Tax highlights

The Cabinet Secretary responsible for the National Treasury and Economic Planning (‘CS’) read his budget speech before the National Assembly on 12th June 2025. In this alert, we highlight the key tax proposals raised by the CS in his speech. The vast majority of these are consistent with the proposed amendments set out in Finance Bill, 2025.

Income Tax Act (ITA)

Bringing certainty to cross-border transactions: Advance Pricing Agreements are here!

The CS confirmed the proposal to introduce Advance Pricing Agreements. This will give multinationals certainty when it comes to the Kenyan tax implications of their cross border, intragroup transactions. This increased certainty should, ideally, lead to reduced instances of transfer pricing disputes on account of related party transactions.

Tax free nest eggs

The CS stated that the Bill proposes to amend the ITA to provide that all gratuity payments, whether from private or public sources are to be tax free. This contradicts the language of the Bill which contains a proposal to include ‘other allowance paid under a public pension scheme’. Further, the law currently provides for an exemption for gratuity payments made of out of both public and private sources.

Digital asset tax halved

The CS signalled his intention to cut the rate of tax on digital asset transactions in half from 3% to 1.5% as proposed by the Finance Bill. This is aimed at spurring wider participation in digital assets.

Goodies galore for companies certified by the Nairobi International Financial Centre

The CS proposes to have companies certified by the Nairobi International Financial Centre Authority (NIFCA) that invest KES 3 billion over a three-year period be subject to Corporate Income Tax (CIT) at the rate of 15% in the first 10 years of their operations and 20% for the subsequent 10 years. These reduced rates will apply where the companies employ Kenyans at senior management levels.

Similarly, the CS proposes to have startups certified by the NIFCA pay CIT at the reduced rate of 15% for the first three years, and 20% for the succeeding four years. 

Additionally, the CS proposes to exempt from tax dividends paid by a company certified by the NIFCA where the company reinvests at least KES 250 million in Kenya, in that year of income. 

These proposals will incentivize investors to register under the NIFC regime.

Higher threshold for tax-free per diems

The CS has proposed to increase the tax-free threshold for per diems paid to employees from the current KES 2,000 per day to KES 10,000.

If passed into law, employees who spend time away from their ordinary place of work will have more money in their pockets.

In case you forgot, statutory deductions and reliefs are not optional

The CS has raised a concern about increased instances of employees seeking refunds from KRA on account of failure by their employers to apply tax reliefs while deducting PAYE from emoluments. In this regard, the CS has proposed to make it mandatory for employers to consider all eligible tax reliefs and deductions when computing employees’ income tax. Should this proposal be passed into law, employees will, in effect, be required to raise any issues relating to statutory deductions with their employers rather than the taxman.

Mortgage interest relief to apply to construction loans

Taxpayers who take out mortgages to construct residential houses will benefit from tax relief on the mortgage interest payments in the same way as individuals who take out mortgages for purchasing or improving residential property.

Clarification on the administration of Fringe Benefit Tax

The CS proposes to clarify in the law that fringe benefit tax is payable by the employer at the CIT rate. The proposed change will codify current practice on the administration of Fringe Benefits Tax currently.

Tax write offs for loose tools in year one

The CS confirmed the proposal to allow businesses to fully recover the investments on utensils, linen and industrial tools in the year of purchase. The proposal is intended to improve cashflows for the businesses especially in the year of purchase of these loose tools.

Value Added Tax, 2013 (VAT Act, 2013)

Changes in the administration of tax invoices

The CS has signalled the intention to introduce a definition of a ‘tax invoice’ to resolve any ambiguity on the meaning of the term.

The CS has further proposed to mandate all persons to issue tax invoices regardless of whether they make supplies that are taxable or exempt. This requirement, which is aimed at giving the taxman an accurate representation of all transactions in real time, will impose an additional cost and administrative burden on businesses that deal with exempt supplies.

Penalty for misuse of zero-rated or exempt supplies

The CS made the proposal to introduce a penalty for Special Economic Zones who misuse their tax benefits, specifically VAT exemptions and zero-rating. Such entities will be sanctioned by being required to pay tax on the affected goods or services at the applicable rate prevailing at the time of disposal or inconsistent use.

This proposal seeks to curb the abuse of tax exemptions and ensure that tax relief measures are only enjoyed by those who use apply the benefits in accordance with the intended policy objectives.

Reclassification of goods from zero rated to exempt

The CS has indicated the intention to reclassify various locally consumed goods which are currently zero-rated to be exempt from VAT. This move which is aimed at preventing revenue leakages, strengthening tax administration and promoting equity across sectors will ultimately prevent such suppliers from claiming input on these supplies.

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