Finance Act 2026 - Tax Alert On Notable Changes

Kenya’s Finance Act, 2026 (“the Act”), introduces a series of amendments to the current tax laws affecting individuals, businesses, and multinational enterprises. The majority of the proposed changes take effect from 1st July 2026, with other provisions slated for 1st September 2026 and 1st January 2027. The Act amends the Income Tax Act (Cap. 470), the Value Added Tax Act (Cap. 476), the Excise Duty Act (Cap. 472), the Tax Procedures Act (Cap. 469B), the Miscellaneous Fees and Levies Act (Cap. 469C), the Stamp Duty Act (Cap. 480), and the Road Maintenance Levy Fund Act (Cap. 427).

This alert provides a brief summary of some of these key amendments.

Income Tax Amendments

• “Royalty” meaning expanded: Date of effect: 1st July 2026.
  Payments (including service fees, transaction fees, network fees, processing fees, et al) for the use or right to use digital payment card networks or platforms including access, participation or usage rights in such system through a card, are now defined as royalties subject to withholding tax. This means that such payments will be subject to withholding tax at the rate of 20% where paid to a non-resident person and 5% where paid to a resident person.
• “Management or professional fee” meaning expanded: Date of effect: 1st July 2026.
  Interchange fees and merchant service fees now qualify as management / professional fees subject to withholding at the rate of 20% where paid to a non- resident person and 5% where paid to a resident person.
• New withholding tax categories: Date of effect: 1st July 2026.
  The Act introduces withholding tax on scrap metal sales at the rate of 1.5% and gambling / lottery winnings at the rate of 20%. Scrap metal dealers and gambling operators should update their systems to deduct and remit these taxes.
• Non-resident rental income: Date of effect: 1st July 2026.
  The Act introduces a rental income filing and payment obligation for non- resident persons. Non-resident persons earning rent from Kenyan property must register, file monthly returns, and pay a final tax at the prescribed rate by the 20th of the following month. Foreign landlords with Kenyan property now have direct tax filing obligations in Kenya.
• Gratuities: Date of effect: 1st July 2026.
  Employer contributions to gratuity schemes are exempt if: (i) the employment contract was for at least 3 years; and (ii) the gratuity does not exceed 31% of the employee’s earnings for that period. Employers should review gratuity schemes to ensure they meet these conditions for tax exemption.
• Individual tax return deadline moved: Date of effect: 1st January 2027
  Individual taxpayers must now file their income tax returns by the end of the 4th month following the close of the financial year, rather than the 6th month as required previously. Whilst companies retain the standard 6th month filing deadline, individual taxpayers must now adhere to this shortened timeline to ensure they are not subjected to late filing penalties.
• Capital gains tax (“CGT”) on indirect transfers expanded: Date of effect: 1st July 2026.
  The Act attempts to clean up the cross-referencing provisions on taxation of gains on indirect disposals which have previously resulted in ambiguity and given rise to varying interpretations. There is still, however, lack of clarity on the clear mechanics of how these provisions apply and how the taxes should be computed. Further, the Act introduces a new catch-all provision extending the scope of CGT to any non-resident person who derives a gain from sale of shares which derive value from Kenya or result in ownership changes of Kenyan entities / property. It is notable that unlike other CGT provisions on indirect disposals, this new paragraph does not contain any thresholds for its application pointing to a deliberate move to cast the net as wide as possible and bring within the ambit of Kenya taxation offshore transactions that touch on Kenyan companies / assets.
• Exemptions and investment allowances expanded: Date of effect: 1st July 2026.
  New exemptions from income tax include death benefits and CGT exemption on transfers of properties to real estate investment trusts (REITs) registered by the Kenya Revenue Authority (KRA).
  The Act also introduces a 100% first-year investment allowance for investments in petroleum or gas storage facilities of over KES 10 billion, which targets significant investments.
• Trust income: Date of effect: 1st July 2026.
  The Act clarifies that income received by a trustee, executor or administrator is deemed their income. Qualifying dividends or interest are not subject to further tax. Where the trustee has paid tax, the beneficiary is not liable for further tax. This clarifies trust taxation and prevents double taxation of trust income.
• National carrier employee exemption: Date of effect: 1st July 2026.
  Income of non-resident employees of designated national carrier airlines will no longer be deemed to accrue in or be derived from Kenya where their employment duties are performed outside the country. Whilst previously, such offshore income faced potential exposure to domestic taxation, this provision ensures that eligible national carrier employees working abroad benefit from reduced Kenyan tax exposure, provided their duties are executed entirely outside Kenya.
• Shipping income tax deadline: Date of effect: 1st July 2026.
  Tax on non-resident shipping income must be paid within 5 days after payment is received or the ship leaves port, whichever is earlier, thus accelerating the payment deadline.
• Loss carry-forward extended: Date of effect: 1st July 2026.
  Businesses that invested at least KES 10 billion in Kenya before 1 July 2025 and incurred tax deficits (ascertained in respect of any period before 1 July 2025) may now carry forward those losses indefinitely until they are fully extinguished. Whilst previously, corporate taxpayers were restricted by a standard statutory period for carrying forward tax losses, this amendment grants significant investors extended relief for historic losses, allowing them to offset their deficits against future taxable profits without any time restriction, until the accumulated losses are fully exhausted.
• Microfinance institutions: Date of effect: 1st July 2026.
  Microfinance institutions licensed under the Microfinance Act are now included in the Fourth Schedule, the import of which is that these institutions will now benefit from exemption from withholding tax on inter-institutional interest income, exclusion from interest deduction restrictions, and broader parity with commercial banks in their tax treatment. This is a welcome change for the microfinance sector, recognising that licensed microfinance banks perform substantially similar functions to commercial banks and should receive equivalent tax treatment.
• Non-resident company tax rate: Date of effect: 1st January 2027.
  The non-resident company tax rate for contractors in the extractive sector has been reduced from 37.5% to 30%, lowering the tax burden for upstream petroleum and mining projects. Concurrently, a 15% tax rate has been introduced on repatriated income for licensees and contractors.

