16 July 2025 Kenya enacts Finance Act, 2025
On 27 June 2025, the President of Kenya signed into law the Finance Act, 2025 (the Act). The Act has amended various tax laws, including the Income Tax Act (ITA), VAT Act, 2013 (VAT Act), Excise Duty Act, Tax Procedures Act, 2015 (TPA), Miscellaneous Fees and Levies Act and the Stamp Duty Act. This Tax Alert summarizes the key amendments contained in the Finance Act, 2025. Unless specifically mentioned, the changes contained in this analysis took effect on 1 July 2025. Because this Alert is lengthy, a list of contents is included here to help the reader find specific sections of interest: Executive summary Business and personal taxes Business tax
Personal tax
Tax Procedures Act, 2015 (TPA)
Indirect Taxes Value Added Tax Act (VAT)
Excise Duty Act
Miscellaneous Fees and Levies Act
Other Amendments Stamp Duty Act
The Act amends 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 individual retirement funds with other retirement funds, as outlined by the Tax Laws (Amendment) Act, 2024 (TLAA), which removed the requirement to register with the KRA. The Act streamlines the definition of "related person" across the ITA by including a single definition of the term in Section 2 of the ITA and deleting the definition of the term in the other Sections of the ITA where the term had been defined. Previously, the term was defined in Section 2 and the Eighth Schedule to the ITA. In the case of two persons, the amended definition defines a related person a person who 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" means any other person who participates directly or indirectly in the management, control or capital of the business of the two persons. It also includes: 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 a situation in which the two persons participate in the management, control or capital of the individual's business. The Act has changed the taxation framework for the players in the gaming and betting industry. Previously, the ITA provided for withholding tax on winnings at the rate of 20% for both resident persons and nonresident persons. Winnings were defined as the payout from the transaction excluding the amount stacked/wagered. The Act has deleted the provisions relating to the taxation of winnings and introduced tax on withdrawals made by players at the withholding tax rate of 5%, for both resident persons and nonresident persons. The term "withdrawals" has been defined as the amount of money withdrawn by a customer from their betting or gaming wallet maintained by a person licensed under the Betting, Lotteries and Gaming Act. The Act has repealed Section 12D of the ITA that provided for the administration of minimum tax. This aligns the ITA with a Court of Appeal ruling that determined minimum tax was unconstitutional. The Act has expanded the scope of Significant Economic Presence Tax (SEPT) by including income derived or accrued from Kenya through a business carried out over the internet or an electronic network. The prior proviso only covered income from services provided over a digital marketplace. Additionally, the Act has repealed the exemption from SEPT for nonresident persons with an annual turnover of less than five million Kenya shillings (KES5m). Moreover, the Act provides that the Cabinet Secretary shall make Regulations for the better implementation of the SEPT provisions within 6 months from 1 July 2025. The TLAA 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 change provides certainty relating to the scope of the SEPT regime. The Act has repealed provisions relating to Digital Asset Tax (DAT). The DAT was payable by a person deriving income from the transfer or exchange of digital assets at the rate of 3% of the transfer or exchange value. It was the obligation of the owner of the platform or the person who facilitated the transfer or exchange to deduct the tax and remit it within five working days after the transaction. This is a welcome development as the Government seeks to spur the growth of the digital economy particularly given that the DAT was payable on the value of the asset rather than the gain on disposal. The Act has introduced 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 TLAAintroduced 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. However, the TLAA did not indicate the due date and thus the proposed amendment is meant to cure this deficiency. The Act has introduced a diminution allowance of 100% with respect to any implement, utensil or similar article that a person uses in the generation of his or her taxable income. The diminution allowance will not be applicable to machinery or equipment that would qualify for an investment allowance as provided for in the Second Schedule to the ITA. A similar provision relating to diminution allowance had been repealed through the Finance Act, 2023. Reinstatement of the allowance is a welcome change as it will help ensure that expenses relating to small-value items utilized in the generation of taxable income are claimed in a single year of income The Act has introduced a provision for the deductibility of expenditure incurred in the construction of a public sports facility on public grounds in the determination of taxable income. The Act has repealed the provision that provided for the carry forward of capital losses. Previously, a taxpayer could indefinitely carry forward capital losses and offset them against capital gains. The Act has introduced a five-year cap on deductibility of tax losses. Previously, the law permitted taxpayers to carry forward tax losses indefinitely. The Act has not provided a transition clause for existing tax losses, thereby leading to uncertainty on the utilization of historical tax losses. The Act has also provided that a taxpayer may apply to the Cabinet Secretary in charge of Finance through the KRA for an extension of time, beyond the five-year limit, to claim a deduction if the taxpayer provides evidence of inability to utilize the tax losses within five years. Note, however, that the Finance Act, 2022, effective 1 July 2022 repealed the proviso that the Act seeks to amend to allow for application of extension of the tax loss carry forward period. This, therefore, creates a potential challenge. The Act has removed the exemption granted to resident surrogate parent entities of a Multinational Enterprise (MNE) Group from filing a country-by-country (CbC) report if the following conditions were met:
