FINANCE BILL 2026: Key Proposed Tax Reforms And Their Impact In Kenya

EXECUTIVE SUMMARY

The Finance Bill 2026 proposes significant reforms to Kenya’s tax framework to expand the tax base, strengthen tax enforcement, modernise tax administration, and regulate emerging sectors of the digital economy.

Some of the key proposed changes include:

• Expansion of withholding tax to digital infrastructure and interchange fee payments;
• Introduction of a formal tax framework for non-resident landlords;
• Enhanced anti-avoidance and assessment powers for the Kenya Revenue Authority (“KRA”);
• New reporting obligations for Virtual Asset Service Providers;
• Increased excise duty on mobile phones and selected products;
• VAT changes affecting fintech services, renewable energy products, and manufacturing sectors;
• Introduction of pre-populated tax returns;
• Extension of Capital Gains Tax to indirect offshore share transfers involving Kenyan assets; and
• New compliance and enforcement mechanisms under the Tax Procedures Act.

Unless otherwise stated, the proposed amendments would take effect only upon the enactment of the Finance Bill 2026 into law and the commencement of the relevant provisions.

WHO IS LIKELY TO BE MOST AFFECTED?

The proposed reforms are likely to significantly affect:

• Banks and fintech companies;
• Employers and employees;
• Real estate investors and landlords;
• Cryptocurrency and virtual asset businesses;
• Mobile phone importers and distributors;
• Betting and gaming operators;
• Manufacturers and importers;
• Foreign investors;
• Trusts and investment structures; and
• Businesses engaging in cross-border transactions.

PART I: INTRODUCTION

The Finance Bill 2026 presents one of the most far-reaching tax reform proposals in Kenya in recent years. The proposed changes are extensive and are likely to affect employees, employers, businesses, investors, landlords, and users of virtual assets, among others.

Several provisions in the Bill appear to respond directly to court decisions that were unfavourable to KRA, particularly in relation to electronic payments, interchange fees, and rental income derived from foreign-owned property. Other proposals seek to curb long-standing tax avoidance arrangements, including offshore share transfers used to circumvent Capital Gains Tax and the bulk importation of mobile phones to benefit from lower excise duty rates.

The Bill also proposes significant enforcement measures by introducing a broader General Anti-Avoidance Rule (“GAAR”), enhanced powers for the Commissioner to assess tax, and new reporting obligations for Virtual Asset Service Providers.
On the incentives front, the Bill proposes exemptions relating to Real Estate Investment Trusts (“REITs”), waiver mechanisms for penalties arising from KRA system malfunctions, relaxed PIN requirements for foreign investors, and the introduction of pre-populated tax returns aimed at easing compliance.

This guide highlights the key proposed amendments in simplified terms to assist taxpayers, businesses, and investors in understanding the possible implications of the Finance Bill 2026 should it be enacted in its current form.

PART II: PROPOSED AMENDMENTS TO T1.HE INCOME TAX ACT

1. Taxing Software and Digital Platform Payments (Clause 2 of the Bill)

The Bill proposes to broaden the interpretation of “royalty” under section 2 of the Income Tax Act to include payments for access to software, digital networks, payment systems, and similar digital infrastructure.

This proposed amendment appears to be a direct response to the Supreme Court decision in Barclays Bank of Kenya Limited (now Absa Bank Kenya PLC) v Commissioner for Domestic Taxes (Large Taxpayers Office), Petition No. E014 of 2022.

In that case, KRA had demanded withholding tax on payments made by the bank to international card companies, arguing that the payments constituted royalties. The taxpayer disputed the assessment, contending that royalties only arise where payments are made for the use of intellectual property such as trademarks.

The Supreme Court agreed with the taxpayer and held that mere access to a global payment network and use of branded payment cards did not amount to the “use of a trademark” for purposes of the Income Tax Act, particularly where the underlying agreements expressly excluded royalty payments.

The proposed amendment, therefore, seeks to clarify that payments for access to digital payment infrastructure may attract withholding tax irrespective of how the parties characterize the payment contractually.

Practical Impact

Banks, payment service providers, and fintech companies may experience increased withholding tax exposure and higher transaction costs.

