Kenya Finance Act 2026: A Comprehensive Legal Analysis of the New Tax Reforms

Executive Summary

 

The Finance Act, 2026 (the Act) was assented to by the President on 23 June 2026 and published in the Kenya Gazette on 26 June 2026. It introduces significant amendments to Kenya’s tax regime, affecting the Income Tax Act (Chapter 470), the Value Added Tax Act, 2013, the Tax Procedures Act, 2015, the Miscellaneous Fees and Levies Act, 2016, the Excise Duty Act, 2015, the Stamp Duty Act, the Affordable Housing Act, 2024, and the Road Maintenance Levy Fund Act (Chapter 427).

The changes have implications for businesses across a range of sectors, particularly multinational groups, financial institutions, technology businesses, manufacturers, importers and employers.

The Act broadens the tax base by introducing new taxing points for both resident and non-resident taxpayers across various sectors. It also strengthens the tax administration framework through measures aimed at enhancing domestic revenue mobilisation, expanding digital tax administration, and reinforcing anti-avoidance rules. In addition, the Act introduces targeted relief measures, including a tax amnesty programme and incentives to promote investment in strategic sectors, such as Public-Private Partnerships.

The Finance Act also departs from several proposals contained in the Finance Bill, 2026. Notably, Parliament declined to expand the definition of royalty to cover software distribution arrangements, introduce a minimum deemed dividend distribution threshold, impose excise duty on the activation of mobile phones, and implement a broad withdrawal of VAT zero-rating. In addition, a number of the VAT exemptions proposed in the Bill were not adopted.

These developments reflect the impact of stakeholder engagement during the legislative process and underscore Parliament’s willingness to balance revenue mobilization with the need to maintain Kenya’s competitiveness as an investment destination.

Unless otherwise specified, the Act came into force on 1 July 2026. The provisions introducing new income tax return filing timelines for individuals and changes to the taxation of non-residents in the extractive industry will take effect on 1 January 2027, while the amendments to the Tax Procedures Act relating to import documentation will take effect on 1 September 2026.

Businesses should assess the impact of the enacted measures on their operations, review existing contractual arrangements where necessary, and ensure that their tax compliance processes are aligned with the new legislative requirements.

This legal update summarizes the key amendments introduced by the Finance Act, 2026 and considers their practical implications for taxpayers and investors.

…………………………………………………………………………

Abbreviations

 

• BEPS – BaseErosion and Profit Shifting
• CbC – Country-by-Country
• CGT – Capital Gains Tax
• DTA – Double Taxation Agreement
• EAC – East African Community
• EACCMA – East Africa Community Customs Management Act
• IDF – Import Declaration Fees
• ITA – Income Tax Act
• KRA – Kenya Revenue Authority
• MFLA – MiscellaneousFees and Levies Act
• MNE – Multinational Enterprise
• NRRIT – Non-Resident Rental Income Tax
• OECD – Organisation for Economic Co-operation and Development
• REITs – Real Estate Investment Trusts
• RDL – Railway Development Levy
• SCOK – Supreme Court of Kenya
• UPE – Ultimate Parent Entity
• VAT – Value Added Tax
• WHT – Withholding Tax

…………………………………………………………………………

 

1. AMENDMENTS TO THE INCOME TAX ACT

The Finance Act, 2026 amends the Income Tax Act (ITA) to expand Kenya’s income tax base, introduce new taxing provisions and rationalise existing exemptions, reliefs and incentives.

The key amendments are summarised below.

 

A. Expansion of withholding tax to card payment network fees, interchange fees and merchant service fees

Effective date: 1 July 2026

 The Act expands the scope of withholding tax (WHT) to include card payment network fees, interchange fees and merchant service fees. These payments are now subject to WHT at the rate of 5% where paid to residents and 20% where paid to non-residents, subject to relief under an applicable double taxation agreement (DTA). The amendments are likely to increase operating costs for banks, payment service providers, fintechs and merchants that accept card payments.

The expanded WHT regime is achieved through two amendments. First, the definition of management or professional fee now includes interchange fees and merchant service fees arising from transactions where a card is used as the means of payment. Secondly, the definition of royalty has been expanded to cover payments for the use of, or the right to use, a proprietary digital payment card network or platform, including payments for access, participation or usage rights. The provision applies irrespective of how the payment is described, including as a service fee, transaction fee, network fee, assessment fee, processing fee or any similar charge.

The amendments legislatively overturn the Supreme Court’s decision in Barclays Bank of Kenya Limited (now Absa Bank Kenya PLC) v Commissioner for Domestic Taxes (SC Petition No. 12 (E014) of 2022), in which the Court held that interchange fees, merchant service fees and card network participation fees did not constitute royalties or management or professional fees under the ITA and were therefore not subject to WHT.

Accordingly, payments to domestic and international card networks, payment processors, switching systems, and clearing and settlement platforms may now attract WHT. Non-resident recipients should assess whether relief is available under an applicable DTA. However, because the expanded definitions under the ITA are broader than those contained in most of Kenya’s DTAs and the OECD Model Tax Convention, the amendments may give rise to characterisation disputes and instances of double taxation. Affected businesses should therefore review their payment arrangements, treaty positions, pricing models and WHT compliance obligations.