(Note: A "surrogate parent entity" is a constituent entity of an MNE Group that the Group appoints to file the CbC report in the constituent entity's jurisdiction of tax residence, on behalf of the MNE Group.) The Act has introduced 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 Act provides that the Cabinet Secretary shall make Regulations for the better implementation of the APA framework within six months from 1 January 2026. 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 Act has replaced the term "life fund" 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 amendment implies that the taxation of long-term insurance companies will be made only in reference to life insurance funds. The Act has reduced the timeframe within which the KRA must communicate its decision in writing to a person who has sought approval for change of year-end from six months to three months from the date of receipt of the application. If the KRA does not provide its decision within the prescribed period the application shall be deemed allowed. The process of changing the year-end involves an adjustment to the taxpayer's online filing portal by KRA. Therefore, in the absence of an adjustment by the KRA, the taxpayer would not be able to practically effect the year-end change on their online filing portal even after the expiry of the three-month time limit. The Act has introduced an exemption from withholding tax for payments made by the national carrier (i.e., airline) to anonresident person without a permanent establishment in Kenya for specialized technical, maintenance, compliance, training or digital systems support services, where such services are not available in Kenya or the service provider is certified or accredited by an international regulatory, standard-setting or licensing body. The Act has repealed the withholding tax provisions in relation to the sale of scrap. Withholding tax at the rate of 1.5% on the sale of scrap was introduced through the TLAA. The Act has included under the withholding tax regime the gains or profits derived from the business of a ship owner or charterer by a nonresident person. Gains or profits derived by a nonresident ship owner or charterer are subject to income tax. However, the law did not provide for withholding tax on this income. In practice, these nonresidents have been declaring tax on the income on self-assessment basis. The Act has provided that a company that distributes dividends out of untaxed gains or profits will be required to remit the tax payable at the due date for filing the company's self-assessment income tax returns. The Act has repealed a provision that imposed a 20% penalty on the difference between the amount of installment tax payable and the installment tax actually paid. This amendment is a welcome change as the 20% penalty was viewed as quite punitive. The Act has extended the timeframe for processing income tax exemption applications from 60 days to 90 days. The change will give the KRA additional time to review the applications, but the extended review time will also leave taxpayers waiting longer to receive a response on their application for income tax exemptions. The Act has amended the provision concerning the exemption of 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 prior proviso provided for exemption of gains on the transfer of property within a SEZ enterprise, developer and operator. The Act introduces incentives to stimulate growth of the Nairobi International Financial Centre Authority (NIFCA) regime as follows:
This is a welcome change as the Government seeks to promote the NIFC considering that it has remained largely dormant since it was established several years ago. The reduced CIT rates for the NIFCA start-ups may, however, not crystallize into substantial benefits because 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 Act has expanded the scope of the investment allowance granted to telecommunication operators by including the purchase or acquisition of spectrum license within the ambit of the allowance. Previously, the allowance was only applicable to the purchase or acquisition of an indefeasible right to use a fibre optic cable. The applicable rate is 10% per annum in equal installments. For a spectrum license purchased or acquired before 1 July 2025, the allowance shall be restricted to the unamortized portion over the remaining useful life of the spectrum license. The Act expressly provides 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 is a welcome change, as it provides clarity that there will be no further taxation on qualifying interest and qualifying dividends. The Act has expanded the scope of transactions that are excluded from capital gains tax to include the transfer of assets to a company where an individual holds a 100% shareholding. The Act has increased the tax free per diem from 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 Act has amended the ITA to allow deduction of interest incurred on a mortgage loan taken to construct residential premises. Previously, the mortgage interest deduction only applied to mortgages taken to purchase or improve residential premises occupied by an individual during a year of income. The Act has repealed specific exemptions that were granted on qualifying lumpsum or periodic withdrawals from registered retirement schemes. This implies that payments of pension benefits from registered retirement schemes will only be exempt as provided in Paragraph 53 of the First Schedule to the ITA. Paragraph 53 of the First Schedule to the ITA provides for exemption of payments of pension benefits upon attainment of the retirement age from registered retirement schemes.
