On 23 June 2026, President William Samoei Ruto assented to Kenya's Finance Act, 2026. The Act amends the Income Tax Act (ITA), the VAT Act 2013, the Excise Duty Act, the Tax Procedures Act 2015 and the Miscellaneous Fees and Levies Act, among others. Unless otherwise stated, changes take effect on 1 July 2026 or 1 January 2027.
The reforms span business taxation, personal tax, VAT and tax administration. Practitioners advising clients with Kenyan operations should review the position promptly, particularly on withholding tax exposure and compliance processes.
Business tax
Immovable property. The Act substitutes "and" with "or" in the definition of immovable property, separately defining land and its encumbrances from extractive and petroleum rights. The change resolves a long-standing interpretational ambiguity and strengthens the statutory basis for taxing income from each category independently.
Management or professional fees. The Act expands the definition to include interchange fees and merchant service fees arising from card-based transactions. The Kenya Revenue Authority (KRA) had recently failed before the Supreme Court to levy withholding tax on such fees under the existing definition. The amendment creates an express statutory basis for that withholding tax.
Royalties. The definition of "royalty" is expanded to include payments for use of or access to a proprietary digital payment card network or platform, payment networks and payment processing systems, regardless of whether payments are periodic or transaction-based, and regardless of how the fee is described contractually. The KRA had lost multiple appeals on this point. The Government has now introduced an all-encompassing definition that is likely to capture payments to digital platform and payment service providers broadly.
Betting and gaming: withdrawals. "Withdrawals" are redefined from the amount a customer actually withdraws from a betting wallet to any amount, cash equivalent or money's worth paid or disbursed to the player's account. The tax point for withholding tax purposes shifts from actual withdrawal to the earlier moment of disbursement to the account. This closes a loophole that allowed players to defer tax by placing further bets from winnings before withdrawing.
Winnings. The Finance Act, 2025 had repealed the definition of "winnings." The Act reinstates it, defining winnings as a pay-out from a lottery or prize competition by a person licensed under the Gambling Control Act, 2025. Withholding tax on winnings is also reintroduced at 20% for both resident and nonresident persons.
Scrap metal. Withholding tax on sales of scrap metal, previously repealed, is reintroduced at 1.5% for resident and nonresident persons alike.
Nonresident rental income tax. A new self-declaration regime imposes tax on gross rental income earned by nonresident persons at 30%, described as nonresident rental income tax. Affected persons must register under a simplified framework, file returns and pay by the 20th day of the month following the month in which rent is paid. The tax does not apply where rental payments are already subject to withholding tax.
Nonresident shipowners and air-transport operators. A specific payment deadline is introduced: tax on income received by nonresident shipowners, charterers or air-transport operators must be paid by the earlier of five days after receipt of the income or when the ship leaves the port. The Act repeals the withholding tax obligation on the payer, making nonresident shipowners responsible for self-assessment and declaration to the KRA. Income of nonresident shipowners remains subject to income tax at 2.5% of gross income.
Trust income. Income received by a trustee, executor or administrator in that capacity is deemed the trustee's income. Qualifying dividends or interest included in such income are exempt from further tax. Where income has been taxed at the trustee level, beneficiaries will not be subject to further income tax. The amendments clarify trust taxation and prevent double taxation across trustee and beneficiary levels.
Instalment tax. A new provision exempts taxpayers whose sole income is employment emoluments from paying instalment tax, reflecting existing practice whereby employers deduct income tax at source.
Bad debts in the financial sector. The Act clarifies that for money-lending businesses, banks and financial institutions licensed under the Banking Act, the Microfinance Act and the Central Bank of Kenya Act, a bad debt includes the principal, interest and any other related amount, in line with guidelines issued by the Commissioner. This addresses a source of recurring disputes between the financial sector and the KRA.
Tax-loss utilisation. Taxpayers that invested at least KES 10 billion in Kenya before 1 July 2025 may utilise tax losses beyond the five-year cap introduced by the Finance Act, 2025, until those losses are fully extinguished. Any losses realised before the 2025 year of income are treated as arising in the 2025 year of income for these purposes.
Interest expense restrictions. Non-deposit-taking institutions engaged in lending, leasing or both are expressly excluded from interest expense restriction rules, separating the two activities so that a lessor is not caught merely because it is not also a lender.
Ultimate Parent Entity definition. The definition of Ultimate Parent Entity is aligned with the OECD Transfer Pricing Guidelines. A UPE is now expressly defined as an entity required to prepare consolidated financial statements, or that would be required to do so if its shares were publicly traded.
Insurance companies. The term "life insurance fund" is replaced with "statutory fund" in the relevant ITA provisions, aligning the taxation of long-term insurance funds with the Insurance Act. Dealings involving non-statutory funds will fall under the ordinary tax regime.