Notably, the expanded definition of royalty is confined to payments relating to a proprietary digital payment card network or platform. This limits its application to card-based payment infrastructure and provides greater certainty on the scope of the amendment within the digital payments world.

 

B. Transition to the new betting and gambling regulatory framework

Effective date: 1 July 2026

The Act amends the definitions of “withdrawals” and “winnings” under the Income Tax Act (ITA) to align with the Gambling Control Act, 2025, which repealed the Betting, Lotteries and Gambling Act (Chapter 131, Laws of Kenya).

The Act reinstates the definition of “winnings”, which was previously deleted by the Finance Act, 2025, to mean a payout from a lottery or prize competition by a person licensed under the Gambling Control Act, 2025. Such winnings will continue to attract withholding tax (WHT) at the rate of 20% for both resident and non-resident recipients.

The definition of “withdrawals” has also been expanded beyond wallet withdrawals to cover any amount of money, cash equivalent or money’s worth paid or disbursed to a player’s account by a person licensed under the Gambling Control Act, 2025. Consequently, cash withdrawals, platform credits, in-platform transfers, vouchers and other non-cash benefits may now trigger WHT at the rate of 5% for both residents and non-residents when paid or credited to a player’s account.

Notably, the reinstated definition of “winnings” is limited to lottery and prize competition payouts. Betting and gaming payouts will instead fall within the broader definition of “withdrawals”. This distinction is significant for licensed gambling operators, as the classification of payouts will determine the applicable WHT treatment and may require a review of existing platform structures and product offerings.

 

C. Introduction of non-resident rental income tax

 Effective date: 1 July 2026

The Act introduces a new tax, known as non-resident rental income tax (NRRIT), applicable to non-resident persons deriving income from the use or occupation of property situated in Kenya.

NRRIT applies at rates aligned with the existing withholding tax (WHT) framework, with rental income from immovable property subject to tax at 30% of the gross amount payable and rental income from movable property subject to tax at 15%.

Under the new regime, non-resident landlords will be required to register and account for NRRIT through a simplified registration framework to be prescribed by the Kenya Revenue Authority (KRA). They will also be required to file returns and remit the tax due on or before the twentieth day of the month following the month in which the rent is paid.

Rental income will, however, be exempt from NRRIT where it is received by a resident person on behalf of a non-resident person, provided that the resident person has accounted for the applicable WHT.

The KRA is yet to issue regulations prescribing the simplified registration framework for NRRIT. However, given that draft residential rental income tax regulations are currently undergoing public consultation, corresponding NRRIT regulations are expected to be issued in due course.

Non-resident investors deriving rental income from property situated in Kenya, including Kenyan real estate, should review their ownership and income structures to assess compliance requirements and identify appropriate tax planning and risk management considerations under the new regime.

 

D. Changes to taxation of trusts

 Effective date: 1 July 2026

 The Act repeals and replaces section 11 of the Income Tax Act (ITA), which governs the taxation of trust income received by trustees and executors, as well as income distributed to beneficiaries.

The revised provision simplifies the taxation of trust income by introducing a clear single-point taxation approach. Specifically:

• qualifying dividends and qualifying interest that have already been taxed in the hands of the trustee or executor at the applicable withholding tax rates will not be subject to further tax when distributed to beneficiaries; and
• once a trustee or executor has paid tax on the chargeable income of a trust, beneficiaries will not be liable for additional tax on the same income upon distribution.

These amendments remove uncertainty on the taxation of trust distributions and provide greater clarity on the treatment of income that has already been taxed at the trustee or executor level. The changes are expected to provide trustees, executors and individuals using trusts for wealth management with a more predictable and simplified tax framework.

 

E. Clarity on bad debt deductibility

Effective date: 1 July 2026

 The Act clarifies the scope of allowable bad debt deductions for persons carrying on money-lending businesses and financial institutions licensed under the Banking Act, the Microfinance Act and the Central Bank of Kenya Act. The amendment expressly provides that deductible bad debts include the principal amount, interest component and any other amount relating to a debt that subsequently becomes irrecoverable.

The amendment addresses uncertainty arising from recent conflicting decisions by the Tax Appeals Tribunal (the Tribunal) and the High Court on whether bad debt deductions arising from loans are limited to interest income or extend to the principal amount.

In Premier Credit Limited v Commissioner of Domestic Taxes (Tax Appeal E1149 of 2024) [2026] KETAT 23 (KLR), the Tribunal held that principal loan amounts constituted a lender’s capital asset and were therefore not deductible, limiting the allowable deduction to interest and related fees. Conversely, in Branch International Limited v Commissioner of Domestic Taxes (HCITA/E080/2025 & E089/2025), the High Court held that principal loan amounts formed part of a lender’s stock-in-trade and were therefore deductible.

The Act now settles this uncertainty by expressly recognising the principal amount, accrued interest and other amounts relating to the debt as allowable deductions, subject to any applicable guidelines issued by the Commissioner. The amendment provides greater certainty for lenders and financial institutions and is expected to reduce disputes with the Kenya Revenue Authority (KRA) regarding the treatment of bad debts.

 

F. Extension of loss carry-forward period for large investors

 Effective date: 1 July 2026

The Act extends the period for carrying forward tax losses for investors who, before 1 July 2025, invested at least KES 10 billion in Kenya and accumulated tax losses during that investment period.

