On 15 May 2025, the Kenyan Government released the draft for Kenya’s Finance Bill 2025. The proposed amendments are significant, aiming to expand the tax base, modernise compliance, and generate increased revenue. However, several changes may raise concerns among businesses and investors. Below is a summary of the key provisions and their potential implications.
Corporate Income Tax
1. Definition of Royalties Expanded
The Bill proposes to expand the definition of “royalty” to include not only fees for the use, development, training, maintenance or support of software but also payments made for software distribution where periodic fees are charged through a distributor.
Our take: This goes beyond the standard definition found in international tax treaties and the OECD and UN Models, increasing the risk of treaty disputes and double taxation, particularly for software and tech businesses. This is also likely to increase the cost of software for Kenyan users, as withholding tax will be imposed.
2. Limitation on Loss Carry Forward
The Bill proposes a five-year cap on carrying forward tax losses, replacing the current indefinite period.
Our take: This is a major shift likely to affect capital-intensive sectors such as energy, infrastructure and manufacturing, where profitability is delayed by significant upfront investment. It may discourage long-term investment and undermine certainty for existing investors who modelled returns under the previous regime.
Transfer Pricing
Advance Pricing Agreements Introduced
A welcome change is the introduction of Advance Pricing Agreements (APAs). These allow taxpayers to agree transfer pricing methodologies with the KRA in advance for a period of up to five years.
Our take: This provides welcome certainty for multinationals and can help reduce disputes and audit risk on cross-border transactions.
Employment Tax
1. Increase in Tax-Free Per Diem Allowance
The tax-free threshold for daily allowances for employees travelling on official duties is increased from KES 2,000 to KES 10,000 per day.
Our take: This is a practical and long-overdue update that will ease compliance and reduce administrative burdens for employers and employees alike.
2. Removal of Expatriate Tax Deduction
The Bill proposes to delete the provision allowing a one-third tax deduction for expatriates working at approved regional offices.
Our take: This could weaken Kenya’s position as a regional headquarters location for multinational companies and may increase employment costs.
3. Mortgage Interest Deduction Amended
The deduction for interest paid on residential property loans is expanded to include loans used for construction, in addition to purchase or improvement.
Our take: A sensible clarification, though the monetary cap and single-residence restriction remain in place, limiting the overall benefit.
Tax Procedures Act
1. Clarification of e-Invoicing Exemptions
Certain payments, including salaries, imports, and final withholding tax transactions, are confirmed as exempt from electronic invoicing.
2. Relief from Withholding Tax Penalties
Withholding agents will not be liable for tax that was not withheld where the recipient has paid and accounted for the tax in full.
Our take: This prevents double taxation and brings fairness to the enforcement process.
3. Agency Notices May Be Issued During Appeals
The KRA will now be able to issue agency notices (e.g. garnishment orders) where a tax payer has lost a case at the Tax Appeal Tribunal or at court, even where a taxpayer has appealed a decision.
Our take: Taxpayers must now act swiftly to obtain stay orders to avoid enforcement, increasing litigation urgency and compliance risk.
4. Timeline Computation Tightened
The proposal deletes the current rule excluding weekends and public holidays when calculating deadlines for objections and appeals.
Our take: This significantly shortens practical timelines and increases the risk of missed deadlines, especially for complex disputes. It also reverses a provision introduced just five months ago, reducing predictability in tax law.
5. KRA Access to Business Data Expanded
The Bill removes protections that previously exempted trade secrets and customer personal data from compulsory sharing with the KRA.
Our take: This raises significant data privacy concerns. Affected businesses should review their data protection and internal IT policies.
6. Failure to File a Return Now Penalised
The penalties currently applicable for late submission of tax returns will now also apply where a return is not filed at all.
7. Waiver of Penalties Due to System Errors
The Cabinet Secretary may waive penalties or interest resulting from errors, delays, or duplications caused by electronic tax systems, such as iTax.
Our take: This aligns with recent judicial guidance and offers fairness where taxpayers have complied in good faith but suffered from system flaws.
Excise Duty
1. Expansion of Digital Lender Definition
The definition of “digital lender” is broadened to cover non-bank credit providers operating through electronic platforms. Banks, Saccos and licensed microfinance institutions are excluded.
Our take: This brings more fintech and informal lenders into the excise net, which may alter the competitive landscape and increase costs for digital borrowers.
2. Time Limit for Licensing Decision Introduced
The KRA will be required to make decisions on excise licence applications within 14 days. However, there is no clear remedy where this deadline is not met.
Stamp Duty
Exemption for Internal Reorganisations
Stamp duty will not apply to the transfer of property from a company to its shareholders as part of an internal reorganisation, provided the transfer is proportional and, in the case of shares, involves a subsidiary.
Our take: This is a positive step for group restructurings, removing unnecessary cost and friction in corporate reorganisation processes.
Conclusion
Kenya’s 2025 Finance Bill reflects a growing focus on revenue mobilisation and compliance enforcement. While some proposals are clearly constructive, others, such as the restriction on loss utilisation and expanded enforcement powers, may have a chilling effect on long-term investment and the perceived stability of the tax regime.
Businesses operating in or through Kenya should assess the impact of these proposals in detail and consider engaging with the legislative process before the Bill is finalised.
Please reach out if you would like a tailored review of the impact on your structure.
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