2. Interchange Fees Now Subject to Withholding Tax (Clause 2 of the Bill)

Interchange fees are charges earned by banks whenever card payments are processed. Following the Supreme Court decision referenced above, such fees were previously held not to constitute royalty payments subject to withholding tax.

The Bill now proposes to classify interchange fees as “management or professional fees,” thereby bringing them within the withholding tax regime and reducing the evidentiary burden on KRA in establishing the precise nature of the service rendered.

Practical Impact

Banks, payment service providers, and fintech companies may experience increased withholding tax exposure and higher transaction costs.

3. Clearer Rules on Gambling Winnings (Clause 2 of the Bill)

The Bill introduces proposed definitions of “winnings” and “withdrawals” under the Income Tax Act.
Importantly, the amount originally staked by a gambler would not constitute taxable income. Only the net gain would be subject to tax. This proposal seeks to resolve long-standing disputes regarding whether tax should apply to gross payouts or only to actual winnings.

4. Taxing Non-Resident Landlords (Clause 4 of the Bill)

The Bill proposes a formal framework for taxing rental income earned by non-resident landlords from property situated in Kenya by introducing a 15% tax on such income.

Historically, enforcement in this area has been difficult, particularly where rental income was received offshore or outside formal agency arrangements. KRA largely relied on indirect collection mechanisms under section 35(3)(j) of the Income Tax Act.

The proposed amendment also appears consistent with many Double Taxation Agreements, which grant taxing rights over immovable property income to the jurisdiction where the property is located.

Practical Impact

Foreign property investors earning rental income from Kenyan real estate may need to regularise their tax affairs and reassess holding structures.

5. Changes to Gratuity Exemptions (Clause 3 of the Bill)

A gratuity is a lump-sum payment made to an employee upon termination or completion of service.
The Bill proposes that:

• Gratuity shall only qualify for tax exemption where the employee has served continuously for at least three years.
• Employer contributions to a gratuity fund shall be tax-exempt up to 31% of the employee’s basic salary, provided the employee satisfies the same three-year requirement and is not already benefiting from statutory pension deductions.
• In the event of the death of an employee while in service, the three-year requirement would be waived to ensure that dependants are not denied the tax-free gratuity benefit (Clause 20 of the Bill).

Practical Impact

Employers may need to review gratuity schemes, employment contracts, and employee benefit structures to ensure compliance with the proposed framework.

6. Taxation of at least 60% of Retained Profits through Deemed Dividends (Clause 16 of the Bill)

The Bill reinforces Section 24, which targets situations where private companies avoid dividend tax by not distributing profits to shareholders.

Currently, the law allows the Commissioner to step in where a private company retains profits for more than 12 months after year-end, even though those profits could reasonably be distributed without harming the business. In such cases, the Commissioner may direct that part of the income be treated as if they were dividends already paid, and tax them accordingly.

The proposed amendment strengthens this anti-avoidance rule by directing that at least 60% of the retained pool be distributed as dividends and taxed accordingly. By defining the minimum threshold, the Treasury is securing a guaranteed pipeline of withholding tax.

Practical Impact

Private companies may now face increased scrutiny if they retain profits without a clear business justification. They will need to demonstrate why profits are being reinvested or retained, otherwise KRA may treat those profits as deemed dividends and tax shareholders accordingly.

7. Other Income Tax Amendments

The Bill also proposes several additional amendments, including:

• An allowable deduction of up to Kshs. 360,000 per year for interest paid on Central Bank of Kenya loans used to purchase or construct a residential home (Clause 10 of the Bill).
• Clarification that businesses engaged solely in lending, leasing, or both may claim certain deductions (Clause 11 of the Bill).
• Streamlining taxation of trust income to reduce the risk of double taxation at both trustee and beneficiary levels (Clause 8 of the Bill).
• Introduction of withholding tax at the rate of 1.5% on scrap metal transactions and 20% on gambling winnings to facilitate collection of tax at source (Clauses 7 and 17 of the Bill).
• Introduction of a Capital Gains Tax exemption for property transferred into a REIT to encourage growth within Kenya’s property investment sector (Clause 20 of the Bill). Extension of Capital Gains Tax to offshore transfers of shares where the underlying value is derived from Kenyan assets or businesses, thereby addressing indirect transfer structures commonly used for tax planning. The proposal appears aligned with broader OECD BEPS recommendations concerning indirect transfers and treaty abuse (Clause 23 of the Bill).
• Introduction of new timelines for filing nil tax returns proposed to be due within one month and self-assessment returns from June to April. (Clauses 18 and 19 of the Bill).