This amendment addresses the limitation introduced by the Finance Act, 2025, which amended section 15(4) of the Income Tax Act (ITA) by restricting the carry-forward of tax losses to a five-year period. Prior to that amendment, tax losses could be carried forward indefinitely.

Under the revised framework, qualifying taxpayers that invested at least KES 10 billion before 1 July 2025 may continue to carry forward and utilise their accumulated tax losses beyond the five-year statutory period until the losses are fully exhausted.

The extension provides relief to large investors by preserving their ability to offset historical losses against future taxable income and improve the recovery of their investments. It also signals the Government’s continued focus on attracting large-scale domestic and foreign investment, particularly in capital-intensive sectors such as energy, manufacturing and infrastructure.

However, extending a similar loss carry-forward framework to future qualifying investments would provide greater long-term certainty for investors and further support Kenya’s objective of positioning itself as a leading regional investment destination.

 

G. Expansion of capital gains tax to offshore transfers with a Kenyan nexus

 Effective date: 1 July 2026

The Act expands the scope of Kenya’s capital gains tax (CGT) regime applicable to offshore disposals by subjecting gains arising from the alienation of shares by a non-resident to CGT where:

• the shares derive their value from Kenya;
• the alienation results in a change in the group membership of a company resident in Kenya; or
• the alienation results in a change in ownership, title to, or interest in property situated in Kenya.

The amendment brings indirect transfers of shares within the scope of Kenyan CGT where the underlying company is resident in Kenya or the underlying assets comprise property situated in Kenya. Notably, the provision does not prescribe any minimum shareholding or value threshold.

The amendment significantly broadens Kenya’s offshore CGT regime and effectively overrides the threshold-based approach introduced on 1 January 2024. Rather than applying only to transactions meeting specified immovable property or ownership tests, the revised framework operates as a broader nexus-based rule, potentially capturing any disposal by a non-resident that has a sufficient economic connection to Kenya.

However, the breadth of the amendment raises several interpretive issues. In particular, the phrase “derive their value from Kenya” remains undefined, with no de minimis threshold, look-back period or methodology for determining the Kenyan value attributable to offshore entities with global operations. Similarly, the “change of group membership” limb is broadly drafted and may potentially apply to internal group reorganisations and corporate restructurings, given the absence of a minimum ownership or control threshold.

Parties involved in mergers and acquisitions, group reorganisations or other transactions with a Kenyan nexus; including buyers, sellers, advisers and lenders, should incorporate a Kenyan CGT assessment into transaction due diligence and structuring processes for offshore share transfers and reorganisations.

 

H. Changes to the transfer pricing regime

Effective date: 1 July 2026

The Act introduces amendments to Kenya’s transfer pricing framework, primarily relating to country-by-country (CbC) reporting obligations for multinational enterprise (MNE) groups and the definition of an ultimate parent entity (UPE).

i. Extension of CbC report content requirements and filing timelines for MNEs

CbC reporting is a key transfer pricing compliance requirement under the OECD’s Base Erosion and Profit Shifting (BEPS) framework. It requires MNE groups to provide jurisdiction-specific financial and operational information to enable tax authorities to assess transfer pricing risks and identify potential misalignment between the location of profits and economic activities.

The Income Tax Act (ITA) provides for two CbC filing mechanisms: the primary mechanism and the secondary mechanism. Under the primary mechanism, the UPE files the CbC report in its jurisdiction of residence. Where the UPE is unable or not required to file, a Kenyan constituent entity may be required to file under the secondary mechanism, including where there is no local filing requirement in the UPE’s jurisdiction, no applicable competent authority agreement with Kenya, or a systemic failure in the UPE’s jurisdiction.

Previously, the prescribed CbC report content requirements and the twelve-month filing deadline were expressly applicable only to primary mechanism filings, creating uncertainty regarding their application to secondary mechanism filings. The Act now extends these requirements to secondary mechanism filings, providing greater certainty on compliance obligations and a clearer basis for enforcement.

Kenyan constituent entities that may be required to file under the secondary mechanism should review their CbC reporting processes and documentation to ensure alignment with the amended requirements.

ii. Revised definition of ultimate parent entity

The Act replaces the previous definition of a UPE with a revised definition aligned more closely with financial reporting principles.

Under the amended definition, a UPE is the constituent entity that holds a sufficient interest in one or more other constituent entities and is required, or would be required if its equity interests were publicly traded, to prepare consolidated financial statements, provided that no other constituent entity holds a sufficient interest in it.

The revised definition shifts the determination of a UPE from a control-based test to one based on consolidation requirements, bringing Kenya’s framework closer to the OECD BEPS Action 13 standard. However, the Act does not define what constitutes a “sufficient interest”, which may create uncertainty for MNE groups with complex ownership structures.

MNE groups should therefore reassess their existing CbC reporting positions to determine whether the revised UPE definition affects their reporting obligations in Kenya.

 

I. Accelerated filing timelines for individual income tax returns

Effective date: 1 January 2027

 The Act reduces the statutory deadline for individuals to file income tax returns from six months to four months after the end of the year of income.

Individual taxpayers will therefore be required to update their compliance calendars and filing processes to reflect the shortened filing period. Notably, while the Finance Bill, 2026 had proposed a one-month filing deadline for nil filers and a four-month deadline for all other taxpayers, the enacted provision adopts a single four-month deadline for all individuals, removing the more onerous nil filer requirement.

