13.5% in 2022/23 to 20% by 2026/27.

Other significant amendments in the Finance Act, 2025

The Finance Act, 2025 has introduced some significant amendments. Some of these include:

• Repeal of Digital Asset Tax- the Act abolishes the 3% tax on digital asset transactions, removing direct taxation on crypto-currencies and non-fungible tokens .
• The carrying forward of tax losses limited- tax losses can now only be carried forward for five years, with a possible five-year extension upon approval by the cabinet secretary.
• Advance Pricing Agreements Introduced- taxpayers can now enter into Advance Pricing Agreements with the tax authority for cross-border transactions, providing certainty and reducing audit risks.
• Reduction of the time line extended to taxpayers for the application of VAT refund claims arising from excess input tax and withholding VAT from 24 months to 12 months.
• Imposition of Excise duty on a range of imported goods not originating from East African Community (EAC) Partner States, such as certain plastics, glass, and paper products, at rates up to 35%. This aims to protect local manufacturers from external competition.