Executive summary

The Cabinet Secretary for the National Treasury and Economic Planning, on 3 November 2025 issued the draft Income Tax (Minimum Top-Up Tax) Regulations, 2025, (the Regulations) under Section 130 of the Income Tax Act (Cap 470 of the Laws of Kenya), as amended by the Tax Laws (Amendment) Act, 2024. This amendment established the statutory framework for implementing Kenya's Qualifying Domestic Minimum Top-Up Tax (QDMTT), aligned with the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework's Pillar Two Global Anti-Base Erosion (GloBE) Rules.

The Regulations aim to ensure that large multinational enterprise (MNE) groups operating in Kenya pay a minimum effective tax rate (ETR) of 15% on their profits, reducing profit shifting and aligning domestic policy with international standards. Additionally, the Regulations operationalize this law, providing guidance on computation, administration and compliance obligations for qualifying multinational enterprise (MNE) groups.

The draft Regulations apply to resident entities and permanent establishments (PEs) in Kenya that are members of multinational groups with consolidated annual revenues of €750m or more in at least two of the prior four fiscal years. The introduction of these Regulations marks Kenya's formal adoption of a domestic minimum top-up tax mechanism consistent with the OECD's Pillar Two framework.

Collection mechanism and Kenya's policy choice

The Pillar Two Global Minimum Tax framework operates through an interlocking set of rules that allocate taxing rights between jurisdictions. These include the Qualified Domestic Minimum Top-Up Tax (QDMTT), the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).

Kenya has opted to implement the Qualified Domestic Minimum Top-Up Tax (QDMTT) as its primary collection mechanism under the Tax Laws (Amendment) Act, 2024. This ensures that Kenya retains first taxing rights over any top-up tax relating to low-taxed profits arising within its jurisdiction. The IIR and UTPR will only apply secondarily in cases involving Kenyan subsidiaries of foreign MNE groups, consistent with international norms.

Scope and application

The Regulations apply to multinational groups meeting the €750m consolidated-revenue threshold and require covered persons to compute and pay a domestic minimum top-up tax (MTT) when their ETR falls below 15%. Certain entities are excluded, including public entities, pension funds, sovereign wealth funds, nonoperating investment holding companies and real estate investment vehicles that are ultimate parent entities.

Computation of the Minimum Top-Up Tax

The draft Regulations prescribe the following formula for computing the Minimum Top-Up Tax (MTT):

MTT = (15% - ETR) × Excess Profit + Additional Top-Up Tax

The ETR is calculated as Adjusted Covered Taxes divided by Net Income or Loss, multiplied by 100. Substance-Based Income Exclusions (SBIE) apply, allowing a deduction of 10% of eligible payroll costs and 8% of the net book value of tangible assets.

Key provisions of the draft regulations

The Regulations feature the following critical aspects:

• Reference to GloBE Rules as an interpretive source — The Regulations provide that the OECD GloBE Rules are a relevant source of interpretation for purposes of applying section 12(G) of the Income Tax Act.
• Net income or loss — Net income/loss is derived from consolidated financial statements with adjustments for excluded dividends, equity gains/losses and pension expenses.
• Net loss election — The Regulations allow a covered person that records a net loss in a year of income to carry forward that loss into a standardized deferred tax asset at 15% preventing ETR distortion and steering clear of unnecessary top-up tax when losses arise.
• Additional top-up tax — The Regulations introduce an additional top-up tax mechanism that applies in exceptional cases in which a group records a loss and negative covered taxes, ensuring a minimum tax outcome consistent with the 15% Pillar Two standard.
• Adjusted covered taxes — Adjusted covered taxes include current and deferred taxes, with provisions for recaptured deferred taxes and unclaimed accruals.
• Substance-Based Income Exclusion (SBIE) — The Regulations allow a deduction of 10% of payroll costs and 8% of tangible assets to reward genuine economic activity.
• Safe harbors and transitional rules — Temporary relief during the initial phase of implementation would support compliance readiness. The adoption of the Transitional CbCR Safe Harbor to years beginning before 1 July 2028 allows qualifying groups to avoid a full GloBE top-up tax computation if country-by-country reporting (CbCR) indicators demonstrate the group is low-risk. They also permit simplified calculations for non-material constituent entities, providing meaningful administrative relief.
• Provision for combined effective tax rate (CETR) — The CETR calculation provides top-up tax consistency.
• Compliance and reporting — Covered persons must file a Minimum Top-Up Tax Return and a GloBE Information Return with the Kenya Revenue Authority (KRA).

