14 May 2025 Kenya introduces Finance Bill 2025
On 30 April 2025, the Cabinet Secretary to the National Treasury presented the Finance Bill, 2025 (the Bill) to Parliament. Parliament will seek stakeholder and public comments before the Bill becomes an Act. The Bill seeks to amend various tax laws, including the Income Tax Act (ITA), VAT Act, 2013 (VAT Act), Excise Duty Act, Tax Procedures Act, 2015 (TPA), and Miscellaneous Fees and Levies Act. The Bill also provides for other miscellaneous amendments to the Stamp Duty Act. Once the Finance Bill, 2025 has been subjected to public participation, it will be tabled before Parliament for debate before it is signed into law by end of June 2025. This Alert summarizes the key proposals contained in the Finance Bill, 2025. Unless specifically mentioned, the changes contained in this analysis are expected to take effect on 1 July 2025 after assent by the President. The Bill seeks to amend the definition of the term "individual retirement fund" by deleting the requirement to abide with the Income Tax (Retirement Benefit) Rules. The Rules require individual retirement funds to be registered with the Commissioner — i.e. the Kenya Revenue Authority (KRA). This amendment aims to align the treatment of retirement funds with other retirement funds, as outlined by the Tax Laws (Amendment) Act, 2024, which removed the requirement to register with the KRA. The Bill seeks to expand the definition of the term "royalty" to include distribution of software where regular payments are made for the use of the software through the distributor. The amendment appears to emanate from historical tax controversy on the withholding tax status of payments to distributors of software. The Bill would streamline the definition of "related person" across the ITA. Currently, the term is defined in Section 2 and the Eighth Schedule to the Act. The proposed definition refers a related person, in the case of two persons, as a case where either person participates directly or indirectly in the management, control or capital of the other's business. When more than two persons are involved, a "related person" includes any other person who participates directly or indirectly in the management, control or capital of the business of the two persons. Additionally, it encompasses an individual who participates directly or indirectly in the management, control, or capital of the business of the two persons; an individual who is associated with the two persons by marriage, consanguinity or affinity, and where the two persons participate in the management, control or capital of the individual's business. The Bill seeks to expand the scope of Significant Economic Presence Tax (SEPT) by including income derived or accrued from Kenya through a business carried out via the internet or an electronic network. The current proviso only covers supplies over a digital marketplace. Additionally, the Bill seeks to do repeal the exemption from SEPT for nonresident persons with an annual turnover of less than five million Kenya shillings (KES5m). The Tax Laws (Amendment) Act, 2024 introduced SEPT in place of Digital Service Tax (DST). The definition of the in-scope businesses, however, created uncertainty over whether SEPT applied to all activities carried out over the internet or an electronic network. The Bill seeks to introduce a due date for payment of minimum top-up tax, being the last day of the fourth month after the end of the year of income. This will align it with the due date for payment of balance of tax. The Tax Laws (Amendment) Act, 2024 introduced a domestic minimum top-up tax to align with the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two. It, however, did not indicate the due date and thus the proposed amendment is meant to cure this deficiency. The Bill proposes to expressly provide that expenditures incurred in the construction of a public sports facility are deductible in the determination of taxable income. In addition, the Bill proposes to repeal the provision that allowed the deductibility of expenditure incurred on sports sponsorship with the prior approval by the Cabinet Secretary responsible for sports. The Bill seeks to introduce a five-year cap on deductibility of tax losses. Currently, the law permits taxpayers to carry forward tax losses indefinitely. The Bill has not provided a transition clause for existing tax losses, thereby leading to uncertainty on the utilization of historical tax losses. The Bill proposes to lift the exemption granted to constituent entities of a Multinational Enterprise (MNE) Group from filing a country-by-country report (CbCR) where there is a competent authority agreement on exchange of information between Kenya and the ultimate parent entity of the MNE Group — e.g. the Multilateral Competent Authority Agreement on the Exchange of Country-By-Country Reports (CbC MCAA). It is noteworthy that Kenya is a signatory to this agreement and has activated a number of relationships for exchange of these reports. The Bill proposes to introduce an advance pricing agreement (APA) framework. This will enable taxpayers to enter an arrangement with the KRA on specific related-party transactions and thus mitigate transfer pricing controversy risks. The validity of an APA will be restricted to five consecutive years, but the KRA will have the right to revoke it through written notice of declaration in case of misrepresentation of facts. The introduction of APAs is long overdue, particularly considering that Kenya is a hub for MNEs. The change will provide taxpayers with complex international transactions to enter into APAs, thus promoting tax certainty. The Bill seeks to replace the term "life fund" and replace it with "life insurance fund" in relation to the taxation of long-term insurance companies. The taxation of long-term insurance