The TLAA (Amendment) Act, 2024 introduced an income tax exemption for gratuities or other allowances paid under a public pension scheme. However, the provision limited the exemption to payouts from public schemes. The Act has now provided for a general exemption on payment of all gratuity and other allowances paid under a pension scheme. This implies that payment of gratuities from both private and public schemes will be exempt from income tax. The Act has repealed a deduction that had been available to qualifying individuals who were not Kenyan citizens equal to one-third of their total gains and profits from employment if they met the following conditions:
The Act has introduced an explicit requirement for employers to grant employees all applicable deductions, reliefs and exemptions provided for in the ITA. The Act provides for a tax rate of 30% on fringe benefits provided by an employer. The TLAA haddeleted this provision, likely inadvertently. The Act amends Section 23A of the TPA to provide that payments subject to withholding tax that is a final taxare 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 requirements are payments of emoluments, payments for imports, payments of interest, transactions for investment allowances and airline passenger ticketing. The Act introduces a provision under Section 31 of the TPA that requires the KRA to issue reasons for amending an assessment if the KRA amends 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 Act amends Section 39A of the TPA to exclude from liability of the principal tax, 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 offers a reprieve to taxpayers who have been penalized to pay 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 Act has amended Section 40(2) of the TPA to allow the Registrar to register a notification from the KRA to hold a defaulting taxpayer's property as security for unpaid tax without charging stamp duty. Previously, the law allowed the Registrar to register a notification from the KRA as a restraint on property for unpaid taxes without levying or charging a fee but did not specify whether stamp duty, as prescribed in the Stamp Duty Act, is payable on the registration of such securities. Further, the Act amends Section 40(5) of the TPA by exempting from stamp duty the transfer of charged property by the KRA where the taxpayer fails to pay the tax liability. The Act amends Section 42 of the TPA to extend the Commissioner's powers to collect unpaid taxes from persons holding or owing money to nonresident taxpayers who are subject to tax in Kenya. The Act has introduced certificate of origin requirements for all goods imported into Kenya whereby no person shall import goods into Kenya without presenting a valid certificate of origin to the KRA or an authorized officer. A certificate of origin has been defined as ''an official document issued by a competent authority of the government of the source country which certifies that the goods being imported into Kenya were manufactured in that particular source country."