Value Added Tax (“VAT”) Amendments

• Labour/outsourcing services: Date of effect: 1st July 2026.
  Employee-related costs (such as salaries, wages and statutory deductions) incurred by suppliers who provide labour, outsourcing or employee placement services shall now be treated as disbursements. Accordingly, VAT shall only apply on the margin or service fee charged by the suppliers and not on these disbursements. This amendment reduces the costs passed through by staffing agencies to their clients.
• Input tax clawback: Date of effect: 1st July 2026.
  Where a supplier has claimed input tax on taxable supplies that subsequently become exempt, the supplier shall be required to account for input tax claimed on any such supplies that remail unsold. Businesses should therefore monitor the VAT status of their inventory to manage the unexpected input tax costs that may arise from a VAT reclassification.
• Fintech VAT: Date of effect: 1st July 2026.
  The Act has reclassified payment processing, settlement, merchant acquiring, gateway, aggregation services supplied over a software or platform for a fee or commission by a payment service provider from VAT exempt to vatable, at the standard rate of 16%. This will likely result in a higher transaction costs to the end consumers.
• Bad debt relief: Date of effect: 1st July 2026.
  Generally, where a person has supplied goods or services, accounted for the VAT, but received no payment from the customer, the person may apply to the KRA for a refund of the tax involved. Whilst the VAT Act previously allowed the person to apply for the refund after a waiting period of 2 years, the Act has now extended this timeline back to 3 years from the date of supply, unless the customer's business officially enters statutory management, receivership, or liquidation before that 3-year period expires.
• Hire purchase VAT: Date of effect: 1st July 2026.
  Whilst VAT was not applicable on any financial charge payable in relation to a supply of credit under a hire purchase agreement (whether registered or not), the Act now restricts this exemption to hire purchase agreements registered in accordance with the Hire Purchase Act.
• Tour operator definition: Date of effect: 1st July 2026.
  The services of tour operators, excluding in-house supplies are generally zero rated for VAT. The VAT Act did not contain a definition of the term “tour operators” which tended to give rise to disputes. The Act now attempts to define a “tour operator” as a tour or safari operator licensed by the competent tourism authority, and further defines “in-house supplies” as supplies from the tour operator’s own resources or materially altered third-party purchases.
• LPG infrastructure goods and services: Date of effect: 1st July 2026.
  The Act exempts taxable goods and services used in the construction of liquefied petroleum gas storage tanks and related infrastructure, provided that the investment in the construction of liquefied petroleum gas storage tanks and related infrastructure in Kenya amounts to at least KES 5 billion and has been recommended by the Cabinet Secretary responsible for matters relating to energy.
• New VAT exemptions: Date of effect: 1st July 2026.
  The following supplies are now exempted from VAT – dialyzers, scrap metal, pharmaceutical inputs and BEV stoves. Additionally, plant, machinery, equipment and spare parts imported or purchased locally for use in a project whose total investment value is not less than KES 3 billion as approved by the Cabinet Secretary responsible for the National Treasury upon recommendation by the Cabinet Secretary responsible for Trade and Investment Promotion will be exempt from VAT.
• Reclassification from exempt to vatable: Date of effect: 1st July 2026.
  The Act has reclassified the following supplies from exempt supplies to vatable supplies – tourism / conference facility construction goods, goods imported or purchased locally for the direct and exclusive use in the construction of houses under an affordable housing scheme approved by the Cabinet Secretary on the recommendation of the Cabinet Secretary responsible for matters relating to Housing, direction finding compasses, among others.
• Zero-rating tariff headings: Date of effect: 1st July 2026.
  The Act now restricts the zero-rating of electric bicycles to those classified under tariff heading 8712.00.00, and of solar and lithium-ion batteries to those under tariff heading 8507.60.00. Whilst previously, the scope of these incentives was broader, this amendment narrows the application to specific tariff classifications, thereby aligning the VAT treatment with customs codes and enhancing certainty in application.
• Public Private Partnership (PPP) goods and services exempt: Date of effect: 1st July 2026.
  Goods and services for direct and exclusive use in PPP infrastructure projects are now VAT-exempt (upon Cabinet Secretary approval). This may result in a reduction of PPP project costs for approved infrastructure projects.

