The corporate form a business takes is influenced by various factors, which may include promoters’ operational interests, statutory compliance issues, tax implications or budget factors. Generally, the laws in place provide for business forms such as sole proprietorship, limited partnership (LP), limited liability partnership (LLP), limited liability company (LTD), public limited company (PLC), and foreign company (FC).

In general, there are entities that are tax pass-through and those where tax is applied to the entity. For instance, for a sole proprietor, LP and LLP, tax applies to the founder(s) or partners, while for an LTD, PLC and FC, tax applies to the corporate structure. However, there can be a further distinction between the tax applied to an FC and a subsidiary of a foreign company (LTD).

The three key transparent entities are:

• sole proprietor, mostly preferred for their simple formation and flexible arrangements of sharing of profits;
• limited partnership, preferred for the flexibility with limitation of liability for passive investors; and
• limited liability partnership, which is the most preferred of partnerships for the purposes of limited liability protection for the founders and partners.

All these entities are preferred because of the pass-through nature of taxation which helps avoid double taxation. Private equity firms may take the form of an LLP due to the near replication of an LTD in terms of limiting the founders’ liability. With regard to venture capital firms and for the purposes of enjoying certain tax benefits, there is no option to opt in for transparent entities, since the Income Tax (Venture Capital Enterprises) Rules require the venture capital firm to be a corporate structure as per the Companies Act. Hedge funds will most often take the shape of limited partnerships and limited companies, especially for the purposes of accommodating foreign investors. While taxation will apply as per the form used, the investors could benefit from various tax incentives offered in Kenya, including the existing double taxation agreements.

An entity’s residence, other than its incorporation in Kenya, is determined through various operational factors. A business is considered to be resident in Kenya if its management and control of its activities take place in Kenya or the Cabinet Secretary declares a given entity to be a resident entity through a Gazette Notice. Therefore, there are instances where a non-resident entity may be considered to have a permanent establishment (PE) in Kenya. Some of the key factors that are used to determine a PE are set out below.

Fixed Place of Business

A fixed place of business wholly or partly serves as a place of management, branch, workshop, office, mine, factory, oil/gas well, quarry, place of extraction/exploitation, warehouse (providing storage facilities), farm, plantation or place for related activities and a sale outlet. For digital nomads, if they stay in Kenya for over 183 days or establish a significant presence, their activities could trigger a fixed place of business and create tax obligations in the country. This could impact both the nomad’s tax residency and the tax residence of their employer, potentially leading to dual tax obligations. Double tax agreements (DTAs) may provide relief in such cases, helping to allocate taxing rights between the home and host countries and reduce the chances of double taxation.

Timeline-Based Activities

183 days

Activities under this category include work on a building site, a construction, assembly or installation project, or any supervisory activity linked to the site or project. There are, however, other factors such as aggregated timelines and related entities, that would be factored in to determine whether an entity is a PE.

91 days

The provision of services or consultancies by a person through employees or other personnel in Kenya where such an activity continues for a period (including an aggregated period) exceeding 91 days within a 12-month period, commencing or ending in the year of income, is also a factor used to determine whether an entity is a PE.

An installation or structure used in the exploration of natural resources for a period exceeding 91 days will also be considered to be a PE.

Dependent agent

A person that has a dependent agent in Kenya who assumes any role, including concluding contracts and playing the principal role in a business entity with no serious supervision, will be deemed to have a PE in Kenya. However, there are some limitations on applying the dependent agent provision, when the activities are what could be defined by law as being of a preparatory or auxiliary nature.

The tax rates in Kenya vary depending on the structure of the entity and certain regulatory factors, such as entities being in the Export Processing Zone (EPZ), Special Economic Zone (SEZ), or entities being involved in shipping, housing development companies or motor vehicle assembly, among other businesses, for which there are special arrangements with the government. See 2.3 Special Incentives for further detail.

General Tax Rates for Incorporated Businesses

The general applicable rate is 30% for a resident entity and an additional repatriation tax of 15% for a non-resident entity.

Some Sector-Specific Taxes for Incorporated Businesses

• EPZ entities are exempt from paying any corporation tax for a period of ten years from the date on which their EPZ business commenced, which will be revised to 25% upon the lapse of the exemption period for the next ten years.
• SEZ entities are subject to corporation tax of 10% for the first ten years in which they are resident in the SEZ, after which, 15% tax will apply for the next ten years.
• An entity engaging in the local assembly of motor vehicles will pay 15% corporate tax for the first five years from commencement of operations. This period will be extended for a further five years should the entity meet the local content requirements.
• If an entity has entered into an agreement with the government for a preferential tax rate, such tax rate will apply.
• An entity engaged in the shipping business will pay 15% corporate tax for the first ten years from commencement of operations.
• An entity engaged in operating a carbon market exchange or emission trading system that is certified by the Nairobi International Financial Centre Authority will pay 15% corporate tax for the first ten years from the year of commencement.