Offenses and penalties

A person who fails to comply with the provisions of these Regulations commits an offense and will be liable to the penalties prescribed under the Tax Procedures Act.

Compliance and administrative requirements

Covered persons are required to file a Minimum Top-Up Tax Return and a GloBE Information Return with the KRA. Returns must provide detailed computations of ETR, covered taxes and top-up tax liabilities. The Regulations also introduce mandatory notification requirements within 60 days of the Regulations' publication, or within six months from the first day of the year of income for subsequent years, as well as annual compliance reporting obligations through the GloBE Information Return (GIR) within 18 months after the end of the first year of income, and within 15 months after the end of subsequent years. There is also a requirement for a top-up tax return by the last day of the sixth month following the year-end. Failure to comply can lead to the imposition of penalties and/or interest and possible prosecution under the Tax Procedures Act.

Implications for taxpayers

The draft framework marks a significant step forward, but refinements will be needed to help ensure effectiveness, efficiency and competitiveness in Kenya's business environment. Consider, for example:

• Complex administrative burden — The computation of ETR and top-up tax at the local-entity level may impose excessive reporting demands on taxpayers. The introduction of a de minimis threshold would ease compliance for smaller constituent entities.
• Currency translation mechanisms — It would be helpful to have clarification on currency translation mechanisms and confirmation that both domestic and multinational groups are included in the €750m and over threshold.
• Deferred tax adjustments — The Regulations could simplify treatment by adopting OECD's simplified deferred tax approach.
• Expansion of the Substance-Based Income Exclusion (SBIE) — The SBIE could be broadened to include digital assets and research and development intangibles for modern investment contexts.
• Ambiguity in coordination with existing tax laws — The interaction between QDMTT, existing transfer pricing rules and tax treaties may cause overlapping adjustments or double taxation. It would be helpful if the Regulations clarified the hierarchy between these provisions and provided guidance on dispute resolution mechanisms.
• Limited clarity on transitional relief — The Regulations lack detail on transition periods for entities adapting to the new regime. An enhancement would be to introduce phased implementation timelines and clear criteria for transitional safe harbors.
• Potential competitiveness risk — The variable staggered reduction in SBIE percentages from 2023 to 2033 onward (10% to 5% for payroll, 8% to 5% for tangible assets) may be less attractive than those of regional peers. Benchmarking Kenya's SBIE thresholds regionally and considering flexibility for key investment sectors would be an added advantage.
• Data and systems readiness challenges — MNEs may lack internal capacity for the extensive reconciliations required under the GloBE Rules. Encouraging early engagement with the KRA for prefiling consultations and data system testing would likely yield better compliance levels.
• Audit and enforcement framework — The Regulations are silent on the KRA's audit process for verifying top-up tax computations. By establishing transparent audit procedures, timelines and appeal mechanisms, certainty and fairness could be enhanced.
• Need for local capacity building — The technical complexity of Pillar Two compliance will require enhanced expertise within both the KRA and the private sector. By developing joint training programs and industry guidance materials, there would be better understanding and consistency in application.

The draft Income Tax (Minimum Top-Up Tax) Regulations, 2025, grounded in the Tax Laws (Amendment) Act, 2024, reflect a proactive approach to adopting the OECD's global minimum tax and provide clarity on Kenya's approach to implementing the 15% global minimum tax. Once finalized, they will require affected multinational groups to undertake significant compliance efforts. Early preparation will be essential to align internal systems and financial reporting processes with the new requirements.

To ensure effective implementation, refinements addressing administrative complexity, transitional clarity and inter-agency coordination will be key. Careful calibration of these measures can help Kenya enhance compliance efficiency, retain competitiveness and secure stable tax revenues in a globalized tax environment.