The revised timeline represents a more balanced approach by accelerating compliance obligations while maintaining a uniform filing deadline for individual taxpayers.

 

J. Enhanced investment allowances for petroleum and gas storage facilities and clarification of industrial building allowance

 Effective date: 1 July 2026

The Act revises the investment allowance regime under the Income Tax Act (ITA) by introducing the following changes:

• The investment allowance for petroleum or gas storage facilities has been increased to 100% in the first year of use, provided that the investment exceeds KES 10 billion. This measure is intended to encourage large-scale investment in petroleum and gas storage infrastructure.
• The Act clarifies that the 10% investment allowance applicable to industrial buildings is claimable in equal instalments over the relevant allowance period, providing greater certainty on the timing and utilisation of the deduction.

These amendments enhance the attractiveness of qualifying investments while providing greater clarity on the application and timing of investment allowance claims.

 

K. Additional changes to the Income Tax Act

The Act introduces several additional amendments to the Income Tax Act (ITA), including changes relating to gratuity payments, scrap metal transactions, REIT structures, death-related benefits, extractive industries, housing developers and dividend taxation.

i. Reintroduction of withholding tax on sale of scrap metal

Effective date: 1 July 2026

 The Act reintroduces withholding tax (WHT) on the sale of scrap metal at the rate of 1.5%, applicable to both resident and non-resident sellers.

Under the revised framework, purchasers of scrap metal will act as WHT agents and will be required to comply with the associated deduction, filing and remittance obligations. The measure is intended to improve traceability within the scrap metal sector and curb illicit trading activities.

ii. CGT and stamp duty exemption on transfers of property to Real Estate Investment Trusts

Effective date: 1 July 2026

 The Act exempts transfers of property to a Real Estate Investment Trust (REIT) registered with the Commissioner from capital gains tax (CGT) under the ITA and stamp duty under the Stamp Duty Act.

The exemption removes a significant tax barrier to the establishment and seeding of REITs in Kenya. Investors with substantial real estate portfolios may therefore consider REIT structures without incurring CGT and stamp duty costs on the initial transfer of qualifying assets.

iii. Clarification of tax-exempt benefits arising on death

 Effective date: 1 July 2026

The Act clarifies that pension benefits arising upon the death of a member are exempt from income tax.

The amendment removes uncertainty regarding the tax treatment of such benefits and confirms that amounts received by dependants, beneficiaries or estates following a member’s death are not taxable income.

iv. Harmonisation of extractive sector tax rates with the general tax framework

Effective date: 1 January 2026

 The Act aligns the taxation of extractive industry licensees and contractors with the general non-resident tax framework by introducing two key changes:

• reducing the non-resident corporate income tax rate applicable to extractive industry participants from 37.5% to 30%; and
• extending the 15% repatriated income tax rate applicable to non-residents to the extractive sector.

These amendments harmonise the tax treatment of the extractive sector with the broader corporate tax framework applicable to non-residents.

v. Repeal of preferential corporate tax rate for residential housing developers

Effective date: 1 July 2026

 The Act repeals the preferential corporate tax rate of 15% applicable to approved companies constructing at least 100 residential units annually.

Affected companies will now be subject to the standard corporate income tax rate of 30%, effectively doubling their corporate tax liability.

The withdrawal of this incentive represents a significant policy shift and may affect the economics of affordable housing projects. Developers may need to reassess project costs and pricing strategies to account for the increased tax burden.

vi. Repeal of reduced dividend tax rate for East African Community partner state citizens

Effective date: 1 July 2026

 The Act repeals the reduced dividend tax rate of 5% applicable to citizens of East African Community (EAC) partner states.

Consequently, dividend payments made to EAC citizens will now be subject to the standard dividend tax rate of 15%.

vii. Repeal of preferential corporate tax rate for residential housing developers

Effective date: 1 July 2026

 The Act repeals the preferential corporate income tax rate of 15% applicable to approved companies constructing at least 100 residential units annually.

As a result, affected companies will revert to the standard corporate income tax rate of 30%, effectively doubling their corporate tax liability. The removal of this incentive may affect the financial viability of affordable housing projects and require developers to reassess project costs, pricing strategies and investment models.

 

2. AMENDMENTS TO THE VALUE ADDED TAX ACT, 2013

Effective date of all amendments: 1 July 2026

The Act introduces several amendments to the Value Added Tax Act, 2013 (VAT Act) aimed at broadening the VAT base, rationalising exemptions, strengthening compliance and reclassifying supplies across various sectors. The changes affect a wide range of industries, including healthcare, agriculture, telecommunications, renewable energy, financial services and infrastructure development.

The key VAT amendments are summarised below.

A. VAT treatment of labour outsourcing and employee placement services

The Act clarifies the VAT treatment of employee-related costs incurred by labour outsourcing agencies and employee placement service providers.

Salaries, wages, statutory deductions and other employment-related expenses incurred on behalf of clients will be treated as disbursements and excluded from the taxable value of the supplier’s services. VAT will therefore apply only to the service fee charged by the outsourcing or placement provider.

