KENYA Law and Practice Contributed by: Ombo Malumbe, Jack Ong’anya and Faith Ngarama O’Bang Law (Ong’anya Ombo Advocates LLP)
6.4 Taxation of Intangibles Developed by Local Corporations In 2026, local corporations cannot allow foreign sub - sidiaries to use Kenyan-developed intangibles for free. To comply with the Transfer Pricing Rules 2023, the Kenyan entity must charge a market-rate royalty, which is taxed as business income at 30%. If the IP is fully transferred abroad, it triggers a 15% CGT on its fair market value. The KRA uses the DEMPE frame - work to ensure that whichever entity actually performs the “development and maintenance” of the IP – typi - cally the Kenyan parent – is the one that pays the tax on the resulting global profits. Failure to document this properly can lead to aggressive audits, which can be mitigated by securing a five-year APA. 6.5 Controlled Foreign Corporation-Type Rules In 2026, Kenya does not have a standalone “controlled foreign corporation” (CFC) framework that taxes the undistributed passive income of a foreign subsidi - ary. However, the position for non-local branches is entirely different: because resident corporations are taxed on worldwide income, the profits of a foreign branch are deemed to accrue in Kenya and are taxed at the standard 30% corporate rate. While subsidiar - ies offer a “tax deferral” (you only pay tax in Kenya when dividends are sent back), branches are taxed in real time. To prevent double taxation, Kenya allows for foreign tax credits under Section 42 if a DTA is in place, or unilateral relief under Section 16 (2)(c). 6.6 The Substance of Non-Local Affiliates There are no economic substance regulations in place; however, the approach by the Commissioner is limited to the activities of the entity as compared to a mere description. Therefore, the regulatory frame - work on what amounts to a resident, non-resident or PE entity will influence how the Commissioner defines an entity’s tax obligations. 6.7 The Sale of Shares in Non-Local Affiliates The taxation of gains from the sale of shares in non- local affiliates depends on the residency of the seller. For a resident Kenyan corporation, the gain on the sale of shares in a foreign subsidiary is generally treated as business income and taxed at 30%, rather than the lower 15% CGT rate, unless it can be proven
the investment was purely capital in nature. However, for non-resident sellers, Kenya only taxes the sale of shares in a foreign holding company if that company derives 20% or more of its value directly or indirectly from immovable property located in Kenya.
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
There are anti-avoidance provisions that are struc - tured to operate both prospectively and retrospec - tively. The provisions focus on transactions designed to avoid a person’s liability to pay tax. Also, there is a provision focusing on private companies that may opt to delay the distribution of dividends that would ordinarily have been disbursed to the shareholders.
8. Audit Cycles 8.1 Regular Routine Audit Cycle
In 2026, the KRA has moved away from traditional “routine” audit cycles toward “continuous compli - ance monitoring”. As of 1 January 2026, all income tax returns are subject to automatic validation upon fil - ing. Using eTIMS, withholding tax data, and customs records, the system cross-checks your expenses in real time. If your declared data does not match the KRA’s digital records, an automated “compliance alert” or a targeted audit is triggered immediately. 9. BEPS 9.1 Adoption of BEPS Recommendations Kenya has successfully implemented several BEPS Actions, including Action 13 (Country-by-Country Reporting) for groups with a turnover exceeding KES95 billion. As of 2026, KRA published the Draft Income Tax (Transfer Pricing) Rules, 2023, to replace the existing 2006 Rules, but those draft rules have not yet been gazetted and the Income Tax (Transfer Pricing) Rules, 2006, remain the operative instrument. Furthermore, Kenya has adopted Common Reporting Standards (CRS), enabling the automated exchange of financial data with other jurisdictions to combat off - shore tax evasion.
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