Key Changes Introduced by Kenya’s Finance Act, 2025

On 27 June 2025, the Finance Act, 2025 was signed into law in Kenya, following parliamentary approval on 19 June 2025. Most provisions take effect from 1 July 2025, with a couple of measures pending until 1 January 2026. Some amendments are highlighted below:

1. Income Tax Act Amendments

• Advance Pricing Agreements (APAs) introduced to provide certainty and mitigate transfer pricing disputes. These agreements can last up to 5 years and may be voided if facts were misrepresented.
• Cap on tax loss carry-forward reduced to 5 years (with possible Cabinet Secretary extension by the Cabinet Secretary, National Treasury), affecting capital-intensive sectors like infrastructure and extractives.  Previously, carrying forward of tax losses was not capped.
• Removal of SEPT exemptions: the threshold exemption for non-resident digital service providers with annual turnover under KES 5 million is eliminated—bringing more providers into the 3% Significant Economic Presence Tax net.
• Minimum Top-Up Tax due date clarified: the tax is now due by the last day of the fourth month after year-end income filing, aligning with tax balance due dates.
• Per Diem Allowance Increase: tax-exempt daily per diem raised from KES 2,000 to KES 10,000, encouraging compliance and reflecting rising costs.
• Fringe Benefits Tax (FBT) aligned to corporate income tax rate (30%), impacting employer-provided non-cash benefits.

2. VAT, Excise and Digital Economy

• Mandatory e‑invoicing and expanding the invoicing obligation to cover all supplies made by a registered person, including exempt supplies strengthens compliance.
• VAT Reforms:
  • VAT refund application timelines reduced to 12 months from 24 months and refund reviews by the Commissioner increased to 120 days from 90 days for routine cases and 180 days for audit cases.
  • The time limit for lodging a refund of VAT on bad debts reduced to 2 years from 3 years from the date of the supply.
  • Identified products have changed tax status.  For example, supplies which relate to the energy sector, healthcare sector and manufacturing sector that are now subject to VAT.
• Excise Duty Updates:

• Definitions for ‘digital lenders’ and ‘digital marketplaces’ now statutory, clarifying coverage for fintech and digital platforms.
• Excise license applications must now be processed within 14 days, increasing predictability for businesses.

3. Corporate Incentives and Reporting Enhancements

• Nairobi International Financial Centre (NIFC) incentive tax rates: certified startups receive 15% corporate tax for initial 3–10 years, then 20% thereafter. Enhanced dividend exemptions available for firms investing at least KES 250 million and meeting local employment thresholds.
• Mandatory Country-by-Country Reporting (CbCR): all multinational enterprise groups with combined turnover above KES 95 billion must now submit CbC reports, regardless of other jurisdictions’ agreements.

1. Tax Administration
2. The Commissioner may collect or recover tax owed by non-resident persons from persons holding money on account of these persons.

• The Cabinet Secretary, National Treasury may – upon the recommendation of the Commissioner – waive penalties or interest either wholly or partially which relate to liability arising from system generated errors or the incorrect registration of tax obligations of a taxpayer.

The changes introduced by the Finance Act, 2025 take effect from 1 July 2025; that introducing APAs takes effect from 1 January 2026

The government’s fiscal strategy aims to narrow the budget deficit to 4.5% of GDP by 2025/26 while avoiding controversial tax hikes—focusing instead on closing loopholes and broadening the tax base through compliance and enforcement rather than increased taxes.

Why It Matters for Your Business

• Compliance burden increases with broader WHT, change in administration timelines and new definitions—prompting review of cross-border payments, software licensing and digital service models and monitoring of administrative compliance.
• Tax planning models for example, organisations must adjust for limited use of historic losses.
• Transfer pricing certainty improved by APAs, reducing audit risk and disputes—but requires early KRA engagement.
• Streamlined admin processes (eTims invoicing; reduced refund and bad debt application timelines; fixed excise duty licensing windows) bring clarity yet demand stronger systems readiness.

Bottom Line: The Finance Act, 2025 marks a comprehensive overhaul of Kenya’s tax architecture—balancing modernization with enforcement. It offers both opportunities (e.g., NIFC incentives, APA certainty) and new compliance obligations (e.g. broadened scope of eTims invoicing). Businesses are advised to review their tax strategies promptly, update internal systems and seek professional guidance where needed to ensure full readiness.

Let us know if you would like bespoke analysis for particular sectors or digital models.