Sole Proprietor/LP/LLP

An individual-owned business’s or pass-through entity’s tax rates are applied on an individual level rather than as a “trading as” or pass-through entity. The rates are applied in bands or scales ranging from 10% to a maximum of 35%, as follows (the figures refer to yearly income computation):

• first KES288,000 – 10%;
• next KES100,000 – 25%;
• next KES5.612 million – 30%;
• next KES3.6 million – 32.5%; and
• all above KES9.6 million – 35%.

Taxable profits are calculated based on accounting profits, but with certain adjustments in terms of deductions and exemptions that a person may apply to their gross profit for the purpose of establishing their net profit. The Kenya Revenue Authority (KRA) is implementing measures to bring taxpayers into the system and there is a requirement that for allowable deductions to be accepted, all tax receipts must be generated from KRA’s electronic tax invoice management systems (eTIMs), save where there are exemptions. Allowable deductions include business-related expenditure, bad debts, expenditure on scientific research, certain expenditures arising prior to commencement of the business, certain investment costs, certain costs under extractive industries, and a person may consider income that is exempt from tax when determining taxable profits. Taxable profits are generally calculated on an accrual basis as income is recognised when earned as opposed to when received.

Scientific Research Incentive

A business that has expenses of a capital nature or not of a capital nature concerning scientific research will have the right to deduct the expense as an allowable deduction, and this equally applies to funds paid to a scientific research association that has been approved by the Commissioner.

Qualifying Intellectual Property

There is a clearer approach on how to qualify intellectual property (IP) income that is subject to determining preferential tax rates. The IP income subject to tax benefits is determined through the division of the taxpayer’s research and development (R&D) costs by the taxpayer’s R&D costs plus acquisition costs and related-party sourcing costs, and the outcome is multiplied by IP income (including royalties, capital gains, any income from the sale of IP assets, and embedded IP income per transfer pricing principles).

Carbon Market Exchange or Emission Trading System

An entity certified by the Nairobi International Financial Centre Authority (NIFCA) to operate a carbon market exchange or emission trading system will be taxed at the rate of 15% for the first ten years from commencement of its operation. For capital/investment allowance on petroleum or gas storage facilities, the same is taxed at the rate of 50% in year one and 25% annually thereafter for machinery, farm works, ships, aircraft, and hospital equipment. It is important to note that this is a general investment deduction, not a renewable energy-specific allowance. Moreover, income earned from the eligible green sectors and projects listed in the Kenya Green Bond Guidelines by the Nairobi Securities Exchange (NSE) are exempt from tax.

Economic and Processing Zones

There are various corporate tax benefits for entities that embrace the use of the EPZ or SEZ. The former is more focused on export from Kenya while the latter provides room to transact with the local market and export while still benefiting from tax incentives.

Manufacture of Human Vaccines

An entity engaged in the manufacture of human vaccines is subjected to a preferential corporate tax charged at 10% on its income, rather than a total exemption. Nonetheless, if such entities enjoy specific exemptions such as dividends paid to non-resident persons, while payments made to non-resident services providers (without a PE in Kenya) are also exempt from tax, provided that these payments are for services directly related to the vaccine manufacturing process.

Motor Vehicle Assembly

An entity engaged in local assembly of motor vehicles will pay 15% corporate tax for the first five years from the commencement of operations. This period will be extended for a further five years should the entity meet the local content requirements, which is equivalent to 50% of the ex-factory value of the motor vehicles.

Special Operating Framework Agreement

The government offers a special tax rate if an entity enters a special operating framework with the government, specifically for purposes of undertaking the manufacturing of human vaccines or other manufacturing activities including refining, where the capital investment is at least KES10 billion.

Where a loss is in line with the regulations on allowable deductions, the law allows a deduction to be carried forward for a maximum period of five years upon approval by the Cabinet Secretary. This follows recommendation from the Commissioner, whereby a person applies for such an extension, giving evidence of inability to extinguish the deficit within the provided period.

There are parameters when deducting interest as one of the allowable deductions under the relevant law. The interest should arise from funds borrowed with a view to advancing a particular investment income (excluding qualifying dividends and interest) for a particular taxable income. However, the deduction of interest on loans from non-resident lenders is capped at 30% of the company’s EBITDA. If the interest expense exceeds this limit, the excess cannot be fully deducted in the current year but may be carried forward and deducted in the subsequent five years, provided it remains within the 30% limit in those years.