The amendment addresses uncertainty arising from recent disputes regarding whether employee-related costs should form part of the taxable value for VAT purposes, including in Commissioner of Domestic Taxes v Stratostaff E.A Limited (ITA No. E048 of 2025) and Commissioner of Domestic Taxes v Techsavanna Company Limited (ITA No. E228 of 2023).

Notably, this amendment was introduced during the legislative process and was not included in the Finance Bill, 2026.

 

B. Restriction of VAT exemption on finance charges in hire purchase transactions to licensed providers

The Act limits the VAT exemption applicable to finance charges under hire purchase agreements to transactions where:

• the supplier is duly licensed; and
• the hire purchase agreement is registered in accordance with the Hire Purchase Act.

Where either condition is not satisfied, the finance charges will form part of the taxable consideration and will be subject to VAT.

The amendment ensures that the exemption applies only to regulated hire purchase transactions and prevents unlicensed arrangements from benefiting from the preferential VAT treatment.

 

C. Input VAT deduction for supplies to government security agencies

The Act expands input VAT recovery rules by allowing registered persons to claim input VAT incurred on supplies made to the Kenya Defence Forces, Defence Forces Welfare Services, the National Intelligence Service and the National Police Service.

Taxpayers may also apply for VAT refunds in respect of excess input VAT arising from such supplies.

The deduction is available where:

• the supplies are supported by documentation prescribed by the Commissioner;
• the input tax claimed is directly attributable to the qualifying supplies; and
• where input tax relates wholly to these exempt supplies, it is not subject to input VAT apportionment.

The amendment removes the previous restriction on input VAT recovery for suppliers to specified security agencies, reducing the irrecoverable VAT cost associated with such supplies and potentially improving efficiency in public procurement.

 

D. Adjustment of input VAT where taxable supplies subsequently become exempt

The Act introduces section 17A to the VAT Act, requiring registered persons to account for input VAT attributable to unsold stock where goods previously treated as taxable supplies are subsequently reclassified as exempt supplies.

Where input VAT has already been claimed before the reclassification, the taxpayer must account for the attributable input VAT adjustment in the VAT return for the period in which the supplies become exempt.

The amendment prevents taxpayers from retaining input VAT deductions relating to supplies that ultimately become exempt and highlights the need for businesses to regularly review inventory classifications and VAT positions.

 

E. Extension of bad debt VAT refund eligibility period from two years to three years

The Act extends the period within which a taxpayer may make an initial VAT refund claim in respect of bad debts from two years to three years.

The extension increases the period during which taxpayers must bear the cost of unrecovered VAT, as businesses are required to account for VAT upon making taxable supplies regardless of whether payment has been received from customers.

The amendment may therefore have cash flow implications, particularly for businesses with significant levels of outstanding receivables, as the recovery of VAT relating to bad debts will be delayed.

 

F. Changes to the First and Second Schedules of the VAT Act

The Act introduces various amendments to the First and Second Schedules of the VAT Act, including:

• introducing new VAT exemptions;
• reclassifying certain supplies from zero-rated to exempt; and
• reclassifying certain exempt supplies as standard-rated.

These changes will have varying implications across affected sectors. Businesses moving from zero-rated to exempt status may lose the ability to recover input VAT, increasing operating costs, while businesses affected by the transition from exempt to standard-rated treatment may face increased VAT costs that could affect pricing and consumer demand.

The amendments impact multiple sectors, including healthcare, manufacturing, energy, tourism and infrastructure development.

 

3. AMENDMENTS TO THE EXCISE DUTY ACT, 2015

The Act introduces several amendments to the Excise Duty Act, 2015 aimed at expanding the excise duty base, introducing new taxable categories and refining the treatment of specific transactions. The key amendments are summarised below.

A. Introduction of definition for “antique, vintage or classic vehicle”

Effective date: 1 July 2026

The Act introduces a definition of an “antique, vintage or classic vehicle” as a motor vehicle that:

• was first registered at least 30 years before the date of purchase; and
• has a value of not less than KES 10 million, excluding depreciation.

The new definition establishes a separate excise duty category, with the importation of qualifying vehicles subject to excise duty at the rate of 50%.

 

B. Refund of excise duty on inputs used in the manufacture of exempt goods supplied to the Defence Forces Welfare Services

 Effective date: 1 July 2026

The Act introduces a refund mechanism under section 29 of the Excise Duty Act, allowing the Commissioner to refund excise duty paid on inputs used by licensed or registered manufacturers to produce exempt excisable goods supplied to the Defence Forces Welfare Services.

The refund applies where the inputs are directly attributable to the manufacture of the exempt goods.

The amendment removes the excise duty cost embedded in qualifying production inputs, ensuring that the exemption granted to the Defence Forces Welfare Services is fully effective and reducing the tax burden for manufacturers supplying exempt goods.

 

C. Betting and gaming: Expansion of excise duty base from wallet deposits to amounts made available for betting or gambling purposes

 Effective date: 1 July 2026

The Act expands the scope of excise duty applicable to betting and gambling transactions by shifting the taxable event from amounts deposited into customer wallets to amounts made available for betting or gambling purposes.

Previously, excise duty applied to amounts deposited into a customer’s betting or gaming wallet. The Act replaces these references with broader concepts of amounts deposited for betting or gambling purposes and removes the previous exclusion applicable to horse racing.

