KENYA Law and Practice Contributed by: Ombo Malumbe, Jack Ong’anya and Faith Ngarama O’Bang Law (Ong’anya Ombo Advocates LLP)
4.7 Transfer Pricing Disputes and Mutual Agreement Procedures In 2026, transfer pricing in Kenya has shifted from a period of “revamping” to a rigorous enforcement of the same. The Kenya Revenue Authority (KRA) is now highly aggressive, utilising eTIMS data to moni - tor cross-border payments in real time and focusing heavily on the “benefit test” for management fees and interest-free loans. To manage this intensity, the government has launched the APA regime, which allows investors to pre-agree on their tax prices for five years, providing a much-needed “safety net” against audits. While international disputes can still be resolved through the mutual agreement procedure (MAP) in tax treaties, the KRA’s 2026 approach priori - tises these forward-looking APAs to prevent double taxation before it occurs. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments In 2026, compensating adjustments are allowed under the new APA regime, allowing taxpayers to align their self-assessment returns and financial records with pre-agreed arm’s length prices for related-party transactions. This is distinct from compensating tax under Section 7A of the ITA, which is a 30% corporate charge triggered by the distribution of dividends from gains or profits that have not been subjected to the full corporate tax rate. 5.2 Local Branches and Local Subsidiaries In 2026, the corporate income tax (CIT) rate for both local subsidiaries and branches of non-resident cor - porations is 30%. The previous 37.5% rate for branch - es was repealed to ensure a level playing field. How - ever, their total tax burden remains different due to how they send money home. A subsidiary pays a 15% withholding tax (WHT) on dividends sent to its parent, while a branch is subject to a 15% branch repatria - tion tax calculated on its “deemed” profit repatriation, regardless of whether it actually sends cash back to the head office. A major distinction remains in expense claims: while a subsidiary can often deduct interest and royalties paid to its parent (subject to withholding tax), a branch is
strictly limited by the KRA from deducting “internal” charges like royalties or management fees paid to its own head office. 5.3 Capital Gains of Non-Residents In 2026, non-residents are subject to a final 15% CGT on the sale of shares in unlisted local corpora - tions. This now extends to indirect transfers whereby Kenya taxes the sale of a foreign holding company if it derives 20% of its value directly or indirectly from Kenyan immovable property, or if the seller holds more than a 20% interest in the Kenyan entity. While DTAs can offer relief, many modern treaties include “land- rich” clauses that allow Kenya to tax gains where shares derive more than 50% of their value from Ken - yan immovable property, not merely the “primarily derived” standard suggested. Furthermore, to claim any treaty benefits, investors must now pass a strict “principal purpose test” (PPT) to prove the structure is not merely for tax avoidance. 5.4 Tax Implications of Change of Control In 2026, a “change of control” for CGT purposes is primarily triggered where a non-resident holds more than 20% of the share capital of a Kenyan company, directly or indirectly, and disposes that interest. This applies even to indirect disposals occurring higher up within an overseas group structure. Senior offic - ers and controlling members also face potential per - sonal liability under the Tax Procedures Act where they deliberately facilitate a disposal that leaves the local company unable to satisfy its tax obligations. 5.5 Formula-Based Income Attribution In 2026, while Kenya primarily follows the arm’s length principle, KRA increasingly uses formulaic methods to determine the taxable income of foreign-owned affiliates. For non-resident digital service providers, the SEP tax deems 10% of gross turnover as tax - able profit and applies the 30% corporate rate, result - ing in an effective 3% levy on gross revenue, with no minimum turnover threshold following removal of the KES5 million exemption. Additionally, for interest-free intercompany loans, the KRA applies a prescribed market interest rate (set at 8% for early 2026) to calculate “deemed inter - est”, which is then subject to a 15% withholding tax.
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