PART III: PROPOSED AMENDMENTS TO THE VALUE ADDED TAX ACT

1. Removal of the phrase “registered person” (Clause 29 of the Bill)

The Bill proposes an amendment to Section 42 of the VAT Act. Under the current framework, only registered persons may issue a VAT invoice. Registration is for taxpayers whose annual turnover exceeds Kshs. 5M. The proposed wording eliminates the need for registration. Therefore, VAT invoices may no longer be limited to VAT-registered taxpayers.

2. Streamlining VAT Administration (Clause 25 of the Bill)

The Bill proposes the removal of certain VAT Act definitions that duplicate provisions under the Tax Procedures Act, thereby consolidating tax administration provisions for improved consistency and clarity.

3. Finance Charges in Registered Hire Purchase Agreements (Clause 26 of the Bill)

The Bill proposes to exclude from VAT any financial charge payable in relation to the supply of credit under a hire purchase agreement registered in accordance with the Hire Purchase Act. The proposal seeks to distinguish the financing component from the supply of goods for VAT purposes.

Practical Impact

Asset financing arrangements may become more commercially attractive due to reduced VAT exposure on financing costs.

4. Preventing VAT Abuse on Exempt Goods (Clause 27 of the Bill)

The Bill proposes a new rule requiring businesses to reverse input VAT previously claimed on goods or services that subsequently become VAT exempt.
The objective is to prevent taxpayers from obtaining VAT refunds on supplies that ultimately do not attract VAT upon sale.

5. The Extended Timeline for VAT Refunds on Bad Debts (Clause 28 of the Bill)

The Bill proposes to amend section 31(1)(a) of the Value Added Tax Act by extending from two years to three years the period after which a registered person may apply for a refund of VAT relating to bad debts. This proposed amendment extends the waiting period from two years to three years before a taxpayer may apply for a VAT refund on bad debts, which is likely to have several legal, commercial, accounting, and cash flow implications for businesses.

6. Crackdown on Fraudulent Tax Invoices (Clause 29 of the Bill)

The Bill proposes enhanced penalties for the issuance or use of fraudulent tax invoices.
Liability would extend beyond registered taxpayers to any person who causes the issuance or acceptance of a false invoice. The proposal also emphasizes that VAT invoices should only be issued in respect of genuine taxable transactions.

7. Amendment of Exempt and Zero-Rated Supplies (Clauses 31 and 32 of the Bill)

The Bill proposes various additions and removals from the lists of exempt and zero-rated supplies.
Items proposed to become taxable include:

• Dialysis machine equipment and maintenance equipment;
• Raw materials used in the manufacture of animal feed;
• Raw materials used in pharmaceutical manufacturing;
• Solar and lithium-ion batteries;
• Locally manufactured electric buses and bicycles; and
• Inputs used in PPP infrastructure projects.

Certain fintech services, including payment processing and merchant acquiring services, are also proposed to become subject to VAT at the standard rate.
The Bill further proposes the introduction of additional zero-rated supplies, including certain pharmaceutical inputs, locally manufactured phones and electric vehicles, and sugarcane transport services.

Practical Impact

Businesses operating in renewable energy, healthcare, manufacturing, and fintech sectors may experience significant changes in pricing, cash flow, and input tax recovery.

PART IV: PROPOSED AMENDMENTS TO THE EXCISE DUTY ACT

1. Old Vehicles (Antique, Vintage, and Classic Vehicles)

Clause 33 proposes a new definition of “antique, vintage or classic vehicle” to mean a motor vehicle first registered at least thirty years before the date of purchase and valued at not less than Kshs. 10 million, exclusive of depreciation.

The Bill further proposes a 50% excise duty rate on such vehicles.

2. Mobile Phone Excise Duty Liability Shifts to Activation

The Bill proposes that excise duty on mobile phones be collected at the point of activation rather than importation.

This would allow KRA to rely on data from mobile network operators and address possible under-declaration or undervaluation by importers.