companies is premised on certain aspects of their funds. The proposal implies that the taxation of long-term insurance companies will be made only in reference to life insurance funds. The Bill seeks to include gains or profits derived from the business of a ship owner or charterer by a nonresident person under the withholding tax regime. Gains or profits derived by a nonresident ship owner or charterer are subject to income tax. The declaration of the tax is currently based on a self-assessment regime. The inclusion of the same in section 35 of the ITA implies that the tax will be withheld by the payer as opposed to the nonresident person making a self-declaration. The Bill seeks to extend the timeframe for processing income tax exemption applications from 60 days to 90 days. Although the proposed change will provide the KRA with additional time to review the applications it is a disadvantage to taxpayers who will have to wait for a longer period before receiving a response on their application for income tax exemptions. The Bill seeks to amend the provision concerning gains from the transfer of property within a Special Economic Zone (SEZ), specifying that the exemption will only apply to the transfer of property within a SEZ by licensed developers, enterprises, or operators. The current proviso provides for exemption of gains on the transfer of property within a SEZ enterprise, developer and operator. The Bill has proposed incentives to stimulate growth of the Nairobi International Financial Centre Authority (NIFCA) regime as follows:
This is a welcome move as the Government seeks to promote the NIFC considering that it has remained largely dormant since it was established several years ago. The exemption of start-ups from CIT may, however, not crystallize into real benefits since most start-ups are not profitable in their initial years of operation. The Government may need to reconsider the incentives that are granted to start-ups. The Bill proposes to repeal the accelerated capital allowances of 100% that are granted to hotel buildings, buildings used for manufacture, machinery used for manufacture, and investments in a special economic zone. Accelerated capital allowances are also granted to such investments where those investments are located outside Nairobi or Mombasa County. The affected organizations will be granted capital allowances at the standard capital allowances that are available qualifying capital expenditure. The proposal aims to harmonize investment allowances. The Bill proposes to repeal the preferential CIT rate of 15% for companies that construct at least 100 residential units annually and companies whose business is local assembling of motor vehicles (for the first five years). These preferential tax regimes were introduced to encourage investment into the real estate and local assembly industry sectors. This appears to be in line with the general move to rationalize tax expenditure. The Bill seeks to expressly provide that the resident withholding tax rates of 5% and 15% on the gross amount payable for qualifying dividends and qualifying interest, respectively, shall be a final tax. This proposal is welcome, as it provides clarity that there will be no further taxation on qualifying interest and qualifying dividends. The Tax Laws (Amendment) Act, 2024 deleted this provision, likely inadvertently. The Bill proposes to reduce the rate of digital asset tax from 3% to 1.5% of the transfer or exchange value of the digital asset. Digital assets include token codes, cryptocurrency and non-fungible tokens (NFTs). The proposed reduction will be a welcome move as the Government seeks to spur the growth of the digital economy particularly given that the tax is imposed on the value of the asset rather than the gain on disposal. The Bill seeks to increase the amount of tax free per-diem amount from the current KES2k per day to KES10k per day. It is noteworthy that this benefit only applies where an employee is granted these amounts when on official duties, outside their usual place of work. The Bill seeks to allow deduction of interest incurred on a mortgage facility taken to construct residential premises. Currently, the mortgage interest deduction only applies for mortgages taken to purchase or improve residential premises occupied by an individual during a year of income. The Bill proposes to repeal specific exemptions that are granted on qualifying lumpsum or periodic withdrawals from registered retirement schemes. The proposals would give full effect to the taxation of income on withdrawal from registered schemes, as per the tax exemption provided for under Paragraph 53 of the First Schedule to the ITA upon meeting the prerequisite conditions for exemption therein at the tax rates provided for under Paragraph 5 (d) of the Act. The Tax Laws (Amendment) Act, 2024 introduced an income tax exemption for gratuities or other allowances paid under a public pension scheme. However, the provision limits the exemption to payouts from public schemes. The Bill proposes a general exemption on all gratuities. This implies that payment of gratuities from both private and public schemes would be exempt from income tax. The Bill proposes to include a tax rate of 30% on fringe benefits provided by an employer. The Tax Laws (Amendment) Act, 2024 deleted this provision, likely inadvertently. The Bill proposes to amend Section 23A of the TPA to provide that payments subject to a withholding tax that is a final tax are excluded from the electronic tax invoicing requirements. Withholding tax is a final tax if (1) a payment subject to withholding tax is made to a nonresident, or (2) qualifying dividends, qualifying interest or winnings are paid to a resident. Other transactions exempted from electronic tax invoicing are payments of emoluments, payments for imports, payments