As a result, excise duty may now apply to a wider range of transactions, including payment methods that do not involve a betting or gaming wallet. The removal of the horse racing exclusion also brings horse racing bets within the scope of excise duty.

The Act further expands the definition of “amount deposited” to include any money or money’s worth paid, transferred, credited or otherwise made available for betting or gambling purposes to a licensed operator under the Gambling Control Act, 2025. The definition applies regardless of whether the value is provided by the player or operator, held in an account, or converted into chips, tokens, tickets, credits or similar instruments.

The amendments appear intended to capture a broader range of value flows within the betting and gambling ecosystem, including promotional credits, operator-funded credits and virtual asset-based transactions.

 

4. AMENDMENTS TO THE TAX PROCEDURES ACT, 2015

The Act introduces several amendments to the Tax Procedures Act, 2015 (TPA) aimed at strengthening tax administration, expanding third-party reporting obligations, enhancing the Kenya Revenue Authority’s (KRA) access to taxpayer information and broadening the Commissioner’s enforcement powers.

The amendments reflect KRA’s continued transition towards data-driven tax administration through mechanisms such as prepopulated tax returns, virtual asset reporting, automatic exchange of information and enhanced electronic compliance requirements.

The key amendments are summarised below.

 

A. Introduction of virtual asset tax reporting framework

Effective date: 1 July 2026

 The Act introduces definitions of “virtual asset” and “virtual asset service provider” (VASP) by reference to the Virtual Asset Service Providers Act, 2025. It also establishes a reporting and information exchange framework requiring VASPs to submit annual returns to the Commissioner containing information on reportable users and controlling persons.

The reporting obligations apply to VASPs involved in virtual asset exchanges, operation of trading platforms, and activities undertaken as intermediaries or counterparties in virtual asset transactions.

The Act further empowers Kenya to enter into agreements with foreign jurisdictions for the automatic exchange of information relating to virtual asset transactions, including customer due diligence information, reportable accounts and anti-avoidance arrangements. Such exchanges must comply with the Data Protection Act and may only occur where the information shared is necessary, relevant and proportionate, and the receiving jurisdiction has adequate data protection safeguards. The Commissioner is also required to maintain records of all disclosures made.

Non-compliance attracts significant penalties, including:

• KES 100,000 for each false statement;
• KES 100,000 for each omission in an information return; and
• KES 1 million for failure to file an information return or nil return.

A taxpayer may, however, rely on a defence where reasonable efforts were made to obtain the required information from a third party.

The introduction of this framework represents a significant expansion of KRA’s oversight powers in the digital asset sector and aligns with the global move towards greater tax transparency for virtual assets. The changes are expected to improve visibility over virtual asset transactions and enhance scrutiny of gains, trading income, offshore holdings and cross-border transfers.

 

B. Introduction of prepopulated tax returns

Effective date: 1 July 2026

 The Act empowers the Commissioner to generate prepopulated tax returns using information available through KRA systems and third-party data sources.

The framework requires that:

• the Commissioner notify the taxpayer once a prepopulated return has been generated;
• prepopulated returns be issued on or before the end of January of each year of income;
• taxpayers have two months from the date of issue to confirm or amend the return; and
• taxpayers may rely on a confirmed or unamended prepopulated return when filing their tax returns.

The introduction of prepopulated returns reflects KRA’s continued shift towards automated and data-driven tax administration. However, taxpayers will need to implement stronger reconciliation processes to identify and address discrepancies between system-generated information and their underlying records.

Taxpayers remain responsible for ensuring the accuracy of their filed returns and should engage with the Commissioner within the prescribed timelines where the prepopulated information does not accurately reflect their tax position.

 

C. Extension of the tax amnesty programme

 Effective date: 1 July 2026

The Act reintroduces the tax amnesty programme, providing relief from penalties and interest relating to tax liabilities arising up to 31 December 2025.

The waiver of penalties and interest applies where the underlying principal tax liability is paid on or before 31 December 2026.

The extended amnesty provides taxpayers with an opportunity to regularise historical tax liabilities and resolve outstanding compliance issues. Taxpayers with unpaid tax liabilities or ongoing disputes should assess whether the amnesty framework provides an opportunity to settle their tax affairs.

 

D. Introduction of consolidated general anti-avoidance rules

 Effective date: 1 July 2026

The Act consolidates Kenya’s general anti-avoidance rules (GAAR) under the TPA by repealing the corresponding provisions previously contained in the Income Tax Act and the VAT Act.

Under the new framework, the Commissioner may adjust a taxpayer’s liability where the Commissioner determines that:

• the taxpayer entered into a tax avoidance scheme;
• a tax benefit arose from the arrangement; and
• obtaining the tax benefit was one of the purposes of the arrangement.

The Act adopts broad definitions of both a “scheme” and a “tax benefit”. A scheme includes any arrangement, agreement, undertaking or course of action, whether legally enforceable or not. A tax benefit includes:

• a reduction in tax liability;
• entitlement to a VAT refund;
• postponement of a tax liability; and
• accelerated recovery of input VAT.

Importantly, the Commissioner must provide written reasons for any GAAR determination within 30 days, enhancing transparency and enabling taxpayers to exercise their objection and appeal rights.