Practical Impact

Importers, distributors, and telecommunications companies may face new compliance and reporting obligations under the proposed framework.

3. Adjusted Excise Rates on Specified Products

Some of the proposed excise duty changes include:

• Mobile phones — increase from 10% to 25% of excisable value;
• Fruit juice — Kshs. 14.14 per litre for products without added sugar and Kshs. 20 per litre for products with added sugar;
• Cigars and cigarillos — Kshs. 18,000 per kilogram;
• Ceramic tiles and sanitary ware — 5% excise duty;
• Coal — 5% excise duty;
• Extra neutral alcohol exceeding 90% alcohol strength — reduction from Kshs. 500 to Kshs. 80 per litre; and
• Betting deposits — wording expanded to align with the Gambling Control Act, 2025.

The proposed excise duty on coal also appears intended to operate as an environmental disincentive against carbon-intensive fuels.

PART V: PROPOSED AMENDMENTS TO THE TAX PROCEDURES ACT

a) Virtual Asset Regulatory Framework (Clauses 37 and 38 of the Bill)

The Bill proposes a reporting framework requiring Virtual Asset Service Providers to file annual information returns with KRA in respect of virtual asset users with whom they maintain a relationship during a calendar year and who are identifiable as reportable users or controlling persons. Failure to comply or submission of false information would attract penalties under the proposed framework.

Practical Impact

Cryptocurrency exchanges and digital asset platforms operating in or servicing Kenyan users may need to implement stronger compliance, reporting, and customer due diligence systems.

b) PIN Reinstatement for Deregistered Taxpayers (Clause 39 of the Bill)

The Bill proposes reinstatement of previously deregistered PINs instead of requiring taxpayers to apply for entirely new PINs, thereby reducing administrative disruptions.

c) Non-Resident Exemption from PIN Requirements (Clause 40 of the Bill)

The Bill proposes that non-resident investors opening investment accounts with investment banks shall not be required to obtain Kenyan PINs.

The proposal may facilitate foreign investment and support Kenya’s position as a regional financial hub.

d) Introduction of a New General Anti-Avoidance Rule (GAAR) (Clause 41 of the Bill)

The Bill proposes the introduction of a new General Anti-Avoidance Rule (“GAAR”) empowering KRA to disregard a tax avoidance scheme where a person has obtained a tax benefit in connection with the arrangement. Under the proposed provision, KRA may determine the taxpayer’s liability as though the scheme had not been entered into or carried out.

The proposal significantly broadens KRA’s anti-avoidance enforcement framework and may increase scrutiny of complex tax planning arrangements and cross-border structures. KRA would be permitted to assess tax based on the economic substance of a transaction rather than its legal form and would have up to five years to raise assessments under this provision.

Businesses and investors utilizing sophisticated tax structures may therefore need to reassess existing arrangements and obtain professional tax advice.

Practical Impact

Cross-border investment structures, tax planning arrangements, and related-party transactions may face increased scrutiny from KRA.

e) Broader Assessment Powers for KRA (Clause 42 of the Bill)

The Bill proposes a new section 29A empowering KRA to raise tax assessments using a wider range of information sources, including third-party information, electronic systems, inspections, and indirect or lifestyle-based assessment methods.

This would significantly strengthen KRA’s investigative and enforcement powers.

f) Pre-Populated Tax Returns (Clause 48 of the Bill)

The Bill proposes to allow KRA to generate pre-filled tax returns based on information already available to it, including PAYE data and bank interest declarations.

Taxpayers would retain the right to review, amend, and submit such returns.

The proposal mirrors systems already implemented in jurisdictions such as Sweden, Norway, Denmark, and Estonia, and may significantly reduce compliance costs and filing errors. However, the accuracy of such returns would depend heavily on the quality of third-party reporting.

g) Electronic System Malfunction Waiver (Clause 51 of the Bill)

The Bill proposes a waiver mechanism allowing KRA to waive penalties or interest of up to Kshs. 2,000,000, where the liability arose due to the malfunction of KRA electronic systems such as iTax or eTIMS.