of interest, transactions for investment allowances and airline passenger ticketing. The Bill seeks to introduce a provision under Section 31 of the TPA to require the Commissioner to issue reasons for amending an assessment if the Commissioner makes an amendment or further amendment to a taxpayer's self-assessment return. This provision aims to promote the right to fair administrative action enshrined in the Constitution of Kenya by ensuring that assessments are not arbitrarily issued to taxpayers without a basis, as well as to give taxpayers more clarity when responding to the Commissioner. The Bill seeks to amend Section 39A of the TPA to exclude from liability a person who fails to remit or deduct withholding tax on a payment, if the recipient of the payment has fully paid and accounted for the principal tax. This proposal would offer a reprieve to taxpayers who have been penalized by paying the entire principal sum of tax not withheld, even if the recipient has accounted for the income tax, resulting in unjust enrichment of the tax collector. The current provision has, on several occasions, been challenged by taxpayers on the basis that it results in double taxation of the same income. The Bill proposes to amend Section 40(2) of the TPA to allow a Registrar to register a notification from the Commissioner to hold a defaulting taxpayer's property as security for unpaid tax without charging stamp duty. Currently, the law allows the Registrar to register a notification from the Commissioner as a restraint on property for unpaid taxes without levying or charging a fee, but does not specify whether stamp duty, as prescribed in the Stamp Duty Act, is payable on the registration such securities. Further, the Bill seeks to amend Section 40(5) by exempting from stamp duty the transfer of charged property by the Commissioner where the taxpayer fails to pay the tax liability. The Bill proposes to amend Section 42 of the TPA to extend the Commissioner's powers to collect unpaid taxes from persons holding or owing money to nonresident taxpayers. The Bill proposes to amend Section 47(2) of the TPA by extending the timeline for the Commissioner to ascertain and determine an application for a refund from 90 days to 120 days. Additionally, the Bill proposes to amend Section 47(4A) to extend the audit period for refund applications from 120 days to 180 days. The extension of these periods provides the Commissioner with more time to review and audit tax refund applications. The proposed provision would result in longer waiting times for taxpayers seeking refunds. The Bill proposes to amend Section 51 of the TPA to introduce a new subsection 7A, which clarifies that where a taxpayer is granted leave by the Commissioner to lodge a late objection, the period within which the Commissioner is required to make an objection decision commences from the date the objection is lodged. This proposal aims to provide clarity on the basis of starting the computation of time for decision-making by the Commissioner when a late objection is accepted by the Commissioner thus eliminating ambiguity and controversy. The Bill proposes to amend Section 59A by deleting subsection 1B, which protects persons from being required to integrate or share data related to trade secrets and private or personal data held on behalf of customers or collected in the course of business. This proposal would grant the Commissioner the unrestricted authority to access personal and other private data for tax compliance purposes. The Bill proposes to delete Section 77(2) introduced by the Tax Procedures (Amendment) Act 2024, which excluded Saturdays, Sundays, and public holidays from the computation of time for lodging objections and appeals. This means that if the proposal is passed, Saturdays, Sundays and public holidays would be included in the computation of time for lodging objections and appeals reverting to previous status. The Bill proposes to clean up Section 83(1) of the TPA to broaden the scope of penalties to apply to late submission of tax returns as well as failure to submit the tax return altogether, in line with the amendments introduced in marginal heading of the Section by the Tax Procedures (Amendment) Act. As a result, taxpayers who fail to file a return will now face the prescribed penalties. The Bill proposes to empower the Cabinet Secretary, upon the recommendation of the Commissioner, to waive all or part of any penalty or interest if the liability arose due to:
The Bill proposes to expand the scope of taxable electronic services by nonresident suppliers to include internet, radio or television broadcasting. This implies that nonresident persons providing internet, radio or television broadcasting services will be required to register and account for VAT in Kenya. The Bill proposes to amend Section 17(5)(d) to reduce the time frame for lodging VAT refunds from the current 24 months to 12 months from the date the tax became due and payable. This proposal is aimed at harmonizing the time limit for applying VAT refunds with the 12-month period contained in Section 47(1)(b) of the Tax Procedures Act, 2015. The Bill proposes to reduce the time limit for lodging a refund of VAT on bad debts from three years to two years from the date of the supply. The Bill further proposes to allow offset of any approved VAT refund on bad debts on future/outstanding VAT liabilities. The Bill proposes to amend Section 42(1) of the Act to broaden the requirement to issue a valid tax invoice by all registered persons making supplies. The proposal aims at ensuring a valid tax invoice issued for both taxable and exempt supplies made by a VAT registered person. The Bill proposes to subject to VAT any prior conditionally approved exempt or zero-rated purchases disposed or used in a manner inconsistent with their intended purpose.