Consolidated Tax Group

Kenya does not allow consolidated tax grouping for the purpose of offsetting profits and losses between related companies; each entity is taxed as a separate legal person. However, the Commissioner requires an entity with Kenyan residence that is an ultimate parent or constituent of a multinational enterprise (MNE) to file transparency reports concerning its activities in Kenya and other jurisdictions. An entity qualifies for this category if the group has a consolidated gross turnover of not less than KES95 billion. This qualifying entity must file country-by-country (CbC) reports through a master file and local file. While the master file includes consolidated financial statements, this is for transfer pricing risk assessment only and does not allow the group to file a single consolidated tax return.

Exemption

A Kenyan resident constituent entity is exempt from local CbC reporting where the MNE’s ultimate parent entity (UPE) or surrogate parent entity (SPE), whether in Kenya or another qualifying jurisdiction, files the said report, provided that the filing jurisdiction has an active qualifying competent authority agreement for automatic exchange with Kenya, and no “systemic failure” has been notified.

For such an exemption to be valid, the Kenyan entity must submit a formal notification to the Commissioner by the last day of the MNE’s financial year, identifying the specific reporting entity and its tax residence, allowing KRA to successfully and effectively retrieve the data through international channels.

Capital gains tax (CGT) in Kenya is currently at the rate of 15%, which is applicable to gains made upon the transfer of property, including land, buildings, and unlisted shares. An entity determines the taxable gain by calculating the difference between the transfer value (selling price) and the adjusted cost (purchase price plus improvement and incidental costs). Crucially, gains on shares traded on the Nairobi Securities Exchange (NSE) or any CMA-approved exchange are currently exempt from CGT to encourage capital market growth.

In the event there is a different tax applicable such as income tax for a “property dealer” who buys and sells land as a business, then CGT will not be applied, as the profit is treated as business income taxed at 30% instead. The CGT applicable when transferring a property will not apply when the title is being transferred to a registered family trust, as this is a recognised tax-exempt “rollover for wealth preservation”.

It is important to note that now, taxpayers are disallowed to deduct any capital loss realised against any future capital gains. This places a burden on taxpayers, who will be required to pay CGT on the sale of property that results in a gain, even though such a transaction might have incurred significant capital loss.

The type or sector specific to a transaction will influence the type of tax that will be applied in a particular transaction. In this regard, the following are some of the taxes included.

Value Added Tax (VAT)

This is applicable to various goods and services rendered to an entity or when rendering the same to another entity if the goods or services are not exempted or zero-rated. As of 2026, the KRA strictly enforces eTIMS compliance; businesses can only claim input VAT if the supplier provides a valid electronic tax invoice. Additionally, the standard rate remains 16%, but the threshold for mandatory registration is KES5 million in annual turnover.

Excise Duty

This is commonly applicable in various transactions, such as bank transactions, gains in the gaming industry, and for certain products/goods per given Harmonised System (HS) Codes, among others. In 2026, excise duty on fees for money transfer services by banks and other financial providers is set at 15%. Furthermore, a new 10% excise duty applies to fees charged by platforms for the transfer or exchange of virtual assets, such as cryptocurrencies. For gains in the gaming industry, a 5% excise duty is applicable on the amount deposited into a customer’s betting wallet; this, however, does not apply to gains accrued from horse racing.

Withholding Tax (WHT)

This is applicable to various classes of transaction and an incorporated business ought to know when to apply for the same. Some instances where WHT is applicable include consultancy fees, royalties, and gaming-related winnings, among others. For 2026, the rate for resident management and professional fees remains 5%, while the rate for non-residents is 20%. Notably, WHT on digital content monetisation (influencers and creators) is established at 5% for residents and 20% for non-residents.

Gambling Industry-Based Tax

This is applicable to all transactions within a betting or gaming wallet. Under the Finance Act 2025, the previous system of taxing “winnings” and “gross gaming revenue” was replaced by a wallet-based model. Excise duty is now set at 5% and is applied at the point of deposit – specifically when a customer transfers money from their mobile wallet (eg, M-Pesa) to the betting company’s wallet. Furthermore, withholding tax (WHT) is also set at 5% and applies to the total value of all withdrawals made from the betting wallet, regardless of whether the funds represent profit or the return of the original stake. These taxes are collected in real time and remitted to the KRA.

Minimum Top-Up Tax

This is applicable to a resident entity or an entity with a permanent establishment in Kenya that is a part of a multinational group with a consolidated annual turnover of EUR750 million (approximately KES104 billion) or more. Effective from January 2025, this tax ensures an effective tax rate (ETR) of 15% in Kenya. If the entity’s ETR falls below 15% due to local tax incentives, the MTT requires the entity to pay a “top-up” amount to reach the 15% minimum threshold.

