Finance Bill 2025: Key Income Tax Changes for Businesses in Kenya
Quick Summary:
- Foreign employee tax exemption scrapped for stays under 183 days.
- Per diem exemption increased to KES 10,000/day.
- Software & SaaS subject to withholding tax, even without IP transfer.
- SEZ & rural investment tax deductions repealed.
- Tax loss carryforward capped at 5 years.
- Fringe benefit tax aligned to corporate tax rate (currently 30%).
- Global minimum tax for multinationals (15%).
- Digital tax threshold removed; tax rate cut to 1.5%.
- New APA framework and changes in CbCR rules introduced.
- NIFCA-certified firms benefit from 15% tax and dividend exemptions.
The Finance Bill 2025 proposes major reforms to Kenya’s Income Tax Act. Businesses need to be aware of these tax changes to ensure compliance and avoid penalties. This guide outlines the most critical changes and what they mean for your operations.
1. Foreign Employee Tax Exemption Removed
Previously, foreign employees staying in Kenya for less than 183 days were exempt from income tax. The bill now removes this exemption, meaning short-term foreign workers will be taxed from day one.
2. Increase in Per Diem Exemption
The allowable tax-free per diem is raised to KES 10,000 per day. This move is intended to align with inflation and real travel costs.
3. Withholding Tax on Software & SaaS
Software purchases and SaaS subscriptions, even without IP transfer, will now be subject to withholding tax. Businesses must revise vendor contracts accordingly.
4. Elimination of SEZ and Rural Investment Deductions
Companies operating in Special Economic Zones (SEZs) or rural investments will lose current tax deductions. Affected businesses must reassess tax projections and expansion strategies.
5. Cap on Tax Loss Carryforward
Tax losses can now only be carried forward for up to five years. Businesses with long-term recovery plans must revisit their financial modeling.
6. Fringe Benefit Tax Adjustment
Fringe Benefit Tax will now match the corporate tax rate (currently 30%), impacting businesses offering substantial non-cash benefits to employees.
7. Global Minimum Tax
Multinational corporations will be subject to a 15% global minimum tax under new OECD rules. Kenyan subsidiaries of global firms must ensure alignment with group-level tax policies.
8. Digital Tax Overhaul
The KES 5M revenue threshold for digital tax has been removed. All digital service providers will now be taxed at a reduced rate of 1.5% regardless of turnover.
9. Advance Pricing Agreements (APA) & CbCR Updates
The bill introduces a framework for APAs and modifies Country-by-Country Reporting (CbCR) requirements. This will provide clarity for transfer pricing arrangements but increase reporting obligations.
10. NIFCA-Certified Firms Tax Incentives
Firms certified by the National Investment for Climate Adaptation (NIFCA) will enjoy a 15% income tax rate and dividend tax exemptions. Sustainability-focused investors should explore certification.
What Should You Do Next?
Consult your tax advisor and review how each of these changes affects your operations. Update your payroll, contracts, and accounting systems accordingly to avoid non-compliance.
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