*An exemption that had been approved prior to the deletion of this paragraph came into effect shall continue to apply until 30 June 2026 (after 30 June 2026, they become taxable). The removal of exemptions implies that consumers of the above supplies are likely to incur additional costs in respect of VAT. Companies that were only providing these goods and services and therefore not registered for VAT may now be required to register and account for VAT in Kenya. Further, the Bill seeks to amend Paragraph 89 of Part I of the First Schedule of the VAT Act by deleting the words "other aircraft spare" and substituting with "aircraft." This implies that other aircraft spare parts imported by aircraft operators or persons engaged in the business of aircraft maintenance upon recommendation by the competent authority responsible for civil aviation will be subject to VAT at 16%.
** A person will be required to make a formal application of exemption to enjoy the exemption status on the Inputs or raw materials locally purchased or imported for the manufacture of animal feeds. The exemption of the above supplies implies that the suppliers will not be entitled to a claim of input tax. Also, these suppliers will need to consider VAT de-registration as persons dealing wholly in exempt supplies are not required to register for VAT. The Bill expands the definition of a digital lender to include a person extending credit through an electronic medium and to exclude banks licensed under the Banking Act, a Sacco society registered under the Co-operative Societies Act, or a microfinance institution licensed under the Microfinance Act. This expands the scope beyond Central Bank of Kenya (CBK) regulated entities and to cover informal and nontraditional lenders, including fintech-based and peer-to-peer platforms, by imposing excise duty on fees and interest charged by all digital lenders. The Bill introduces the definition of a digital marketplace to include an online platform which enables users to sell goods or provide services to other users. This definition aligns to that already included in the VAT Act and the ITA. The Bill also amends Section 5 of the Excise Duty Act to expand the scope of the excise tax to include services offered by nonresidents over the internet, an electronic network or through a digital marketplace. Excise duty will be applicable at 20% of the transaction value. This is in line with the Government's agenda of taxing the digital economy. The Bill proposes to classify excisable goods according to the tariff codes contained in the EAC Common External Tariffs, and the General Interpretation Rules (GIRs). This will align classification of goods and services under the Act in accordance with internationally accepted standards. Introduction of a statutory 14-day timeline for the Commissioner to consider the licenses application. This proposed amendment, seeks to establish a clear timeline for the issuance (or refusal) of excise licenses, which previously had no specified timeframe. This could help prevent administrative delays and support ease of doing business for local manufacturers and importers. The Bill proposes to amend the list of excisable goods and corresponding excise duty rates as set out in Part I of the First Schedule to the Excise Duty Act as follows:
The Bill proposes to introduce a more limited exemption from Import Declaration Fee that only applies to parts of Chapter 88 (aircraft, spacecraft and parts thereof) and goods falling under tariff heading 8802.30.00 and 8802.40.00 which are airplanes and other aircraft, of an unladen weight exceeding 2,000 kg and 15,000 kg, respectively. The Bill further proposes to remove from the Railway Development Levy exempt list all aircraft and spacecraft of chapter 88, except those of tariff Numbers 8802.30.00 and 8802.40.00. The parts of these aircraft and spacecraft will remain exempt from the levy.
These amendments aim to make the importation of semi-finished steel products more affordable, potentially benefiting manufacturers and industries that rely on these materials. The Bill seeks to amend Section 117 of the Act to exempt a company's transfer of property to its shareholders, as part of an internal reorganization of a group from stamp duty. The exemption is subject to the following conditions:
Document ID: 2025-1057 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