Stamp Duty

In 2026, stamp duty remains a critical requirement for the legal enforceability of documents in Kenya, as an unstamped instrument is generally inadmissible as evidence in court. The prevailing rates for property transfers are categorised by location: a 4% duty applies to land and buildings within gazetted cities and municipalities, while a lower rate of 2% is charged for transfers in rural areas. For corporate and commercial transactions, the transfer of unlisted shares attracts a 1% duty on the transfer value, while commercial leases are taxed at 1% of the annual rent for terms up to three years, increasing to 2% for longer durations.

A significant development in the current tax landscape is the relief introduced by the Finance Act 2025, which amended Section 117 of the Stamp Duty Act (Cap. 480) to exempt from stamp duty the transfer of property by a company to its shareholders as part of an internal group reorganisation, provided the transfer is proportional to each shareholder's existing ownership. Where the property being transferred consists of shares, those shares must be shares in a subsidiary of the transferring company. This provision does not independently exempt transfers to subsidiaries as a distinct category.

There are several tax classifications that apply to various businesses based on the sector that a particular business ventures into during that tax period. Some of the notable taxes, other than VAT and WHT, among others, are as follows.

Affordable Housing Levy

The Affordable Housing Act, 2024, remains the governing law in 2026. The levy is applicable at a rate of 1.5% of the gross salary of an employee, with a matching 1.5% contribution from the employer. For businesses and individuals not in formal employment, the levy is also payable at a rate of 1.5% of their gross income, remitted by the 9th working day of the following month.

Tax on Untaxed Distributions (formerly Compensating Tax)

Compensating tax was repealed and replaced by dividend distributed out of untaxed gains or profit. Where a company distributes a dividend out of gains or profits that have not been subjected to tax (eg, due to specific tax incentives or exemptions), that distribution is charged to tax at the standard resident corporate rate of 30%.

Significant Economic Presence (SEP) Tax

As of 2025/2026, the 1.5% digital service tax (DST) has been repealed and replaced by the significant economic presence (SEP) tax. This tax applies to non-resident entities earning income from digital services provided to users in Kenya. The effective rate is 3% of gross turnover, and it applies regardless of whether the entity has a physical presence (PE) in Kenya.

National Industrial Training Authority Levy

This levy remains at KES50 per employee monthly. It is a mandatory contribution by the employer and must not be deducted from the staff payroll. The collection of this levy is now centralised through the KRA’s unified payroll system to simplify compliance.

Turnover Tax

Turnover tax is applicable to resident entities with annual revenues ranging between KES1 million and KES25 million. The current rate is 3% of gross receipts, as per the Finance Act 2023 (which remains the standard in 2026). TOT is a final tax, meaning entities under this regime do not file annual income tax returns for that business. However, it does not apply to rental income, management fees, professional fees, or any income subject to a final withholding tax.

It is common practice for founders, the majority of whom operate small and medium-sized enterprises, to prefer to start their businesses in the form of a sole proprietorship because of its low costs and simple structures, and later to convert, mostly to an LTD or LLP after significant growth in the business. However, some founders who prefer the benefits associated with corporate structures opt for them from the outset.

Individual Tax Rates

The current individual income tax rate operates on a progressive scale from 10% to 35%. As of 2026, the top rate of 35% applies to annual income exceeding KES9.6 million. These rates apply to individuals, sole proprietorships, and partners in an LP or LLP. Because the top individual rate (35%) is higher than the standard corporate rate (30%), there is a natural incentive for high-earning professionals to incorporate.

Corporate Tax Rates

The standard corporate tax rate is 30% for resident companies. However, specific sectors enjoy preferential rates:

• special economic zones (SEZ) – 10% for the first ten years, then 15% for the next ten;
• export processing zones (EPZ) – 0% (tax holiday) for the first ten years, then 25%.
• human vaccine manufacture – a preferential rate of 10%; and
• motor vehicle assembly – reduced rates (typically 15%) based on local content requirements.

Rules to Prevent “Income Shifting”

To prevent individual professionals from simply “earning” their salary through a company to pay 30% instead of 35%, the KRA uses the following rules in 2026:

• Personal Service Income Rules: If a company’s income is derived primarily from the personal services of an individual (like a consultant or doctor), the KRA can “look through” the corporate structure and tax that income at the higher individual rates.
• eTIMS Validation: Effective 1 January 2026, the KRA validates all corporate expenses against eTIMS data. If a professional uses a company to pay for “personal expenses” to lower their corporate profit, those expenses are now automatically disallowed and taxed.
• Dividend Tax: Under the Income Tax Act (Cap. 470) and the applicable WHT schedules, the WHT on dividends paid to a resident individual is 5%. However, there is a 15% rate, applicable only to non-resident recipients.

Other Options

While lawyers and certain other professionals are legally restricted to sole proprietorships or LLPs due to professional ethics and public interest, many other service providers (architects, engineers, consultants) adopt Limited (LTD) structures for liability protection, even though the tax benefits are increasingly monitored by the KRA.