Tax anti-avoidance under the ITA. Section 23 of the ITA, which empowered the KRA to make presumptions about tax-avoidance transactions, is repealed. Anti-avoidance rules are now consolidated in the Tax Procedures Act.
Commissions on international transport. Commissions paid by a resident air-transport operator to a nonresident agent to secure tickets for cross-border transportation of both passengers and goods are now exempt from withholding tax. Previously the exemption covered passenger tickets only.
Income tax return filing deadline. For individuals, the filing deadline moves from the last day of the sixth month to the last day of the fourth month after the end of their year of income. Effective 1 January 2027.
Capital gains on REIT transfers. Capital gains arising from the transfer of property to a REIT registered by the Commissioner under section 20 of the ITA are exempt from income tax.
Investment allowances. A 100% first-year investment allowance is introduced for petroleum or gas storage facilities where investment exceeds KES 10 billion. The Act also clarifies that the 10% investment allowance on industrial buildings is claimed per year of income in equal instalments, correcting a drafting gap.
Residential developer tax rate repealed. The reduced 15% corporate income tax (CIT) rate for companies constructing at least 100 residential units per year is deleted. Those companies revert to the standard 30% CIT rate.
EAC dividend withholding tax rate repealed. The reduced 5% withholding tax rate on dividends paid to citizens of East African Community partner states is deleted, apparently because reciprocal mechanisms from partner states have not materialised.
Microfinance institutions. Microfinance institutions licensed under the Microfinance Act are added to the list of specified financial institutions in the Fourth Schedule to the ITA, bringing them within the specific tax treatments applicable to that category.
Capital gains on shares: nonresidents. Capital gains tax now applies to gains arising from alienation of shares by a nonresident person where the shares derive their value from Kenya, or where the alienation results in a change to the group membership of a Kenyan-resident company or to ownership of or interest in property located in Kenya. No shareholding or control threshold is specified, so any such gain by a nonresident is in scope.
Extractive sector: nonresidents. A 15% repatriation tax is introduced on income earned in Kenya by nonresident persons operating under a mining licence or holding a mining right, and extended to nonresident contractors in the petroleum industry. The CIT rate applicable to nonresidents in the extractive industries is simultaneously reduced from 37.5% to 30%, aligning it with the general CIT rate. Effective 1 January 2027.
Personal tax
Nonresident employees of air-transport operators. Income earned by a nonresident individual employed by, or engaged on behalf of, a resident air-transport operator designated as a national carrier is not taxable in Kenya to the extent it relates to duties performed outside Kenya and to international transport operations.
Gratuity exemption. A new provision exempts gratuity from income tax where the contract of service was for a continuous period of at least three years and the total contribution does not exceed 31% of the employee's base salary.
Death benefits. Benefits received on death from a registered pension fund, registered provident fund, registered individual retirement fund, public pension scheme or the National Social Security Fund are exempt from income tax.
Tax Procedures Act
Virtual Asset Service Providers (VASPs). VASPs must file annual information returns with the KRA. Falsifying or failing to file such returns, including nil returns, is an offence. The Act also creates a framework for Kenya to enter automatic exchange of information agreements with other countries covering virtual asset transactions. These changes build on the VASP Act introduced in 2025 and signal a move towards a fully integrated supervision, taxation and cross-border information exchange regime.
Reinstatement of deregistered taxpayers. Persons previously deregistered who subsequently become liable for tax may apply to the KRA for reinstatement. If satisfied, the KRA will register the person and reinstate the same PIN previously held.
PIN exemption for nonresident investors. Nonresident persons wishing to open an account with an investment bank are exempt from the requirement to obtain a Personal Identification Number, easing the onboarding process for inbound investors.
Tax avoidance assessments. The KRA may now independently assess tax liability where a taxpayer is found to have participated in a tax avoidance scheme. The range of information sources the KRA may use in raising an assessment is expanded to include withholding tax declarations, PAYE declarations, e-TIMS data, third-party returns, records inspections, whistleblower information and information submitted under any other written law.
Tax amnesty. An amnesty on penalties and interest applies to obligations for periods up to 31 December 2025 where the entire principal tax is settled by 31 December 2026. The KRA may also waive penalties and interest of up to KES 2 million arising from errors generated by an electronic tax system.
Prepopulated tax returns. The Commissioner may generate prepopulated tax returns using information available to the KRA. Taxpayers may rely on these returns when filing and must confirm or amend them within the prescribed period. The Cabinet Secretary is empowered to prescribe regulations governing this system.
Import documentation. Importers must obtain, retain and produce on request export declarations or equivalent customs documents issued by the country of export. Failure to do so may lead the KRA to reject claims regarding the importation, value, origin, cost or ownership of goods and to determine tax liability from available information.