Taxpayers may also apply for a private ruling in respect of complex transactions, providing an avenue for greater certainty before implementation and reducing potential GAAR exposure.

The consolidation of GAAR under the TPA represents a significant strengthening of Kenya’s anti-avoidance framework and is likely to increase scrutiny of transactions involving tax-driven structures.

 

E. Expanded waiver powers for system-generated errors

 Effective date: 1 July 2026

The Act empowers the Commissioner to waive penalties or interest of up to KES 2 million where the liability arises from an error generated by an electronic tax system.

This amendment is a welcome development given the increasing digitisation of tax administration and provides relief for taxpayers affected by system-related issues, including technical failures, filing errors arising from system malfunctions and electronic invoicing discrepancies.

 

F. New export declaration requirements

Effective date: 1 September 2026

 The Act introduces a new compliance requirement for importers, requiring them to obtain and retain an export declaration, or an equivalent customs document issued by the competent authority in the country of export, evidencing the lawful exportation of imported goods.

The document must contain prescribed details, including:

• exporter and importer information;
• description of goods;
• tariff classification;
• country of export;
• date of exportation; and
• customs reference number.

Importers must retain the documents for five years and provide them upon request by the Commissioner.

Failure to provide a valid export declaration or satisfactory equivalent evidence may result in the Commissioner:

• rejecting claims relating to the importation, value, origin, cost or ownership of goods;
• determining customs values, tax liabilities or claims for deductions, exemptions, refunds or reliefs based on available information; and
• imposing administrative penalties.

The Commissioner may waive the requirement where the country of export does not issue export declarations for the relevant category of goods.

The amendment strengthens KRA’s ability to verify import transactions and complements existing customs documentation requirements, including Certificates of Origin. While intended to address undervaluation and misdeclaration risks, the requirement introduces additional record-keeping obligations for importers and is likely to increase scrutiny during customs audits and post-clearance reviews.

 

G. Recovery of unpaid fees and levies by KRA

 Effective date: 1 July 2026

The Act empowers the Commissioner to recover unpaid fees, levies and charges collectible by KRA under other written laws as if they were unpaid tax liabilities.

Amounts not exceeding KES 100,000 may be recovered through summary procedures.

This amendment significantly expands KRA’s enforcement powers by allowing the use of tax recovery mechanisms, including third-party collection notices and other recovery measures under the TPA, in respect of statutory fees and levies arising under non-tax legislation.

Persons subject to such obligations should ensure timely compliance to mitigate the risk of enforcement action by KRA.

 

H. Exemption from requirement to obtain a PIN

 Effective date: 1 July 2026

The Act exempts non-resident persons opening accounts with investment banks and other financial institutions from the requirement to obtain a KRA PIN.

The amendment reduces administrative barriers for non-resident investors and is intended to facilitate investment into Kenya.

 

5. AMENDMENTS TO THE MISCELLANEOUS FEES AND LEVIES ACT, 2016

Effective date of all amendments: 1 July 2026

The Act introduces amendments to the Miscellaneous Fees and Levies Act, 2016 (MFLA) aimed at clarifying the valuation framework for miscellaneous fees and introducing targeted investment incentives.

The key amendments are set out below.

 

A. Application of EACCMA customs valuation rules for miscellaneous fees and levies

The Act amends the MFLA to require the application of the East African Community Customs Management Act (EACCMA) valuation rules when determining the value of imported goods for purposes of assessing, collecting and enforcing miscellaneous fees under Part III of the MFLA.

The affected fees and levies include:

• Export Levy;
• Import Declaration Fee (IDF);
• Export and Investment Promotion Levy;
• Railway Development Levy (RDL);
• Anti-Adulteration Levy;
• processing fees on duty-free motor vehicles; and
• duty on goods for home use from an export processing zone enterprise.

The amendment provides greater certainty by establishing a uniform valuation methodology for determining the applicable fees and levies.

 

B. Exemption from Import Declaration Fee and Railway Development Levy

The Act introduces an exemption from both IDF and RDL for goods imported for the construction of liquefied petroleum gas (LPG) storage tanks and related infrastructure, provided that:

• the investment value is at least KES 5 billion; and
• the investment has been recommended by the Cabinet Secretary responsible for energy.

The incentive is intended to encourage large-scale investment in Kenya’s LPG storage infrastructure by reducing import-related costs for qualifying projects.

 

 

6. FINANCE ACT, 2026: PROPOSALS MODIFIED FROM THE FINANCE BILL, 2026

i. Royalty definition retained, but software distribution excluded

Effective date: 1 July 2026

The Finance Act, 2026 retains the expanded definition of “royalty” proposed in the Finance Bill but removes the specific inclusion of software distribution payments. However, software licence, development, maintenance and support fees remain classified as royalties and are therefore subject to withholding tax (WHT).

As a result, businesses, including banks, fintechs and payment service providers, should continue to assess WHT obligations on software-related payments and card payment network access fees.

 

ii. Revised penalty for non-compliance with electronic tax system requirements

Effective date: 1 July 2026

The Finance Act repeals the existing penalty under section 86 of the Tax Procedures Act (TPA), which imposed a penalty equal to twice the tax due for failure to comply with electronic tax system requirements.

The Act replaces this with a revised penalty equal to the higher of:

• 5% of the tax due;
• KES 100,000 for companies; or
• KES 10,000 for individuals.

