Kenya: The Finance Bill, 2025

Disclaimer: This newsflash is based on a copy of the Finance Bill, 2025 available in general circulation, which has not yet been confirmed as the official copy of the Bill tabled before the National Assembly.

The proposals in the Bill are proposed to come into effect on 01 July 2025 with the exception to the following two proposals that are proposed to come into effect on 01 January 2026, that is, (a) the proposed introduction of advance pricing agreements and (b) the proposed grant to the Cabinet Secretary responsible for matters relating to Finance of the power to waive penalties and interest that accrue due to errors in the tax systems.

Income Tax Act

• Tax Losses: The Bill proposes to limit the deductibility of tax losses by:
  • restricting the carrying forward of tax losses to five (5) years. Currently, taxable losses can be carried forward in perpetuity. Commentary: this proposal will significantly impact taxpayers in capital intensive sectors (e.g. energy, projects, manufacturing) as it is unlikely that such taxpayers would exhaust tax losses arising from claiming investment allowances within a five (5) year period. The proposal could also impact the commercial viability of capital-intensive projects that are in the pipeline; and
  • deleting the provision that allows taxpayers to deduct any capital loss realized against any future capital gains. Commentary: this proposal is quite punitive as it will result in taxpayers being required to pay capital gains tax on the sale of property that results in a gain even though such a taxpayer may have sold prior property for a significant capital loss.
• Investment Allowances: The Bill proposes to delete the provisions that allow taxpayers to claim investment allowances at the rate of 100% in a particular year of income where:
  • the cumulative investment value (with respect to hotel building or a building used for manufacture or of machinery used for manufacture) in the preceding three (3) years outside Nairobi City County and Mombasa County is at least Kenya Shillings one billion; and
  • the investment value in the year that a person is claiming the investment allowances is at least Kenya Shillings two hundred and fifty million; or
  • the person has incurred investment in a special economic zone.

Commentary: the impact of this proposal is that capital allowances on capital expenditure relating to hotel buildings, buildings used for manufacture and machinery used for manufacture will be claimed at the rate of 50% in the first year of use and the balance in equal instalments of 25% which is a slower rate of claim.

• Taxation of the digital economy: The Bill proposes to:
  • expand the scope of significant economic presence tax (SEPT) by:
    • deleting the exemption from SEPT that applies to a non-resident person with an annual turnover of less than Kenya Shillings five million.
  • reducing the rate of digital assets tax from 3% of the transfer or exchange value of the digital asset to 1.5%; and
  • classifying as royalty (and therefore subject to withholding tax) regular payments made by resident persons to distributors of software for the right to use software.
• Nairobi International Financial Centre (NIFC): The Bill proposes to incentivize investment in the NIFC by introducing:
  • reduced corporate income tax rate of 15% for the first three (3) years and at the rate of 20% for the succeeding four (4) years for start-ups certified by the NIFC;
  • reduced corporate income tax rate of 15% for the first ten (10) years and at the rate of 20% for the subsequent ten (10) years with respect to a company certified by the NIFC and that:
    • invests at least Kenya Shillings three billion in the first three (3) years of operations;
    • is a holding company and at least 70% of its employees in senior management are citizens of Kenya; and
    • the regional headquarters of the company is in Kenya and at least 60% of the employees in senior management are citizens of Kenya.
  • an exemption for dividends paid by a company certified by NIFC would be exempt from tax should such a company reinvest a sum of Kenya Shillings two hundred and fifty million (KES 250,000,000) in that year of income.

Commentary: it is not entirely clear how a company would be expected to meet the different sets of thresholds on the employment of citizens of Kenya. In addition, we have not seen the NIFC model work and therefore there is a need to rethink the entire approach in a bid to attract investors who would want to operate under NIFC regime.

• Income Tax Exemptions: restriction of income tax exemptions by:
  • deleting the reduced corporate income tax rates for:
    • companies constructing at least one hundred (100) houses annually; and
    • companies undertaking the assembly of motor vehicles where fifty percent (50%) of the ex-factory value of the motor vehicles relates to parts designed and manufactured in Kenya.
  • restricting persons entitled to exemption from capital gains on the transfer of property within a special economic zone to only licensed special economic zone developers, enterprises or operators.

Commentary: the deletion of the exemptions relating to housing and assembly of motor vehicles will negatively affect the two sectors that are coincidentally labour intensive.

• Capital gains tax: the Bill proposes to:
• delete the provision that provides that income is not chargeable to capital gains tax to the extent that it is chargeable to tax under any other provision of the Income Tax Act.

Commentary: this proposal should be deleted as the provision it seeks to delete is important to avoid questions as to whether it is corporate income tax or capital gains tax that would be applicable on for example, the sale of property on which investment allowances have been claimed; and

• exempt from CGT the transfer of property to a company where the transferor is the sole shareholder. Commentary: this is a welcome move as grant taxpayers’ flexibility in the manner in which they structure their personal affairs.
• Sponsorship of sporting activities: the Bill proposes that amounts incurred in sponsoring sports shall no longer be tax deductible. In addition, the Bill proposes that amounts incurred in the construction of a public sports facility shall be deductible.