The proposal may reduce disputes arising from system-generated errors and improve taxpayer confidence in KRA digital platforms.

h) Other Tax Procedures Amendments

Additional proposed amendments include:

• Extension of the tax amnesty for interest, penalties, and fines relating to principal tax liabilities accrued up to 31 December 2025, provided the principal taxes are settled by 31 December 2026 (Clause 43 of the Bill).
• Removal of statutory protections previously available to withholding agents, potentially exposing them to increased recovery risks even where the underlying income may already have been taxed (Clause 44 of the Bill).
• Removal of restrictions preventing KRA from issuing agency notices while disputes are pending before the courts or the Tax Appeals Tribunal (Clause 45 of the Bill).
• Removal of the mandatory requirement for importers to provide Certificates of Origin during customs clearance (Clause 46 of the Bill).
• Removal of import VAT from taxes that may be offset against overpaid tax credits (Clause 47 of the Bill).
• Inclusion of weekends and public holidays in the computation of objection and appeal timelines, effectively shortening the practical time available to taxpayers (Clause 49 of the Bill).
• Replacement of the existing automatic penalty framework with a more process-oriented compliance system that allows taxpayers to provide explanations before penalties are imposed (Clause 50 of the Bill).
• Repeal and replacement of Section 86 by introducing a formal “show cause” mechanism before a penalty is levied when a taxpayer fails to comply with the requirement under a tax law to issue an electronic tax invoice, submit a tax return in electronic form, or pay tax electronically pursuant to section 75 (Clause 53 of the Bill).

POTENTIAL AREAS OF CONTROVERSY

Some of the proposed amendments may generate legal, constitutional, or commercial debate, including:

• The breadth of the proposed GAAR and potential uncertainty for taxpayers engaging in legitimate tax planning;
• Expanded KRA assessment and enforcement powers;
• Privacy and data protection concerns arising from virtual asset reporting obligations;
• Increased compliance burdens for fintech and digital economy businesses;
• The increase in excise duty on mobile phones and its potential effect on affordability and digital access;
• The inclusion of weekends and public holidays in tax objection and appeal timelines; and
• Potential disputes relating to the interpretation of “economic substance” under the proposed anti-avoidance provisions.

PART VI: PROPOSED AMENDMENTS TO THE MISCELLANEOUS FEES AND LEVIES ACT (CLAUSES 53–55)

The Bill proposes reducing the proportion of Import Declaration Fee (IDF) revenue allocated to a dedicated Government fund from 20% to 10%.

It also proposes removing the requirement that part of the fund be specifically allocated to revenue enforcement initiatives.

Further, imports of mobile phones are proposed to be exempt from certain import levies, consistent with the proposed excise duty treatment at the activation stage.

PART VII: PROPOSED AMENDMENTS TO THE STAMP DUTY ACT AND THE ROAD MAINTENANCE LEVY FUND ACT

The Bill proposes exemption from stamp duty for transfers of property into a Real Estate Investment Trust (REIT), thereby encouraging REIT formation and investment in Kenya’s real estate sector (Clause 56 of the Bill).

The Bill proposes amendments to the Road Maintenance Levy Fund Act aimed at reducing the amount allocated to the Road Annuity Fund from KShs. 3 to Kshs. 1.50 per litre.

EXECUTIVE SUMMARY

If enacted in its current form, the Finance Bill 2026 would significantly reshape Kenya’s tax landscape by expanding the tax base, strengthening enforcement powers, and introducing new compliance obligations in emerging sectors such as digital finance, betting and gaming, and virtual assets.

The Bill also seeks to address historical tax leakages, respond to judicial interpretations that limited KRA’s enforcement powers, and introduce measures aimed at attracting foreign investment and improving tax administration efficiency.

The Finance Bill 2026 further signals a continued shift towards data-driven tax administration, broader anti-avoidance enforcement, and increased taxation of the digital economy. Businesses may therefore need to prioritize tax governance, transaction transparency, compliance monitoring, and proactive tax risk management.

The proposed amendments are likely to affect individuals, businesses, investors, employers, financial institutions, and digital service providers. Taxpayers may therefore need to reassess existing tax structures, contractual arrangements, gratuity schemes, VAT positions, and compliance procedures in anticipation of the proposed reforms.

DISCLAIMER:

This article is intended for general informational purposes only and does not constitute legal or tax advice. Professional advice should be obtained in relation to specific circumstances or transactions.

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