KENYA Law and Practice Contributed by: Ombo Malumbe, Jack Ong’anya and Faith Ngarama O’Bang Law (Ong’anya Ombo Advocates LLP)
6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions For a resident corporation, all income – whether earned locally or abroad – is subject to the standard 30% corporate tax. Under Section 4 of the Income Tax Act, if a business is carried on partly within and partly outside Kenya by a resident entity, the entire profit is deemed to have accrued in Kenya and is fully taxable. To avoid double taxation, companies can claim foreign tax credits if a DTA exists with the source country, or apply for unilateral relief (under Section 16 or 39) to deduct foreign taxes paid from their Kenyan liability. 6.2 Non-Deductible Local Expenses In 2026, local expenses attributed to exempt foreign income are strictly non-deductible. Under the “wholly and exclusively” rule of Section 16 (1), for an expense to be allowed, it must be linked to income that is sub - ject to tax in Kenya. If a local affiliate incurs costs that support both taxable and exempt activities, those costs must be proportionately disallowed in the annu - al tax return. However, because Kenyan resident com - panies are taxed on their worldwide business income, most foreign-sourced profits are considered taxable, which in turn preserves the deductibility of the local expenses incurred to generate them. 6.3 Dividends From Foreign Subsidiaries In 2026, dividends received by a Kenyan resident company from a foreign subsidiary are exempt from corporate tax if the resident company holds at least 12.5% of the voting power in the payer. This exemp - tion is designed to prevent the triple taxation of profits as they move up a corporate chain. As a direct con - sequence of this “exempt” status, any local expenses such as interest on loans used to buy those foreign shares or administrative costs for managing the invest - ment are strictly non-deductible in Kenya. Where the shareholding falls below 12.5%, dividends received by a Kenyan resident company are generally taxable at a WHT rate of 5%, while the 15% rate applies to dividends paid to non-residents, unless a lower treaty rate applies.
Other formulaic caps include the restriction of interest deductions to 30% of EBITDA for foreign-controlled entities and specific “deemed profit” rates for non- residents in shipping (2.5%) and telecommunications (5%) based on their gross Kenyan billings. 5.6 Deductibility of Intra-Group Management and Administrative Charges In 2026, the standard for deducting management and administrative fees has moved beyond the simple “wholly and exclusively” rule to a data-verified “ben - efit test”. To claim a deduction, a local affiliate must prove that the services provided a specific economic value and were not merely “shareholder activities” for the parent’s benefit. Legally, as of 1 January 2026, the KRA automatically blocks any expense in your tax return that is not supported by a valid eTIMS-compli - ant invoice, which must be transmitted in real time by the supplier. Furthermore, while a local subsidiary can deduct these fees (subject to a 20% withholding tax), a local branch is strictly prohibited from deducting “internal” recharges for management or administrative costs paid to its own head office. 5.7 Restraints on Related-Party Borrowing Related-party borrowing in 2026 is strictly governed by Section 16 (2) of the ITA, which limits deductible interest on foreign loans to 30% of EBITDA. Any inter - est exceeding this cap is non-deductible but may be carried forward for up to five years, subject to the same annual 30% limit. Furthermore, even if a loan is interest-free, KRA applies a “deemed interest” provi - sion, currently set at a prescribed market rate of 8%, and charges a 15% withholding tax on that amount. To gain certainty on transfer pricing methodology for related-party transactions, taxpayers may, from 1 Jan - uary 2026, enter into an APA with the Commissioner of Domestic Taxes. The APA covers up to five years and requires a non-refundable application fee of KES5 million (per the Draft Income Tax (APA) Regulations 2025, currently awaiting finalisation), payable after a mandatory pre-filing meeting with the KRA.
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