Kenya: Tax measures in Finance Act, 2026 include CbC reporting changes

The Finance Act, 2026 has been enacted, introducing a broad range of tax measures aimed at widening the tax base and enhancing tax administration. The legislation includes amendments concerning income tax, country-by-country (CbC) reporting, VAT, and excise duties, with several of the amendments seeking to address emerging developments in the digital economy and financial services sectors. Many of the changes are scheduled become effective on July 1, 2026.

Income tax

• New withholding tax regime for nonresident rental income: A new final withholding tax regime is introduced for nonresidents earning rental income from property in Kenya, with a rate of 30% on gross rent from immovable property and 15% on rent from movable property.
• Withholding tax expansion:
  • The definition of "management or professional fees" is expanded to include interchange fees and merchant service fees from card-based transactions, bringing them into the withholding tax net.
  • The definition of "royalty" is significantly broadened to cover payments for software, digital platforms, payment networks, and various other digital services.
  • Withholding tax is now applied to scrap metal sales at a rate of 1.5% on the gross amount and on gambling winnings at 20%.
• Capital gains on indirect transfers: The scope of capital gains tax is expanded to capture gains made by nonresidents on the disposal of shares that derive their value from Kenyan assets, closing a previous loophole.
• Return filing timelines: The deadline for filing income tax returns will be shortened. Effective January 1, 2027, individuals must file by the fourth month and companies by the sixth month after their year-end.
• Taxation of nonresidents in extractive sector: The income tax rate for certain nonresident companies in the extractive/petroleum sector is reduced from 37.5% to 30%, with a new 15% tax on repatriated income for both nonresident licensees and contractors.
• Repeal of preferential corporate tax rate for developers: The preferential 15% corporate tax rate for developers who construct at least 150 residential units annually has been repealed.

Country-by-country (CbC) reporting

• Technical amendments: The Act clarifies CbC reporting obligations by aligning statutory references and definitions, including "country-by-country report" and "excluded multinational enterprise group," with global standards.
• New ultimate parent entity (UPE) definition: A new, more detailed definition of a UPE is adopted to provide greater certainty in identifying the entity responsible for filing the CbC report.
• Master file and Local file obligations: The amendments separate the Master File and Local File obligations from CbC reporting. However, the legislation does not specify a turnover threshold for Master/Local File requirements, potentially meaning all multinational groups in Kenya must comply, regardless of size.

VAT

• Digital and financial services:
  • The VAT net has been expanded to include previously exempt financial services. Services such as payment processing, cash handling services, and fees for digital payment platforms are now subject to the standard VAT rate.
  • The VAT treatment for outsourcing arrangements has been clarified to exclude employee-related costs (salaries, wages) from the taxable value of the service.
• Changes in VAT rates and status:
  •  Several items, including electric bicycles and solar batteries, have been moved from zero-rated to standard-rated.
  • Goods like aircraft spare parts and services for constructing large-scale tourism and convention facilities have moved from exempt to standard-rated.
  • Certain items, including dialyzers and scrap metal, have moved from standard-rated to exempt.
• Bad debt refunds: The period a taxpayer must wait before applying for a VAT refund on bad debts has been increased from two to three years.
• Input VAT for National Security Organs: A new provision allows suppliers to deduct input VAT on supplies made to National Security Organs, even though the supplies themselves remain exempt.

Excise duties

• Expanded scope:
  • Excise duties now apply to services offered by licensed virtual asset service providers.
  • Imported goods from East African Community (EAC) partner states, such as float glass, are now subject to excise duties.
• Rate and base changes:
  • The basis for calculating excise duty on betting has changed from the amount deposited in a wallet to the amount deposited for the purpose of betting/gambling.
  • Excise duty rates have increased for products like imported sugar, cigars, and certain tobacco products.
  • The excise duty on bottled water has been removed.

Read a July 2026 report (77 pages) prepared by the KPMG member firm in Kenya