KENYA Law and Practice Contributed by: Ombo Malumbe, Jack Ong’anya and Faith Ngarama O’Bang Law (Ong’anya Ombo Advocates LLP)
9.2 Government Policy and Objectives Approach The government is aggressively pursuing Pillars One and Two. Effective 1 January 2025, Kenya introduced a domestic minimum top-up tax (DMTT) of 15% to align with Pillar Two, ensuring that multinational groups pay at least 15% on their Kenyan-derived profits. The policy shift is focused on digitalising the tax base and preventing profit shifting, as seen in the mandate for eTIMS real-time expense validation. 9.3 International Tax International tax now has a huge public profile in Ken - ya due to high-stakes litigation and the introduction of new levies like the SEP tax and virtual asset (excise) duty. These measures demonstrate a “source-based” expansion where the KRA taxes profits derived from Kenya’s digital interface, even when the parent com - pany has no physical presence. 9.4 Competitive Tax Policy Objectives Kenya balances BEPS compliance with competitive - ness by offering targeted incentives. While it enforces a global 15% minimum tax, it maintains lower rates for special economic zones at a rate of 10% (for the first ten years, rising to 15% thereafter) and export processing zones at a rate of 0% (for the first ten years, rising to 25% thereafter), and carbon market exchanges (15%). The challenge for 2026 is maintain - ing these “investor-friendly” pockets while ensuring they do not qualify as “harmful tax practices” under OECD reviews. 9.5 The Competitive Tax System The most competitive – and vulnerable – parts of the system are the EPZ and SEZ tax holidays. These are under pressure from Pillar Two, which may allow other countries to tax Kenyan-sourced profits if the local effective rate is too low. To counter this, Kenya has introduced its own 15% minimum top-up tax so that it retains the tax revenue rather than losing it to a foreign parent’s jurisdiction. 9.6 Hybrid Instruments and BEPS Implementation Kenya has taken a step towards ratifying the Multi - lateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
Regardless of reservations in place, there are moves towards implementing measures on how to deal with hybrid instruments. 9.7 Interest Deductibility and Territorial Tax Regime Kenya does not have a purely territorial regime; it uses a residency-based system for locals, taxing their worldwide income. Interest deductibility is strict - ly capped at 30% of EBITDA for foreign-controlled companies. Excess interest can be carried forward for five years, provided the cap is not exceeded in those future periods. 9.8 Controlled Foreign Corporation Reform While Kenya lacks a formal “CFC Act”, it achieves similar results through the Residency Test. A foreign entity is treated as a Kenyan resident (and taxed on worldwide income) if its “place of effective manage - ment and control” is in Kenya. Furthermore, under the 2026 DMTT rules, Kenyan parents may be liable for a “top-up tax” if their foreign subsidiaries are taxed at less than 15%. 9.9 Anti-Avoidance Rules Kenya has a limited number of active DTAs, which, in general, seem to mirror each other on standard provi - sions, while certain areas come with favourable terms that may enhance the possibility of improving inbound and outbound investment, not to mention that a DTA with certain suitable markets encourages multina - tionals to establish headquarters in Kenya, thereby enhancing the viability of the country. The DTAs, while in place to curb double taxation, pro - vide room for taxation to take effect at reasonable rates, or factoring in what would be described as ter - ritorial tax, as compared to a generalised worldwide tax model. 9.10 Transfer Pricing and IP Taxation In 2026, IP taxation is governed by the DEMPE frame - work (development, enhancement, maintenance, pro - tection, and exploitation). A company cannot move IP profits offshore unless it proves those functions were performed abroad. If IP is transferred, a 15% CGT applies, while local licensing income is taxed at 30%.
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