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Accounting for Trading Losses in Kenya: What the Finance Act 2025 Means for Businesses

Introduction
Tax planning in Kenya has taken another significant turn. The Finance Act, 2025 reintroduced a five-year cap on the carry-forward of trading losses, reversing the indefinite regime introduced in 2021. For many businesses especially in capital-intensive industries such as energy, infrastructure, and manufacturing this change could have far-reaching implications for investment and compliance.

A Brief History of Loss Carry-Forward in Kenya

  • 2014: The Finance Act introduced a five-year cap on loss carry-forward, with discretionary extensions by the Cabinet Secretary.
  • 2015: The cap was extended to ten years.
  • 2021: The cap was removed entirely, allowing indefinite carry-forward a relief for capital-heavy businesses.
  • 2025: The Finance Act reinstates a five-year cap under Section 15(4), with limited extension powers under Section 15(5).

Key Changes Under the Finance Act 2025

  1. Five-Year Cap Reinstated
    • Trading losses can only be carried forward for five years from the year incurred.
  2. Discretionary Extensions
    • The Cabinet Secretary may extend the period upon KRA recommendation and taxpayer application.
    • However, no clear criteria are defined, creating potential uncertainty and disputes.
  3. Capital Losses No Longer Offset
    • Capital losses can no longer be carried forward to offset future capital gains.
    • This exposes investors to Capital Gains Tax (CGT) even where they have prior unutilized capital losses.

Implications for Businesses

  • Capital-Intensive Sectors: Energy, infrastructure, and manufacturing businesses may struggle to fully utilize investment allowances within five years.
  • Administrative Uncertainty: Discretionary extensions without clear criteria may increase tax disputes.
  • No Transitional Relief: Companies with accumulated losses under the old indefinite regime may lose out, undermining investment planning.
  • Impact on Investment: By denying deductions and still collecting tax in later years, the changes may discourage new investments.

Conclusion

The reintroduction of a five-year cap on trading losses marks a significant shift in Kenya’s tax landscape. While aimed at boosting short-term revenues, the move could discourage capital-intensive investments and create compliance uncertainty.

Taxpayers need to review their financial strategies, explore extension applications under Section 15(5), and seek professional advice to minimize exposure.

📞 Need Guidance on Navigating Loss Carry-Forward Rules?
UHY Kenya’s tax experts can help you adapt to the new regime, structure your finances strategically, and ensure compliance.

👉 Contact us today:

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