Budget season is upon us and after the furore occasioned by last year’s Finance Bill, the not so anticipated Finance Bill, 2025 has been tabled before the National Assembly. Read on for highlights.

Income Tax Act (ITA)

Advance Pricing Agreements: introducing certainty to related party transactions

Effective date: 1 January 2026

The Bill proposes amendments that give the Kenya Revenue Authority (KRA) the power to enter into Advance Pricing Agreements (APA) with taxpayers who carry out related party transactions. APAs will form the basis for determining the arm’s length nature of the related party transactions for transfer pricing purposes. Under the proposed amendment, an APA will be valid for five years but could be voided by the KRA where it determines that the taxpayer misrepresented the facts in order to enter into the agreement. In such circumstances, the KRA will issue a notice to the taxpayer voiding the APA.

APAs will bring certainty in determining the arm’s length price in related party transactions, which should give confidence to taxpayers concluding the APAs. This increased certainty will also reduce the incidence of transfer pricing disputes with a desirable spill-over effect on customs valuation on account of importation of goods from related parties.

Loss carry forward period limited to five years

Effective date: 1 July 2025

Currently, tax losses may be carried forward indefinitely. The Bill proposes to limit the period within which tax losses may be carried forward to the five succeeding years of income following that in which the loss is incurred. If the amendments are passed in their current form, there would be no provision under which a taxpayer could seek an extension of this period.

The requirement to have taxpayers utilise tax losses within five years seems at odds with the prevailing economic environment where it takes several years for businesses and projects to break even, let alone realise profits. Case in point are large infrastructure projects, which incur significant costs upfront and take several years of income before generating taxable profits. The proposed amendment is also silent on the fate of carried forward losses predating the proposed amendment. Taxpayers will be required to track their losses to avoid losing their entitlement of utilising them upon lapse of five years.

Expanded definition of “royalty”

Effective date: 1 July 2025

The Bill proposes to broaden the definition of the term “royalty” to include the distribution of software where regular payments are made for the use of the software through the distributor.

In our view, the proposed amendment is moot in light of the fact that the Tax Laws (Amendment) Act, 2024 already brought all payments made on account of any software, proprietary or off-the-shelf within the ambit of a “royalty”.

No more preferential Corporate Income Tax rates for housing developers and vehicle assemblers

Effective date: 1 July 2025

Companies that construct at least 100 residential houses annually pay Corporate Income Tax (CIT) at the reduced rate of 15%. This rate applies in each year of income in which such persons meet the 100- unit threshold. Similarly, motor vehicle assemblers are subject to CIT at this reduced rate for the first five yeas of income from the year in which they commence operations.

The Bill proposes to scrap this preferential rate of tax, meaning that the affected companies will be subject to CIT at the prevailing rate, which is currently 30%. This will disincentivise potential investors in the two sectors.

100% and 150% Investment Deductions done away with

Effective date: 1 July 2025

The law currently allows taxpayers to claim accelerated Investment Deductions (ID) where they incur significant capital expenditure outside Nairobi and Mombasa counties, or where the investment is in a Special Economic Zone (SEZ). The applicable rate of ID may be either 100% or 150%, depending on the circumstances.

The Finance Bill, 2025 proposes to do away with these accelerated rates, which were introduced to incentivise investments to areas outside the country’s two main economic and commercial centres.

“Related parties” redefined uniformly across the ITA

Effective date: 1 July 2025

The Bill has proposed a single definition of “related parties” that will apply to all sections of the ITA. This is in contrast to the current position where the expression has different meanings in different contexts, for example, Transfer pricing vis-à-vis Capital Gains Tax (CGT).

Once passed into law, two persons will be deemed to be related if either of the persons participates directly in the management, control or capital of the business of the other person. In the case of more than two persons, the term will include:

• any other person who participates directly or indirectly in the management, control or capital of the business of the two persons; or
• any individual who 

• participates directly or indirectly in the management, control or capital of the business of the two persons;
• is associated with the two persons by marriage, consanguinity or affinity; and
• the two persons participate in the management, control or capital of the business of the individual.

Goodies galore for companies certified by the Nairobi International Financial Centre

Effective date: 1 July 2025

Companies certified by the Nairobi International Financial Centre (NIFC) Authority will be subject to CIT at the rate of 15% in the first 10 years of their operations and 20% for the subsequent 10 years where:

• the company invests at least KES 3 billion in the first three years of operation;
• the company is a holding company with at least 70% of its senior management being Kenyan citizens; and
• the regional headquarters of the company is in Kenya with at least 60% of its senior management being Kenyan citizens

Startups certified by the NIFC Authority will pay CIT at the reduced rate of 15% for the first three years, and 20% for the succeeding four years.

Furthermore, the Bill proposes to exempt from tax dividends paid by a company certified by the NIFC Authority where the company reinvests at least KES 250 million in Kenya, in that year of income. 

These proposals are geared to incentivise investors to register under the NIFC regime and seem to envision the country being a hub for outward investment into the region. With this in mind, perhaps it would be wise to rethink the high capital investment thresholds and the requirements to employ a certain percentage of Kenyan citizens. It would also be prudent to consider the NIFC regime wholistically and introduce other reforms that would encourage and ease the free movement of capital into and out of the country. Only then  would we see Kenya become a more attractive as a holding company jurisdiction.

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