Recovery of unpaid levies and fees. The KRA may recover any unpaid fee, levy or charge it collects under any written law as though it were an unpaid tax liability, using the recovery mechanisms in the Tax Procedures Act. Amounts not exceeding KES 100,000 may be recovered summarily.
Electronic tax system penalties. A structured enforcement framework replaces the previous provision. Where a taxpayer fails to issue electronic tax invoices, file returns electronically or make electronic payments, the KRA must first issue a notice seeking reasons. If the failure was not due to circumstances beyond the taxpayer's control and reasonable steps were not taken, the penalty is the higher of 5% of tax due, KES 100,000 for companies, or KES 10,000 for individuals.
VAT
Labour outsourcing and employee placement. A new subsection deems employee-related costs (salaries, wages, statutory deductions and related costs) incurred by suppliers of labour, outsourcing or employee placement services to be disbursements made on behalf of the client. VAT therefore does not apply to those cost elements. The amendment addresses uncertainty created by the Tax Appeals Tribunal decision in *Commissioner of Domestic Taxes v. Techsavana Company Limited* (Income Tax Appeal No. E228 of 2023).
Hire purchase transactions. Financial charges are excluded from the taxable value of a supply under hire purchase agreements where the supplier is licensed and the agreement is registered under the Hire Purchase Act. For unlicensed or unregistered hire purchase transactions, financial charges remain part of the taxable value and are subject to VAT.
Input tax refunds and relief for security agencies. Registered suppliers making supplies for official use to the Kenya Defence Forces, the Defence Forces Welfare Services, the National Intelligence Service and the National Police Service may now claim input tax refunds and deduct input VAT in full (without apportionment) on supplies directly attributable to those agencies, subject to proper documentation.
Input tax adjustment on exempted supplies. Where taxable supplies become exempt while still unsold, any input VAT previously deducted on those unsold supplies must be reversed and accounted for in the VAT return for the period of exemption. Businesses holding significant inventory when a VAT status changes will face an immediate cash-flow impact and should monitor VAT classification changes closely.
Bad debt VAT refunds. The period within which a taxpayer may apply for a VAT refund on bad debts is extended from two to three years. The longer window may increase cash-flow pressure in the interim where customers default.
Tax invoice restriction. VAT invoices may only be issued for taxable supplies, targeting informal suppliers not registered for VAT and preventing artificial VAT being charged on non-taxable supplies.
Payment service providers: VAT on digital financial services. The VAT exemption for financial services is clarified not to extend to payment processing, settlement, merchant acquiring, gateway or aggregation services supplied through software or over a platform by a payment service provider for a fee or commission. Such fees and commissions are subject to VAT at the standard rate of 16%. A "payment service provider" is defined as a person, company or organisation that owns, operates, manages or controls a public switched network for payment services, or that processes or stores data on behalf of such a provider or its users.
Tour operators. The exemption for tour operator services is clarified by introducing definitions of "tour operator" (a tour or safari operator licensed by the competent tourism authority) and "in-house supplies" (supplies made from the operator's own resources or from third-party purchases materially altered so the output is substantially different from the input).
Repossessed loan collateral. A new VAT exemption covers the sale, disposal or realisation of collateral, repossessed assets or secured property arising from enforcement of security for loans, credit or other exempt financial services. This resolves a long-running dispute following the Tax Appeals Tribunal ruling in *KCB Bank v Commissioner of Domestic Taxes*, in which the Tribunal held that VAT applied to the auction of vehicles repossessed from loan defaulters. For background, see the EY Global Tax Alert, Kenya Tax Appeals Tribunal rules that the sale of repossessed collateral is subject to VAT, dated 21 February 2025.
Traveller baggage allowance. The tax-free allowance on goods imported by a returning traveller is increased from US$300 (approximately KES 39,000) to US$2,000 (approximately KES 260,000), subject to applicable conditions.
VAT status changes. The Act amends the VAT status of a number of supplies, including moving aircraft parts (other than those imported by aircraft operators or persons in aircraft maintenance upon civil aviation authority recommendation) from exempt to standard-rated at 16%, and similarly reclassifying spare parts for aid-funded projects (with any exemption granted before 30 June 2026 continuing until project conclusion) and direction-finding compasses and instruments for aircraft. The source does not set out the full table of status changes.
Actions for practitioners
Businesses with Kenyan operations should review affected contracts and pricing models, particularly where withholding tax now applies to card-based interchange and merchant service fees, royalty-type payments to digital platform providers, and gains on share disposals by nonresident shareholders. Withholding tax processes, trust structures, loss-utilisation positions and VAT compliance procedures all warrant prompt attention ahead of the 1 July 2026 and 1 January 2027 effective dates.