Tax Developments in Kenya

Anjarwalla & Khanna (A&K) is a full-service Kenyan law firm which is frequently cited as a market leader in Kenya. In addition to its recent receipt of the Kenya Law Firm of the Year award, its many accolades include a Band 1 Chambers ranking in Kenya Corporate/M&A, which it has held every year since Chambers Global 2009, and a further Band 1 in the newly launched Kenya Tax rankings.  

A&K is also well known for its coordination of the ALN legal network, comprising leading law firms in several African jurisdictions, including Mesfin Tafesse & Associates in Ethiopia and Aluko & Oyebode in Nigeria, as well as ADNA, which comprises Chambers-ranked offices in Algeria, Côte d’Ivoire, Guinea and Morocco. The network as a whole is also ranked Band 1 for Africa-Wide Leading Regional Law Firm Networks. 

There have been various recent changes to Kenya's tax regime which are primarily aimed at expanding the tax base. Prior to July 2023, Capital Gains Tax (CGT) applied only on gains derived from the transfer of property situated in Kenya. The Finance Act 2023 introduced new provisions, effective 1 July 2023, which bring to tax in Kenya offshore disposals where certain requirements are met. 

We have categorised the changes into three tests as follows: (1) the Onshore Transfer Test; (2) the Immovable Property Test; and (3) the Residency Test. The Onshore Transfer Test refers to the provision that existed pre-July 2023 which subjected to tax gains on disposal of property situated in Kenya.  

The Immovable Property Test seeks to subject to CGT any gains derived from the alienation of shares or comparable interests, if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived more than 20% of their value directly or indirectly from immovable property situated in Kenya. The Residency Test seeks to impose CGT on any gain derived from the alienation of shares of a company resident in Kenya, if the alienator held directly or indirectly at least 20% of the capital of that company. 

These changes are likely to have a tremendous effect on the structures adopted by international investors who make investments in Kenya through offshore entities. The new changes are not particularly straightforward as there have been various contrasting interpretations on their application. Investors are encouraged to seek tax advice on the interpretation and/or application of the new CGT provisions on their investments, especially where there is an impending disposal or during the structuring phase for new investments into Kenya. 

The Finance Act 2023 also introduced amendments on the CGT exemption regime, particularly in relation to internal group reorganisations. For an internal group reorganisation to qualify for a CGT exemption, the group must have been in existence for at least twenty-four months before the restructuring transaction.  

The Finance Act also set out the due date for the payment of the CGT as being the earlier of the receipt of the full purchase price by the vendor or the registration of the transfer. 

In recent years, Kenya has undertaken some significant tax reforms in the digital sector. On the heels of the introduction of the Digital Services Tax, which was effective from 1 January 2021 on services provided over the internet and electronic networks, the Digital Asset Tax (DAT) was introduced by an amendment to the Income Tax Act (ITA) of Kenya, through the Finance Act 2023.  

The DAT has been effective since 1 September 2023 and it targets income derived from the transfer or exchange of digital assets, which have been defined to include cryptocurrencies, token codes, and Non-Fungible Tokens (NFTs), among other valuable non-tangible assets.

The DAT is levied at the rate of 3% on the gross fair market value of consideration received from the sale of the digital asset. The obligation to remit the DAT falls on platform owners facilitating these transactions. Where the platform owners are non-resident, they are required to register for tax in Kenya for purposes of complying with the DAT obligation. Kenya lacks a comprehensive policy framework for taxing digital assets, and it is expected that the DAT will meet significant headwinds in relation to its implementation in Kenya which is recognised as a technology hub in the region. 

Another significant move is the introduction of income tax on digital content creators, introduced by an amendment to the ITA through the Finance Act 2023. Recognising the thriving digital content creation industry among the youth accelerated by the ease of access to mobile smartphones and internet access, Kenya seeks to raise revenue from activities such as entertainment, social media engagement, and educational content monetisation. Income from these activities is subject to a withholding tax of 5% for Kenyan tax residents and 20% for non-residents. By defining "digital content monetisation" broadly to encompass various revenue streams such as brand partnerships, sponsorships, and subscription services, Kenya aims to tap into the growing creative sector. 

Further, Kenya has also made changes to nurture start-ups and foster entrepreneurship, particularly noting that Kenya boasts of a growing start-up economy in the fintech space. The amendments relate to granting tax benefits to eligible start-ups that offer share ownership schemes which is a popular way of incentivising employees of such start-ups to supplement cash remuneration. Effective 1 January 2024, share ownership schemes offered by eligible start-up companies are granted tax deferrals on benefits derived from such schemes where the benefits are to be taxed within thirty days of the expiration of five years from the share award, share disposal, or cessation of employment. This initiative aims to support Kenya's status as a hub for venture capital entrepreneurship by incentivising investment in start-ups and facilitating employee ownership. Kenya's tax reforms reflect its commitment to adapt to the changing economic landscape and ensure that emerging sectors contribute to its revenue base. 

By targeting digital assets, content creators, and start-up ventures, the country seeks to strike a balance between fostering innovation and ensuring tax compliance, thereby positioning itself for sustainable economic growth in the digital age.