Excise Duty Amendments

• Antique vehicles: Date of effect: 1st July 2026.
  The Act now introduces a 50% excise duty charge on antique, vintage, and classic vehicles, alongside a clear statutory definition based on age (30+ years) and value (KES 10 million+). This amendment formally recognizes such vehicles as a distinct luxury asset class for tax purposes, thereby expanding the excise tax base to cover high-value historical automotive assets.
• Excise duty refunds and exemptions: Date of effect: 1st July 2026.
  Where excise duty has been paid in respect of inputs used by a licensed or registered manufacturer to manufacture excisable goods that are otherwise exempt because they are imported or purchased locally by the Defence Forces Welfare Services, a mechanism has been introduced to allow for a refund of the duty, provided that the inputs are directly attributable to the manufactured goods. Additionally, the Act now exempts from excise duty all goods including materials supplies, equipment, machinery and motor vehicles for the official use the National Intelligence Service, similar to the Kenya Defence Forces, the Defence Forces Welfare Services and the National Police Service.
• Rate changes: Date of effect: 1st July 2026.
  Excise duty rate has been changed for various supplies including: -
  
  1. cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes – from KES 16,260.29/kg to KES 18,000/kg.
  2. other manufactured tobacco and manufactured tobacco substitutes –
  3. imported sugar (excluding sugar imported by a registered pharmaceutical manufacturer and raw sugar imported for processing by a licensed sugar refinery) – from KES 7.50/kg to KES 40/kg.
  4. spirits of undenatured extra neutral alcohol of alcoholic strength exceeding 90% purchased by licensed manufacturers of spirituous beverages” – from KES 500/litre to KES 80/litre.
  The increase in excise duty rate would likely lead to higher prices on these goods, likely to be passed on to consumers.
• Juices and bottled water: Date of effect: 1st July 2026.
  The Act now introduces a two-tier excise structure by separating sweetened and unsweetened fruit and vegetable juices. Whilst previously, a single-line provision applied a flat rate regardless of sugar content, a higher excise duty of KES 20/litre now applies to juices containing added sugar or sweeteners, while unsweetened juices remain at KES 14.14/litre. Notably, bottled water shall now be exempt from excise duty. The Commissioner is expected to issue guidelines on the return of unutilized stamps and the decommissioning of digital stamps.
• Betting and gambling: Date of effect: 1st July 2026.
  All amounts deposited for betting and gambling purposes shall now be subject to excise duty, including deposits made for horse-racing. Whilst previously, horse-racing was expressly exempt and excise duty only applied to specific types of gambling stakes, the Act has now removed this exemption and expanded the scope to ensure that any amount made available for betting or gambling purposes is taxed.
• EAC Rules of Origin: Date of effect: 1st July 2026.
  Imported float glass and surface ground or polished glass originating from East African Community (EAC) Partner States shall now attract excise duty at the same rate as imports from non-EAC countries, effectively removing their previous tax exemption. Furthermore, excise duty has been introduced on a wide range of newly dutiable imported goods including MDF, particle boards, plywood, timber, and unprinted plastic sheets, without providing any EAC-origin exemptions or preferential rates. Whilst previously, some goods meeting the EAC Rules of Origin enjoyed tax carve-outs, these amendments signal a policy shift toward applying excise duty on imported construction and manufacturing inputs uniformly, regardless of their EAC origin.