There are no regulatory measures that limit a closely held corporation in the accumulation of funds for investment purposes. However, where an amount that would have been distributed as dividends, upon other deductions (such as investments) being made, has not been distributed within 12 months of the accounting period, the Commissioner will deem the amount as having been paid, thereby resulting in the applicable tax being applied, which is a 30% tax on those gains at the corporate level, in addition to the WHT due on the dividend.

Withholding tax (WHT) is the tax applicable to dividends, while CGT is the tax applicable to the gain on the sale of shares. The CGT rate is 15% on the net gain, and the WHT rate on dividends for resident individuals is 5%. There are exemptions depending on whether there is a gain or a loss, or if the shares are listed on the Nairobi Securities Exchange (NSE), which could result in the CGT not being applied to a particular transaction.

The dividends from traded shares are subject to WHT that is applied and remitted by the company declaring the dividend (the issuer). The WHT must be remitted to the KRA on or before the 20th day of the following month. The WHT rate applicable to a resident person is 5% (this rate also applies to citizens of East African Community partner states). For a non-resident person, the WHT rate is 15%, unless a lower rate is applicable under a double taxation agreement (DTA). Notably, gains on the sale of shares listed on the Nairobi Securities Exchange (NSE) are exempt from CGT to encourage capital market growth.

In Kenya, WHT rates are primarily determined by the nature of the transaction and the residency status of the recipient. For 2026, resident individuals and entities are subject to a 5% WHT on dividends and royalties, while interest is generally taxed at 15%. For non-resident investors, these rates increase significantly to 15% for dividends and interest, and 20% for royalties. Notably, the SEP tax, which replaced the previous digital service tax, now imposes a 3% levy on the gross turnover of non-resident digital service providers deriving income from Kenyan users without a local permanent establishment.

The Kenya Revenue Authority (KRA) maintains an aggressive focus on the classification of payments to prevent tax leakage. A primary area of scrutiny is “management and professional fees”, which attract a high 20% WHT for non-residents, leading the KRA to frequently challenge service agreements that might be used to repatriate profits under lower-taxed labels. Furthermore, the KRA strictly enforces “deemed interest” on interest-free loans from non-resident-related parties, calculating a market-based rate to apply the 15% WHT. Compliance is now heavily monitored through eTIMS data validation, ensuring that businesses can only claim deductions for outbound payments if they have properly remitted the required withholding tax.

Kenya presently has 14 active double tax agreements (DTAs). Other DTAs are either under consideration, negotiation, or have been concluded but not signed and ratified. These DTAs are essentially meant to manage the possible taxes applied on cross-border transactions. The country receiving the tax is influenced by factors such as IP structuring for licensing, accessibility to investors, and socio-political factors. Therefore, an entity is advised to assess its commercial interest before exploring the structures under DTAs.

A DTA’s use is limited to the parties to that DTA. A person needing any consensus with the Commissioner on an item where a DTA does not apply will have to reach out directly to the Commissioner. This is even more important where there is a grey area and the use of a DTA, or international agreement, will help in providing a solution.

As of 2026, the biggest hurdle is that the Kenya Revenue Authority (KRA) now strictly scrutinises “intragroup” payments like management fees, royalties, or loans between a parent company and its Kenyan subsidiary. To avoid expensive audits and disputes over whether these prices are “fair” (the arm’s length principle), the government has introduced advance pricing agreements (APAs). For a KES5 million fee, a company can now pre-agree on its tax prices with the KRA for five years, providing total legal certainty. However, the trade-off is much heavier paperwork: large companies must now file three detailed annual reports (master, local, and country-by-country files) to prove they are not hiding profits, with the KRA using eTIMS to cross-check these transactions in real time.

As of 2026, the Kenya Revenue Authority (KRA) no longer accepts “limited risk” labels at face value. Instead, they use a “substance over form” rule to verify if a local company’s daily activities truly match its low-risk contract. If a company claims to be low risk to justify low profits but actually manages its own marketing or inventory, the KRA will reclassify it as a “full distributor” and tax it on much higher profit margins. To gain certainty, businesses can now pay a KES5 million fee for a new APA, which secures their tax position for five years and prevents these challenges.

While Kenya is not a formal member of the OECD, it is an active participant in the OECD/G20 Inclusive Framework on BEPS and has fully aligned its laws with international standards. As of 2026, the KRA published Draft Income Tax (Transfer Pricing) Rules, 2023, to replace the existing 2006 Rules, but as of 2026, those draft rules have not yet been gazetted and the Income Tax (Transfer Pricing) Rules, 2006, remain the operative instrument. A major precision for this year is the launch of the APA regime, which allows investors to pre-agree on their tax pricing with the KRA for up to five years (subject to a KES5 million fee). Furthermore, Kenya now enforces the OECD’s three-tiered reporting – master file, local file, and country-by-country reports – to ensure maximum transparency in cross-border transactions.