Any person who contravenes the provisions relating to the certificate of origin requirements shall have their goods seized or forfeited by the KRA or approved officer. This is an important development that persons importing goods into Kenya should take note of to help avoid seizure or forfeiture of the goods they intend to import into Kenya. The timelines for the KRA to ascertain and determine an application for a refund has been extended from 90 days to 120 days. Additionally, the period for audit of refund applications has been extended from 120 days to 180 days. The extension of these periods provides the KRA with more time to review and audit tax refund applications. However, the provision will result in longer waiting times for taxpayers seeking refunds. The Act amends Section 51 of the TPA to introduce a new subsection 7B, which clarifies that if the KRA grants a taxpayer leave to lodge a late objection, the period within which the KRA is required to make an objection decision commences from the date the objection is lodged. This amendment aims to provide clarity on the basis of starting the computation of time for decision-making by the KRA when a late objection is accepted by the KRA thus eliminating ambiguity and controversy. The Act introduces changes to Section 83(1) of the TPA, broadening the scope of penalties to cover both the late submission of tax returns and the failure to submit a return. This aligns the provision with the amendments previously made to the 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 Act has empowered 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 Act has amended the definition of a tax invoice to include an electronic tax invoice issued as per Section 23A of the TPA. This implies that for VAT purposes, only invoices issued through TIMS/eTIMS are recognized as valid tax invoices. The Act has expanded the scope of taxable electronic services provided by nonresident suppliers to include internet, radio or television broadcasting. This implies that nonresident persons providing internet, radio or television broadcasting services are required to register and account for VAT in Kenya. The Act has amended Section 17(5)(d) of the VAT Act to reduce the time frame for applying for VAT refunds from the current 24 months to 12 months from the date the tax became due and payable. The change aims to harmonize the time limit for applying VAT refunds with the 12-month period stipulated in Section 47(1)(b) of the Tax Procedures Act, 2015. VAT registered taxpayers may miss out on any refunds that are not lodged within 12 months, as such end up being in a permanent VAT credit position. The TLAA (Amendment) Act 2024 amended Section 17(5) of the VAT Act by adding a new Section 5(ea) after Section 5(e), which stipulates that if a taxable supply becomes zero-rated or exempt and this results in a permanent credit position for a registered person due to a difference in tax rates (specifically, the rate applicable on 1 July 2022, and a lower rate), the registered person must apply to the KRA for relief within six months after the commencement of the provision. The Finance Act 2025 amends section 17(ea) of the VAT Act to specify that excess credit can now only be claimed for taxable supplies that became zero-rated on 1 July 2023, eliminating the previous reference to the VAT rate applicable on 1 July 2022. The amendment also removes references to exempt supplies. This amendment enhances clarity for registered persons regarding their eligibility for refunds by explicitly stating the requirement to apply for a refund, as opposed to the previous provision, which vaguely mentioned applying for relief without specifying the type. By focusing on a specific date for zero-rated supplies and removing ambiguity related to exempt supplies, the changes are expected to streamline the refund application process and improve compliance with VAT regulations. The Act has reduced the time limit within which a taxpayer can apply for a refund of VAT on bad debts from three years to two years from the date of the supply. The Act has further amended Section 31 of the VAT Act to allow offset of any approved VAT refund on bad debts against future/outstanding VAT liabilities. The Act has also deleted the provision requiring taxpayers to refund the KRA any VAT on bad debts recovered from the recipient of the supply subsequently after being refunded by the Commissioner. Furthermore, no interest shall apply going forward. This is a welcome change as it improves cashflows in a shorter period of two years as opposed to three years. The Act has amended Section 42(1) of the VAT Act to broaden the requirement to issue a valid tax invoice by all registered persons making supplies. A valid tax invoice (TIMS/eTIMS compliant) should be issued for both taxable and exempt supplies made by a VAT registered person. In the past it has been presumed that exempt supplies do not require valid tax invoices which has always led to reconciliation challenges and variances in incomes registered for income taxes and VAT purposes. The Act has introduced Section 66A of the VAT Act, which stipulates that VAT shall apply to any prior conditionally approved exempt or zero-rated purchases disposed or used in a manner inconsistent with their intended (zero rated or exempt) purpose. The change intends to punish taxpayers who misuse exemptions granted by the National Treasury/Commissioner.
**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, the products become taxable). The removal of exemptions implies that consumers of the above supplies are likely to incur additional costs in respect of the additional 16% VAT. Companies that were only providing these goods and services and not registered for VAT shall now be required to register and account for VAT in Kenya. The Act has amended the VAT Act, extending the VAT exemption granted to capital goods in the manufacturing sector where the exemption was granted before 27 December 2024. The exemption shall continue to apply until 27 December 2025. Previously, the exemption applied on approvals granted before 1 January 2024 and it was supposed to last up 31 December 2024.