This amendment replaces the previous punitive penalty with a more proportionate framework while preserving a strong incentive for taxpayers to comply with electronic tax system requirements.

 

iii. Tax exemption for employer gratuity contributions

Effective date: 1 July 2026

The Finance Act, 2026 retains the income tax exemption for employer gratuity contributions but revises the applicable cap. Unlike the Finance Bill, which proposed a cap based on 30% of an employee’s basic salary, the Act caps the exemption at 30% of the employee’s emoluments earned over the contract period.

The exemption applies to gratuity contributions made under an employment arrangement where:

• the employee has served continuously for at least three years; and
• the total gratuity contributions do not exceed 30% of the employee’s emoluments earned during the employment period.

This amendment builds on the Finance Act, 2025, which exempted gratuity payments accruing on or after 1 July 2025 from income tax.

 

 

7. PROPOSALS FROM THE FINANCE BILL, 2026 THAT WERE NOT ENACTED

The Finance Bill, 2026 proposed several amendments that were ultimately excluded from the Finance Act, 2026. The key proposals that were not enacted are summarized below.

i. Proposed expansion of the definition of royalty to software distribution payments not adopted

The proposal to expand the definition of “royalty” under the Income Tax Act (ITA) to include payments for software distribution arrangements involving recurring payments through a distributor was not enacted.

Accordingly, payments made by a local distributor to a software owner or licensor for the right to sub-license or distribute software to end users will not be treated as royalties for withholding tax (WHT) purposes under the current law.

The proposal was removed following stakeholder submissions to the Departmental Committee on Finance and National Planning, which recommended its exclusion on the basis that software distribution arrangements do not constitute royalty-generating activities under international tax principles.

ii. Proposed minimum deemed dividend distribution threshold not adopted

The proposal to empower the Commissioner to prescribe a minimum deemed dividend distribution threshold of 60% for companies with accumulated undistributed profits was not enacted.

Had it been adopted, the rule would have applied where a company had sufficient distributable profits and could make a distribution without adversely affecting its operations.

Companies therefore retain discretion over the timing and amount of dividend distributions based on their commercial and operational requirements.

iii. Proposed excise duty on mobile phone activation not adopted

The proposal to impose Excise Duty at 25% on the activation of mobile phones, together with the removal of the import declaration fee (IDF) and railway development levy (RDL) exemptions on mobile phones, was not enacted.

Mobile phones therefore remain subject to the existing tax regime, allowing importers, distributors and telecommunications providers to continue operating under the current framework.

iv. Proposed withdrawal of VAT zero-rating largely reversed

The Finance Bill’s proposed removal of a broad range of zero-rated supplies was substantially reversed in the Finance Act.

The Act removes only paragraph 11 (pharmaceutical inputs) and paragraph 35 (bioethanol vapour (BEV) stoves) from the zero-rating schedule. In addition, the zero-rating for bicycles and batteries has been limited to the specific tariff headings 8712.00.00 and 8507.60.00, respectively.

As a result, most suppliers retain the existing zero-rating treatment and associated VAT refund position, except in relation to the items specifically removed.

v. Several proposed VAT exemptions not adopted

The Finance Act does not introduce several VAT exemptions proposed in the Finance Bill, including exemptions for:

• inputs used in the manufacture of animal feeds;
• electric buses, motorcycles and bicycles;
• solar and lithium-ion batteries;
• telephones for cellular and wireless networks; and
• worn clothing (mitumba).

The Act, however, retains the proposed exemptions for pharmaceutical inputs, bioethanol vapour (BEV) stoves and public-private partnership (PPP) infrastructure, and introduces additional VAT exemptions.

Businesses that anticipated these proposed exemptions should continue applying the existing VAT treatment, as the proposed reliefs were not enacted.

 

Final Thoughts

The Finance Act, 2026 introduces a number of significant legislative changes that will reshape Kenya’s tax landscape and have far-reaching implications for businesses, investors, employers, and individual taxpayers. While the Act reflects the Government’s continued focus on enhancing revenue mobilization and strengthening tax administration, it also introduces measures that will require taxpayers to reassess their compliance obligations, tax positions, and commercial arrangements.

Organizations should undertake a timely review of the enacted amendments to determine their operational, financial, and tax implications. Particular attention should be given to the effective dates of the various provisions, as well as the impact on existing business structures, contractual arrangements, transfer pricing policies, payroll processes, indirect tax compliance, and overall tax governance frameworks.

Given the breadth and complexity of the reforms, proactive planning will be essential to facilitate a smooth transition to the new legislative framework, minimize compliance risks, and identify opportunities arising from the changes. Taxpayers should also monitor the issuance of subsidiary legislation, Kenya Revenue Authority guidance, and administrative practice notes, which are expected to provide further clarity on the interpretation and implementation of several provisions of the Act.

We will continue to monitor developments and provide updates as additional guidance becomes available. Should you require assistance in assessing the implications of the Finance Act, 2026 on your business or implementing the necessary changes to your tax and compliance processes, our tax team would be pleased to assist.

Disclaimer: This piece should not be regarded as legal advice, nor should it be considered as a substitute for legal consultation and/or legal advice from the best law firm in Kenya. Feel free to contact us by calling on +254703124871 or click here book an appointment with us.