Tax Procedures Amendments

• General anti-avoidance rule (GAAR): Date of effect: 1st July 2026.
  A centralized GAAR has been introduced under the Tax Procedures Act (TPA) to apply uniformly across all tax categories. Under this framework, the Commissioner is empowered to disregard tax avoidance schemes and reassess a taxpayer's liability, provided that any resulting assessments are issued within a 5-year statutory limitation period. However, as with the previous GAAR provisions, there is still some ambiguity in defining the specific parameters that give rise to a tax avoidance scheme.
• Virtual asset reporting: Date of effect: 1st July 2026.
  Virtual asset service providers operating within Kenya are now required to file annual information returns with the KRA. Additionally, an automatic exchange of information framework will be enabled, empowering the KRA to share this financial data with foreign tax authorities. Whilst previously, such transactions benefited from regulatory anonymity, the Act now enforces a stringent compliance structure where failure to file returns attracts penalties of up to KES 1 million per failure, data omissions attract penalties of KES 100,000 per omission, and false statements constitute a criminal offence punishable by a fine of KES 100,000 per false statement or imprisonment of up to three years, or both.
• Prepopulated returns: Date of effect: 1st July 2026.
  The KRA may now issue pre-populated tax returns to taxpayers by the end of January each year. Under this mechanism, taxpayers are granted a strict 2- month window from the date of issue to review and confirm, or amend the pre- filled financial details before final submission. Whilst this update may appear to simplify the overall filing process, it points to a shift in Kenya’s self-assessment tax regime and may introduce technical legal questions on the burden of proof of tax positions.
• Tax amnesty extended: Date of effect: 1st July 2026.
  The Act extends the tax amnesty framework by extending the eligibility date for qualifying tax liabilities from 31 December 2023 to 31 December 2025, while pushing the final settlement deadline for outstanding principal tax from 30 June 2025 to 31 December 2026. This extension provides a window of opportunity to taxpayers who have historical tax liabilities to make a voluntary disclosure of the same without incurring penalties and interests.
• Electronic tax relief: Date of effect: 1st July 2026.
  Taxpayer protections have been strengthened where non-compliance arises directly from electronic tax system errors. System malfunctions are now established as a standalone ground for the waiver of penalties and interest under the Commissioner's general discretionary power, imposing no monetary cap on the relief granted. Concurrently, a separate waiver mechanism has been introduced, empowering the Commissioner to waive the whole or part of any penalty or interest not exceeding KES 2 million where the liability was directly attributable to an error generated by an electronic tax system. This is a welcome move as previously, taxpayers would bear the risks of technical disruptions to i-Tax or other automated platforms beyond their control.
• Commissioner assessment powers: Date of effect: 1st July 2026.
  The Commissioner is now empowered to issue tax assessments utilizing data from third-party returns, withholding tax records, e-TIMS invoices, audit findings, and other alternative information sources.
• Import documentation: Effective 1st September 2026
  Importers must obtain proper export declarations from the country of export and retain these documents for a period of at least 5 years. Failure to produce such documents may result in rejected claims, adjusted valuations, or penalties.
• Personal Identification Number (“PIN”) reinstatement: Date of effect: 1st July 2026.
  Persons whose PIN was deregistered can apply to the Commissioner for reinstatement of their registration once they qualify for registration. Upon approval, the Commissioner will re-register the taxpayer and reissue the exact same PIN that had been issued prior to the deregistration.
• Non-resident PIN exemption: Date of effect: 1st July 2026.
  Non-residents are now exempted from the PIN requirement when opening accounts with investment banks and financial institutions. Whilst previously, foreign investors faced administrative delays and rigid compliance hurdles during the onboarding process, the Act now removes this barrier to streamline account openings and enhance the country's competitiveness for international capital inflows.
• E-tax non-compliance process: Date of effect: 1st July 2026.
  The Act mandates a procedural safeguard requiring the Commissioner to issue a written notice and consider taxpayer explanations regarding circumstances beyond their control before imposing penalties for electronic tax non- compliance. Penalties are now enforced only if the taxpayer's explanation is unsatisfactory, calculated as the higher of 5% of the tax due or a minimum floor of KES 100,000 for companies and KES 10,000 for individuals.
• Fee / levy recovery: Date of effect: 1st July 2026.
  Where the KRA is mandated to collect fees, levies, or charges under other written laws, the Act now empowers the Commissioner to recover any unremitted amounts using the full suite of tax enforcement mechanisms available under the Tax Procedures Act — including agency notices, distress proceedings, and civil action — as if the outstanding sums were unpaid taxes. This effectively closes a previous regulatory gap whereby non-tax agency debts collected by KRA lacked the robust enforcement and recovery tools ordinarily available for tax liabilities. For outstanding amounts not exceeding KES 100,000, the Act provides for summary recovery, enabling the Commissioner to pursue expedited proceedings without the need for full litigation.

Other Adjustments

• Import declaration fee (IDF) and railway development levy (RDL) exemptions: Date of effect: 1st July 2026.
  LPG storage infrastructure (investments of KES 5 billion+) shall now be exempt from IDF and RDL upon importation and recommendation by the Cabinet Secretary responsible for matters relating to energy. This will result in reduced import costs.
• REIT stamp duty exemption: Date of effect: 1st July 2026.
  Transfers of beneficial interests in property to REITs are now exempt from stamp duty. Combined with the CGT exemption, this significantly reduces tax friction for REITs. Setting up or expanding a REIT may be far cheaper, and this may be a boost for the property investment sector.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.