Kenya's Finance Act, 2025 (“the Act”), which was assented to on 27 June 2025, ushers in a raft of amendments affecting individuals and businesses alike. The changes, most of which take effect from 1st July 2025 with a few slated for 1st January 2026, are designed to streamline tax administration, enhance revenue collection, and bring Kenya's tax regime in line with international standards. The alert below provides briefly summarises some of the key changes introduced by the Act.
Amendments to the Income Tax Act, CAP 470, Laws of Kenya (“ITA”)
A notable change is the harmonisation and expansion of the definition of the term “related person” under the ITA. This new definition now captures not only direct or indirect participation in the management, control, or capital of a business but also relationships by marriage, blood, or affinity. This means that more transactions are likely to fall under the scrutiny of transfer pricing and anti-avoidance rules, compelling businesses to reassess their group structures and related party dealings to ensure they remain compliant with the law.
The Act also introduces a five-year limit on the carry-forward of tax losses, replacing the previous indefinite period. This could disadvantage businesses with long investment cycles or those recovering from significant losses, as any losses older than five years will be written off.
In a move welcomed by multinational groups, the Act empowers the tax authority to enter into Advance Pricing Agreements with taxpayers for transfer pricing matters, valid for up to five years. These agreements provide certainty, reduce the risk of double taxation, and encourage transparency, but taxpayers must ensure full and accurate disclosure to avoid having their agreements voided.
Suppliers to public entities will need to take note of new withholding tax obligations. Payments for goods supplied to public entities will now attract withholding tax at 0.5% for residents and 5% for non-residents.
The digital sector faces further changes with the expansion of the Significant Economic Presence Tax. Now, not only businesses operating on digital marketplaces but also those providing services through the internet or electronic networks will be subject to this tax. The removal of the KES 5 million threshold for non-residents means that even smaller foreign service providers must comply, broadening the tax base.
Multinational enterprises will need to adjust their tax planning as the minimum top-up tax is now due by the end of the fourth month after the end of the year of income. This change is part of Kenya's efforts to align with the global minimum tax rate for large multinationals, ensuring that such entities pay at least a 15% effective tax rate.
Employees will welcome the increase in the daily tax-free per diem allowance from KES 2,000 to KES 10,000, a move that reflects inflationary trends and boosts take-home pay for those who travel for work. Employers, on the other hand, will need to update their payroll systems to accommodate this new threshold. However, the Act also brings a shift in the taxation of pension income. While several specific pension exemptions have been deleted, a general exemption remains but is now limited to those who retire at the prescribed age or have been members of a pension scheme for at least 20 years. This change could see employees with less than 20 years' membership who withdraw before the retirement age facing tax on their pension income, potentially reducing their net benefits. On a more positive note, the Act clarifies that all gratuity payments, not just those from public schemes, are exempt from tax, ensuring broader relief for employees.
Amendments to the Value Added Tax Act, 2013 (“VAT Act”)
The VAT regime has also seen various amendments. The definition of a tax invoice now explicitly includes electronic tax invoices, reflecting the ongoing digitalisation of tax administration. Businesses must ensure their invoicing systems are compliant to avoid falling foul of the law. The period for lodging VAT refund claims has been halved from 24 to 12 months, and bad debt relief can now be claimed after two years instead of three. While these changes should improve cash flow for suppliers, they also mean that taxpayers must be more proactive in managing their VAT credits and bad debts, as delayed claims may be forfeited.
A new provision introduces a penalty for the misuse of exempt or zero-rated goods and services. If such items are used in a manner inconsistent with their intended purpose, VAT becomes payable at the applicable rate. This places a greater onus on businesses to maintain robust controls and documentation, as the lack of a clear framework for determining misuse could lead to disputes with the tax authority. Updates to the schedules of exempt and zero-rated goods and services mean that businesses must review their VAT treatment to ensure compliance and avoid under- or over-collection of VAT.
Amendments to the Excise duty Act, 2015 (“EDA”)
The EDA is amended to align the classification of goods with the East African Community Tariff Code, simplifying cross-border trade and compliance for importers and manufacturers.
Non-resident suppliers of goods and services consumed in Kenya via the internet or digital marketplaces are now subject to excise duty, expanding the tax net to the digital economy and levelling the playing field for local businesses.
The Commissioner is now required to process excise licence applications within 14 days, enhancing administrative efficiency and providing certainty for businesses.
In a move likely to be welcomed by consumers, excise duty has been removed from imported eggs, onions, potatoes, potato crisps, and chips, which should result in a reduction in prices for these goods. New and amended excise rates have also been introduced, including a 10% excise duty on fees charged on virtual asset transactions, requiring businesses in affected sectors to update their pricing and compliance systems.
Amendment to Tax Procedures Act, 2015 (“TPA”)
The TPA has been refined to provide greater clarity and fairness. The list of transactions exempt from the electronic Tax Invoice Management System has been clarified, giving taxpayers greater certainty and reducing the risk of inadvertent non-compliance. The Commissioner is now required to provide reasons for any amended tax assessment, enhancing transparency and supporting taxpayers' rights to challenge or appeal tax decisions. If the recipient of a payment has paid the tax, the withholding agent is no longer liable for the principal tax, reducing the risk of double taxation and penalties.
The Commissioner's powers to recover unpaid tax from non-residents have been expanded, strengthening enforcement in cross-border transactions and requiring businesses to ensure compliance when dealing with non-residents. Redundant provisions, such as duplicate penalties and the appointment of digital service tax agents, have been removed, streamlining the law and reducing administrative complexity.
The Commissioner now has more time to process applications for tax offsets and refunds, which may delay recoveries for taxpayers but eases administrative burdens. Importers must now present a valid Certificate of Origin for all goods imported into Kenya, with non-compliance potentially resulting in seizure or forfeiture of goods, making proper documentation more important than ever. The Cabinet Secretary is also empowered to waive penalties or interest arising from errors or delays caused by electronic tax systems, providing relief for taxpayers affected by system failures.
Other Adjustments
The Miscellaneous Fees and Levies Act has expanded the application of export and investment promotion levies to items such as ceramic, steel, and sanitary products, ranging from the rate of 3% or 17.5%. Importers of these goods will need to factor in the additional costs, which may impact pricing, competitiveness, and supply chain decisions.
Finally, the Act brings changes to the Stamp Duty regime, providing that stamp duty does not apply when the Commissioner of Domestic Taxes registers an encumbrance over property for unpaid tax or on the transfer of such property for tax recovery, provided certain conditions are met. This reduces transaction costs in tax recovery processes and facilitates more efficient enforcement by the tax authority
Conclusion
In conclusion, individuals and businesses alike are urged to review their operations, update their systems as necessary and seek professional advice to ensure they remain compliant with the new changes in the tax laws. The changes discussed above are non-exhaustive. If you require a detailed discussion of how these amendments may affect you or your business, please feel free to reach out to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