In 2026, transfer pricing in Kenya has shifted from a period of “revamping” to a rigorous enforcement of the same. The Kenya Revenue Authority (KRA) is now highly aggressive, utilising eTIMS data to monitor cross-border payments in real time and focusing heavily on the “benefit test” for management fees and interest-free loans. To manage this intensity, the government has launched the APA regime, which allows investors to pre-agree on their tax prices for five years, providing a much-needed “safety net” against audits. While international disputes can still be resolved through the mutual agreement procedure (MAP) in tax treaties, the KRA’s 2026 approach prioritises these forward-looking APAs to prevent double taxation before it occurs.

In 2026, compensating adjustments are allowed under the new APA regime, allowing taxpayers to align their self-assessment returns and financial records with pre-agreed arm’s length prices for related-party transactions. This is distinct from compensating tax under Section 7A of the ITA, which is a 30% corporate charge triggered by the distribution of dividends from gains or profits that have not been subjected to the full corporate tax rate.

In 2026, the corporate income tax (CIT) rate for both local subsidiaries and branches of non-resident corporations is 30%. The previous 37.5% rate for branches was repealed to ensure a level playing field. However, their total tax burden remains different due to how they send money home. A subsidiary pays a 15% withholding tax (WHT) on dividends sent to its parent, while a branch is subject to a 15% branch repatriation tax calculated on its “deemed” profit repatriation, regardless of whether it actually sends cash back to the head office.

A major distinction remains in expense claims: while a subsidiary can often deduct interest and royalties paid to its parent (subject to withholding tax), a branch is strictly limited by the KRA from deducting “internal” charges like royalties or management fees paid to its own head office.

In 2026, non-residents are subject to a final 15% CGT on the sale of shares in unlisted local corporations. This now extends to indirect transfers whereby Kenya taxes the sale of a foreign holding company if it derives 20% of its value directly or indirectly from Kenyan immovable property, or if the seller holds more than a 20% interest in the Kenyan entity. While DTAs can offer relief, many modern treaties include “land-rich” clauses that allow Kenya to tax gains where shares derive more than 50% of their value from Kenyan immovable property, not merely the “primarily derived” standard suggested. Furthermore, to claim any treaty benefits, investors must now pass a strict “principal purpose test” (PPT) to prove the structure is not merely for tax avoidance.

In 2026, a “change of control” for CGT purposes is primarily triggered where a non-resident holds more than 20% of the share capital of a Kenyan company, directly or indirectly, and disposes that interest. This applies even to indirect disposals occurring higher up within an overseas group structure. Senior officers and controlling members also face potential personal liability under the Tax Procedures Act where they deliberately facilitate a disposal that leaves the local company unable to satisfy its tax obligations.

In 2026, while Kenya primarily follows the arm’s length principle, KRA increasingly uses formulaic methods to determine the taxable income of foreign-owned affiliates. For non-resident digital service providers, the SEP tax deems 10% of gross turnover as taxable profit and applies the 30% corporate rate, resulting in an effective 3% levy on gross revenue, with no minimum turnover threshold following removal of the KES5 million exemption.

Additionally, for interest-free intercompany loans, the KRA applies a prescribed market interest rate (set at 8% for early 2026) to calculate “deemed interest”, which is then subject to a 15% withholding tax. Other formulaic caps include the restriction of interest deductions to 30% of EBITDA for foreign-controlled entities and specific “deemed profit” rates for non-residents in shipping (2.5%) and telecommunications (5%) based on their gross Kenyan billings.

In 2026, the standard for deducting management and administrative fees has moved beyond the simple “wholly and exclusively” rule to a data-verified “benefit test”. To claim a deduction, a local affiliate must prove that the services provided a specific economic value and were not merely “shareholder activities” for the parent’s benefit. Legally, as of 1 January 2026, the KRA automatically blocks any expense in your tax return that is not supported by a valid eTIMS-compliant invoice, which must be transmitted in real time by the supplier. Furthermore, while a local subsidiary can deduct these fees (subject to a 20% withholding tax), a local branch is strictly prohibited from deducting “internal” recharges for management or administrative costs paid to its own head office.

Related-party borrowing in 2026 is strictly governed by Section 16(2) of the ITA, which limits deductible interest on foreign loans to 30% of EBITDA. Any interest exceeding this cap is non-deductible but may be carried forward for up to five years, subject to the same annual 30% limit. Furthermore, even if a loan is interest-free, KRA applies a “deemed interest” provision, currently set at a prescribed market rate of 8%, and charges a 15% withholding tax on that amount. To gain certainty on transfer pricing methodology for related-party transactions, taxpayers may, from 1 January 2026, enter into an APA with the Commissioner of Domestic Taxes. The APA covers up to five years and requires a non-refundable application fee of KES5 million (per the Draft Income Tax (APA) Regulations 2025, currently awaiting finalisation), payable after a mandatory pre-filing meeting with the KRA.