Commentary: the proposal will negatively impact sports fraternity as entities are more likely to spend their CSR budgets in other tax-deductible ventures as opposed to spending on sports activities. In addition, the proposed deductibility of amounts incurred in the construction of a public sports facility will require additional clarity as to what would comprise a “public sports facility” and whether making donations to the construction of such facility would qualify as a deductible expense.

Value Added Tax Act

• Imposition of VAT at the rate of 16% on previously exempt items. The Bill proposes to delete certain VAT exemptions granted to key sectors such as manufacturing, energy, mining, food, healthcare, housing, e-mobility, tourism and aviation. These products would be subject to VAT at the standard rate which would increase the cost for consumers. Key examples include:
  • taxable goods imported or purchased for direct and exclusive use in geothermal, oil or mining prospecting or exploration (this exemption was not available to motor vehicles imported for such purposes);
  • specialized equipment for the development and generation of solar and wind energy;
  • taxable goods for the direct and exclusive use in the construction and equipping of specialized hospitals with a minimum bed capacity of fifty (50);
  • specially designed locally assembled motor vehicles for the transportation of tourists;
  • goods imported or purchased locally for the direct and exclusive use in the construction of houses under an affordable housing scheme;
  • smartcards for use in accessing healthcare services, weighing machinery for use in hospitals, food supplements of HS Code 2106.90.91;
  • all goods and parts thereof of chapter 88 (aircraft including helicopters, spacecraft and parts); and
  • locally manufactured passenger motor vehicles and inputs for use in the manufacture of passenger motor vehicles.

Commentary: some of the supplies that are proposed to be subject to VAT relate to the healthcare sector. The proposal therefore contradicts the Government’s stated objective of making healthcare affordable for all.

• The Bill also proposes to exempt from VAT the following previously zero-rated supplies:
• inputs or raw materials for use in the manufacture of medicaments;
• inputs or raw materials purchased or imported for the manufacture of animal feeds;
• transportation of sugarcane from farms to milling factories;
• supply of locally assembled and manufactured mobile phones;
• supply of electric bicycles, buses and motorcycles with electric propulsion; and
• supply of bioethanol stoves and packaging materials.

Commentary: the suppliers would not be eligible for refund of the input VAT incurred in the making of the exempt supplies. Accordingly, such suppliers would pass down the cost to the final consumers.

• VAT refund for bad debts: The Bill proposes to reduce the timeline allowing taxpayers apply for refund of VAT paid if the taxpayer has not received payment from the buyer to two (2) years from the date of the supply instead of the current three (3) years. This is a welcome move for taxpayers.
• The Bill proposes to subject to value added tax (VAT) goods or services that are exempt or zero-rated, if the taxpayer disposes or uses the goods or services in a manner inconsistent with the purpose of the VAT exemption or zero-rating.

Excise Duty Act

• Non-residents digital supplies subject to excise duty: The Bill proposes to expand the scope of excise duty charged on digital platforms to include services offered by non-resident persons over the internet, an electronic network or through a digital marketplace to consumers in Kenya.

Miscellaneous Fees and Levies Act

• Aircraft (including helicopters) no longer subject to blanket IDF and RDL exemption. The Bill proposes to delete the blanket import declaration fee and railway development levy exemption that applies to aircraft including helicopters. Accordingly, going forward, IDF and RDL exemptions shall only be applicable to:
• the importation of aeroplanes and other aircraft of unladen weight exceeding 2,000 kg but not exceeding 15,000 kg; and
• the importation of aeroplanes and other aircraft of unladen weight exceeding 15,000 kg; and
• parts of falling under chapter 88 (that is parts of aircrafts and helicopters).
• Reduction of the export and investment promotion levy. The Bill proposes to reduce the export and investment promotion levy on semi-finished iron, non-alloy steel, specific bars and rods of iron and non-alloy steel. The rate would be reduced from seventeen-point five percent (17.5%) to five percent (5%) of the customs value.

Tax Procedures Act

• Enforcement against non-residents: The Bill proposes to amend the KRA’s power to issue agency notices by extending its scope beyond resident taxpayers to also include non-resident persons who are subject to tax in Kenya.

Commentary: this means that where a non-resident person subject to tax in Kenya owes taxes, the KRA could now require that resident persons who hold monies owing to such a non-resident person remit such an amount to the KRA.

• Refund Timelines: The Bill has amendments that collectively lengthen the statutory timelines within which the KRA must process refund and offset application.
• Computation of Time: The Bill proposes to exclude Saturdays, Sundays, and public holidays when calculating the time allowed to lodge an objection or file an appeal against a tax decision. This proposal comes barely five (5) months after the Act was amended to exclude weekends and public holidays in the computation of time.