** The paragraph initially exempted only alcoholic and nonalcoholic beverages. With effect from 1 July 2025, all goods provided to the Defence Forces Welfare Services are exempted from VAT. The exemption of the above supplies implies that the suppliers will not be entitled to a claim of input tax on costs incurred in providing the above supplies. Furthermore, these suppliers will need to consider VAT deregistration as persons dealing wholly in exempt supplies are not required to register for VAT. The Act has amended the VAT rate (from 16% to zero rated (0%)) of Packaging materials for tea and coffee upon recommendation by the Cabinet Secretary for matters relating to agriculture. Suppliers of this product will be able to apply for VAT refunds on any excess VAT credits. The Act 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 charged by all digital lenders. The Act introduces the definition of a digital marketplace to include an online platform that enables users to sell goods or provide services to other users. This definition aligns to the one already included in the VAT Act and Income Tax Act. Additionally, Section 5 of the Excise Duty Act has been amended 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 Act has recommended that excisable goods be classified according to the tariff codes contained in the East African Community Common External Tariffs, and the General Interpretation Rules (GIRs). This aligns Kenya's classification of goods under the Act in accordance with internationally accepted standards and regional trade protocols. The Act introduces a new definition for micro distillers to mean manufacturers of spirituous beverages who use two fundamental processes - fermentation and distillation - employing a still (boiler) not exceeding 1,800 liters in capacity, and whose annual production volume does not exceed 100,000 liters. This classification intends to distinguish small-scale producers from industrial-scale manufacturers and tailor compliance requirements accordingly. The Act further amends section 25 of the Excise Duty Act to exempt licensed micro distillers from requirements related to automation, continuous piping and mass-flow meters. Instead, their production volume will be monitored through excise stamps or other mechanisms prescribed by the Commissioner. This supports small-scale producers by reducing compliance costs while maintaining regulatory oversight. The Act amends Section 15 of the Excise Duty Act by introducing excise duty on the importation, distribution, or handling of methanol and ethanol in Kenya. This measure is intended to regulate inputs used in illicit alcohol production and enhance public health safeguards. It will however also increase costs of the methanol and ethanol for genuine importers and users of the products which are not readily available in Kenya. The Act introduces a statutory 14-day timeline for the KRA to review and approve any applications for excise licenses. This amendment establishes 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 the ease of doing business for local manufacturers and importers. The Act defines the amount deposited into a customer's betting wallet as the money transferred by a customer into a wallet managed by a licensed betting or gaming operator, specifically for the purpose of engaging in betting or gaming activities. This definition shifts the excise duty trigger from the point of wagering to the point of deposit. It standardizes the taxable event, closes previous compliance gaps and supports revenue collection by anchoring the levy to a verifiable transaction. The Act revises 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 Act amends the Second Schedule by granting excise duty exemptions on all goods and services imported or purchased locally by the Defence Forces Welfare Services. This measure recognizes the welfare services as a public interest entity and reduces operational costs. The Act mandates that 20% of IDF collections be placed in a Fund governed by the Public Finance Management Act. From this fund, 10% will support Kenya's contributions to international bodies, and another 10% will fund revenue enforcement. This amendment marks a significant shift from earlier frameworks under the MFLA, which lacked a defined revenue utilization structure. The change thereby should help enhance fiscal accountability and strategic deployment of trade-related revenues The Act amends Section 9B of the MFLA by removing the reference to Section 47 of the Tax Procedures Act, which previously governed the refund process for excess levies like the IDF and the Railway Development Levy. This deletion signals a shift away from standardized refund timelines and procedures, suggesting that future claims may now be subject to separate administrative guidelines or regulations issued by either the KRA or Cabinet Secretary. The change introduces procedural flexibility but may reduce predictability for taxpayers seeking levy refunds. The Act expands exemptions from Railway Development Levy to include Defence Forces Welfare Services, covering both goods and services — streamlining procurement costs for national security operations and aligning with exemptions in related tax statutes.
Section 117 of the Stamp Duty Act has been amended to exempt from stamp duty a company's transfer of property to its shareholders, as part of an internal reorganization. The exemption is subject to the following conditions:
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