For a resident corporation, all income – whether earned locally or abroad – is subject to the standard 30% corporate tax. Under Section 4 of the Income Tax Act, if a business is carried on partly within and partly outside Kenya by a resident entity, the entire profit is deemed to have accrued in Kenya and is fully taxable. To avoid double taxation, companies can claim foreign tax credits if a DTA exists with the source country, or apply for unilateral relief (under Section 16 or 39) to deduct foreign taxes paid from their Kenyan liability.

In 2026, local expenses attributed to exempt foreign income are strictly non-deductible. Under the “wholly and exclusively” rule of Section 16(1), for an expense to be allowed, it must be linked to income that is subject to tax in Kenya. If a local affiliate incurs costs that support both taxable and exempt activities, those costs must be proportionately disallowed in the annual tax return. However, because Kenyan resident companies are taxed on their worldwide business income, most foreign-sourced profits are considered taxable, which in turn preserves the deductibility of the local expenses incurred to generate them.

In 2026, dividends received by a Kenyan resident company from a foreign subsidiary are exempt from corporate tax if the resident company holds at least 12.5% of the voting power in the payer. This exemption is designed to prevent the triple taxation of profits as they move up a corporate chain. As a direct consequence of this “exempt” status, any local expenses such as interest on loans used to buy those foreign shares or administrative costs for managing the investment are strictly non-deductible in Kenya. Where the shareholding falls below 12.5%, dividends received by a Kenyan resident company are generally taxable at a WHT rate of 5%, while the 15% rate applies to dividends paid to non-residents, unless a lower treaty rate applies.

In 2026, local corporations cannot allow foreign subsidiaries to use Kenyan-developed intangibles for free. To comply with the Transfer Pricing Rules 2023, the Kenyan entity must charge a market-rate royalty, which is taxed as business income at 30%. If the IP is fully transferred abroad, it triggers a 15% CGT on its fair market value. The KRA uses the DEMPE framework to ensure that whichever entity actually performs the “development and maintenance” of the IP – typically the Kenyan parent – is the one that pays the tax on the resulting global profits. Failure to document this properly can lead to aggressive audits, which can be mitigated by securing a five-year APA.

In 2026, Kenya does not have a standalone “controlled foreign corporation” (CFC) framework that taxes the undistributed passive income of a foreign subsidiary. However, the position for non-local branches is entirely different: because resident corporations are taxed on worldwide income, the profits of a foreign branch are deemed to accrue in Kenya and are taxed at the standard 30% corporate rate. While subsidiaries offer a “tax deferral” (you only pay tax in Kenya when dividends are sent back), branches are taxed in real time. To prevent double taxation, Kenya allows for foreign tax credits under Section 42 if a DTA is in place, or unilateral relief under Section 16(2)(c).

There are no economic substance regulations in place; however, the approach by the Commissioner is limited to the activities of the entity as compared to a mere description. Therefore, the regulatory framework on what amounts to a resident, non-resident or PE entity will influence how the Commissioner defines an entity’s tax obligations.

The taxation of gains from the sale of shares in non-local affiliates depends on the residency of the seller. For a resident Kenyan corporation, the gain on the sale of shares in a foreign subsidiary is generally treated as business income and taxed at 30%, rather than the lower 15% CGT rate, unless it can be proven the investment was purely capital in nature. However, for non-resident sellers, Kenya only taxes the sale of shares in a foreign holding company if that company derives 20% or more of its value directly or indirectly from immovable property located in Kenya.

There are anti-avoidance provisions that are structured to operate both prospectively and retrospectively. The provisions focus on transactions designed to avoid a person’s liability to pay tax. Also, there is a provision focusing on private companies that may opt to delay the distribution of dividends that would ordinarily have been disbursed to the shareholders.

In 2026, the KRA has moved away from traditional “routine” audit cycles toward “continuous compliance monitoring”. As of 1 January 2026, all income tax returns are subject to automatic validation upon filing. Using eTIMS, withholding tax data, and customs records, the system cross-checks your expenses in real time. If your declared data does not match the KRA’s digital records, an automated “compliance alert” or a targeted audit is triggered immediately.

Kenya has successfully implemented several BEPS Actions, including Action 13 (Country-by-Country Reporting) for groups with a turnover exceeding KES95 billion. As of 2026, KRA published the Draft Income Tax (Transfer Pricing) Rules, 2023, to replace the existing 2006 Rules, but those draft rules have not yet been gazetted and the Income Tax (Transfer Pricing) Rules, 2006, remain the operative instrument. Furthermore, Kenya has adopted Common Reporting Standards (CRS), enabling the automated exchange of financial data with other jurisdictions to combat offshore tax evasion.

