• BENEFICIARIES

Employees

(a) Per Diem

Section 5 of the Income Tax Act has been amended to increase the daily tax-exempt allowance (per diem) for employees on official duty from KSh 2,000 to KSh 10,000. This change significantly enhances the non-taxable compensation employees can receive for work-related travel.

(b) Tax Reliefs

A new Section 1(a) has been introduced, requiring employers to apply all eligible deductions, reliefs, and exemptions before calculating PAYE. The implications include a legal obligation for employers to incorporate deductions such as pension contributions, insurance relief, personal relief, and disability relief into payroll calculations. This results in improved employee take-home pay due to the immediate application of tax reliefs, reduces the need for refunds, and lowers the administrative burden on KRA by decreasing the number of refund claims.

Homeowners

Section 15(3)(b) of the Income Tax Act has been clarified to confirm that interest on loans for home construction qualifies for tax deductions of up to KSh 360,000 annually, just as interest on loans for the purchase or improvement of a home. This removes prior ambiguity regarding construction financing.

Investors in the Nairobi International Financial Centre

Building on the preferential 5 per cent Capital Gains Tax introduced under the Tax Laws (Amendment) Act, 2024, the Finance Bill 2025 proposes a reduced corporate tax rate for certified NIFC companies of 15 per cent for the first 10 years of operation and 20 per cent for the subsequent 10 years. However, the companies must invest KSh 3 billion within the first three years. Additionally, companies must ensure that at least 70 per cent of senior managers are Kenyan citizens (if a holding company) and at least 60 per cent of senior management are Kenyans (if designated as a regional headquarters).

Multinational Companies

The introduction of a framework for advance pricing agreements (APAs) between the Commissioner and taxpayers engaging in transactions under section 18(3) or 18A. These are the key highlights:

1. Advance Pricing Agreements (APAs): The Commissioner can enter into an agreement with a person who conducts transactions under section 18(3) or 18A. This agreement will establish the terms for determining arm’s-length pricing for related-party transactions. 
2. Arm’s Length Principle: The APA will determine the price that would have been expected to accrue if the transaction had been conducted by independent parties, ensuring it complies with the arm’s length principle in transfer pricing.
3. Validity Period: The APA will be valid for a maximum of five consecutive years, providing certainty for both the taxpayer and the tax authority throughout the agreement period.
4. Misrepresentation: If the taxpayer misrepresents facts during the APA process, the Commissioner has the authority to declare the agreement void and issue a formal notice to the taxpayer. 
5. Regulations: The Cabinet Secretary can create regulations to facilitate the implementation of this section, providing further clarity on the process and requirements for APAs. 

Small and Medium Enterprises

The bill introduces clearer rules by explicitly listing payment categories exempt from the e-TIMS electronic invoicing requirement, including emoluments, imports, Interest, investment allowances, airline passenger ticketing, and payments subject to final withholding tax. This streamlining aims to improve compliance among small businesses.

• NEGATIVELY IMPACTED GROUPS

Non-Resident Employees
A long-standing provision that exempted certain non-resident employees from one-third of their income, provided they worked outside Kenya for at least 120 days, has been removed. These employees will now be taxed on their full income, increasing their tax burden. 

Foreign Companies Operating via Digital Platforms

The Significant Economic Presence Tax (SEP), introduced in 2024, initially exempted non-resident companies with annual turnover below KSh 5 million. The Finance Bill, 2025, proposes removing this threshold, bringing even low-revenue digital service providers within the scope of the SEP tax net.

Investors in Special Economic Zones Outside Nairobi and Mombasa

The Bill proposes eliminating the 100 per cent investment deduction previously granted to companies that made substantial capital investments in Special Economic Zones (SEZs) located outside Nairobi and Mombasa. Affected businesses must now rely on standard, less generous investment allowances.

Digital Lenders Not Licensed by CBK

The definition of a digital lender has been expanded to include any entity offering credit through electronic means, regardless of whether they are licensed under the CBK’s Digital Credit Providers framework. While those licensed under the Banking Act and Microfinance Act remain regulated, the expansion potentially exposes unlicensed entities to tax obligations without the benefit of excise duty exemptions.

Data Privacy Risks for Businesses

The repeal of Section 59A (1)(b) removes the statutory safeguard that previously protected customer data from automatic disclosure to the Kenya Revenue Authority. This could lead to legal conflicts with the Data Protection Act, 2019, and increase the risk of invasive audits.

House Developers and Motor Vehicle Assemblers

The removal of preferential corporate tax rates (e.g., 15% for developers of 100,000+ housing units and local motor vehicle assemblers in their first five years) undermines ongoing efforts to promote local industry and the Affordable Housing Scheme. These industries may face increased costs and reduced investor interest.

Software Distributors

The definition of “royalties” is expanded to include payments for the distribution of software, even if the distributor is not the original developer. This categorisation means that such payments are subject to withholding tax. Although a similar proposal was rescinded in the 2024 Bill, it has resurfaced and remains controversial, especially given past court rulings that have questioned this classification.

Businesses Making Losses

The Bill proposes the removal of a provision that allows taxpayers to carry forward their tax losses by restricting the carrying forward of tax losses to five years. The Income Tax Act currently allows tax losses to be carried forward indefinitely. The move may reduce taxpayers’ ability to fully utilise losses from prior periods, especially in capital-intensive industries where recovery spans more extended periods. 

Clean Energy and Electric Mobility

The Finance Bill proposes to standard-rate inputs for solar, wind, and geothermal energy, removing them from their current zero-rated status. This move is likely to dampen investment in the green energy sector. Similarly, in the ongoing rationalisation of the VAT Act, specifically the First and Second Schedules covering zero-rated and exempt goods and services, electric bicycles and electric buses have been reclassified from zero-rated to VAT-exempt. While an exemption avoids outright taxation, it limits the ability to claim input VAT, which may discourage investment in electric mobility solutions.

Local Motor Vehicle Assemblers

The Bill proposes to remove the incentive of a 15 per cent reduced corporate income tax rate for companies engaged in the local assembly of motor vehicles. The rate currently applies for the first five years from the commencement of operations and may be extended for an additional five years. The removal of such incentives could discourage investment in Kenya’s automotive assembly industry, a key focus area for manufacturing sector growth and local job creation.

Scrap Metal Businesses

The Bill proposes to amend Section 10 of the Income Tax Act by including the “sale of scrap” as a payment subject to income tax. This amendment aligns with the introduction of withholding tax on such supplies to residents and non-residents, as provided under Sections 35(1) and 35(3) of the Act. The objective is to provide clarity that income derived from the sale of scrap is taxable.