The government is aggressively pursuing Pillars One and Two. Effective 1 January 2025, Kenya introduced a domestic minimum top-up tax (DMTT) of 15% to align with Pillar Two, ensuring that multinational groups pay at least 15% on their Kenyan-derived profits. The policy shift is focused on digitalising the tax base and preventing profit shifting, as seen in the mandate for eTIMS real-time expense validation.

International tax now has a huge public profile in Kenya due to high-stakes litigation and the introduction of new levies like the SEP tax and virtual asset (excise) duty. These measures demonstrate a “source-based” expansion where the KRA taxes profits derived from Kenya’s digital interface, even when the parent company has no physical presence.

Kenya balances BEPS compliance with competitiveness by offering targeted incentives. While it enforces a global 15% minimum tax, it maintains lower rates for special economic zones at a rate of 10% (for the first ten years, rising to 15% thereafter) and export processing zones at a rate of 0% (for the first ten years, rising to 25% thereafter), and carbon market exchanges (15%). The challenge for 2026 is maintaining these “investor-friendly” pockets while ensuring they do not qualify as “harmful tax practices” under OECD reviews.

The most competitive – and vulnerable – parts of the system are the EPZ and SEZ tax holidays. These are under pressure from Pillar Two, which may allow other countries to tax Kenyan-sourced profits if the local effective rate is too low. To counter this, Kenya has introduced its own 15% minimum top-up tax so that it retains the tax revenue rather than losing it to a foreign parent’s jurisdiction.

Kenya has taken a step towards ratifying the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Regardless of reservations in place, there are moves towards implementing measures on how to deal with hybrid instruments.

Kenya does not have a purely territorial regime; it uses a residency-based system for locals, taxing their worldwide income. Interest deductibility is strictly capped at 30% of EBITDA for foreign-controlled companies. Excess interest can be carried forward for five years, provided the cap is not exceeded in those future periods.

While Kenya lacks a formal “CFC Act”, it achieves similar results through the Residency Test. A foreign entity is treated as a Kenyan resident (and taxed on worldwide income) if its “place of effective management and control” is in Kenya. Furthermore, under the 2026 DMTT rules, Kenyan parents may be liable for a “top-up tax” if their foreign subsidiaries are taxed at less than 15%.

Kenya has a limited number of active DTAs, which, in general, seem to mirror each other on standard provisions, while certain areas come with favourable terms that may enhance the possibility of improving inbound and outbound investment, not to mention that a DTA with certain suitable markets encourages multinationals to establish headquarters in Kenya, thereby enhancing the viability of the country.

The DTAs, while in place to curb double taxation, provide room for taxation to take effect at reasonable rates, or factoring in what would be described as territorial tax, as compared to a generalised worldwide tax model.

In 2026, IP taxation is governed by the DEMPE framework (development, enhancement, maintenance, protection, and exploitation). A company cannot move IP profits offshore unless it proves those functions were performed abroad. If IP is transferred, a 15% CGT applies, while local licensing income is taxed at 30%.

Transparency is now absolute due to the KES95 billion threshold for CbC reports. The KRA uses this data to map out “low-tax” hubs in a group’s structure. Failure to file can lead to penalties of KES1 million or imprisonment. Large taxpayers must file the master file and local file within six months of the group’s financial year-end.

The tax landscape for digital assets changed drastically in July 2025. The 3% digital asset tax was repealed and replaced with a 10% excise duty on service fees charged by VASPs. This shifted the burden from the total transaction value to the platform’s commission, making the environment more investor-friendly while still capturing revenue.

The SEP tax replaced the 1.5% DST in late 2024. As of 2026, it is a final tax of 3% on gross turnover for non-residents providing services through a digital marketplace with annual Kenyan turnover exceeding KES5 million.

However, under the Finance Act, 2025, the scope was expanded to cover all income derived by non-residents from services provided via the internet or any electronic network, and the KES5 million threshold was removed entirely, meaning that even a single qualifying digital sale to a Kenyan user now triggers SEPT. The effective tax rate is 3% on gross turnover, computed by deeming 10% of gross turnover as taxable profit and applying the 30% corporate tax rate.

The Kenyan government has expressed interest in determining the value of IP for the purposes of better taxation. One solution is a preferential tax to be applied on IP (currently law: see 2.2 Technology Investments). On the other hand, the Cabinet Secretary of the National Treasury and Economic Planning recently proposed new Transfer Pricing Rules, 2023, which should replace the Transfer Pricing Rules, 2006 (see 9.10 Transfer Pricing and IP Taxation).