The Finance Bill, 2026 (“the Bill”) is presented in support of the Government’s fiscal objective of raising approximately KShs. 3.53 trillion in revenue to finance the proposed national budget of KShs. 4.74 trillion for the 2026/27 financial year. This revenue target reflects efforts by the Government to sustain development expenditure, ensure fiscal consolidation, and implement priority programmes under the Bottom-Up Economic Transformation Agenda (BETA).
In this regard, the Bill introduces a series of tax policy and administrative measures aimed at strengthening revenue mobilisation, while enhancing the use of technology in tax administration to support compliance and improve efficiency. Set out below are the key tax proposals contained in the Bill.
Income Tax
- Clarification Amendment to the Definition of Immovable Property
The Bill seeks to amend Section 2 of the Income Tax Act (ITA) by substituting the word “and” with “or” in the definition of “immovable property”.
The amendment shifts the interpretation from a cumulative to an alternative construction. As a result, each component within the definition can stand independently as immovable property rather than requiring a combined reading. This materially broadens the classification scope, potentially bringing a wider range of assets within the definition of “immovable property”.
Date of Commencement: July 2026
- Expanding the Definition of Management or Professional Fees
The Bill proposes to widen the definition of “management fee” to expressly include interchange fees and merchant service charges arising from card payment transactions, including those processed through payment networks and digital systems.
This amendment materially extends the withholding tax base to cover fees embedded within the payments ecosystem. It captures charges previously excluded following judicial interpretation, including the Supreme Court ruling in Commissioner of Domestic Taxes v Absa Bank Kenya PLC, which held that interchange fees did not fall within the definition of management or professional fees.
The effect is to recharacterise such fees through legislation, thereby expanding withholding tax exposure across banks, fintechs, payment processors, and merchants. The additional tax costs, particularly on fees paid to non-residents, are likely to be passed on to end users, which may ultimately increase the cost of card-based transactions for the ordinary Mwananchi.
Date of Commencement: July 2026
- Expansion of Royalty Definition
The definition of “royalty” is expanded to include software, digital platforms, payment systems, intellectual property rights, and related digital infrastructure fees.
The amendment significantly broadens the withholding tax scope across digital, fintech, and intellectual property-driven transactions. It captures modern commercial arrangements that were previously outside traditional royalty definitions, increasing tax exposure and compliance obligations, particularly for cross-border digital services.
Date of Commencement: 1 July 2026
- Taxation of Trust Income at Trustee Level
The Bill removes Section 11 and replaces it with a provision deeming all income received by trustees, executors, or administrators as taxable in their hands. Dividend and interest income are treated as final tax, with beneficiaries exempt from further taxation.
The amendment consolidates tax liability at the fiduciary level and eliminates pass-through treatment of trust income. This removes ambiguity around attribution of income between trustees and beneficiaries and ensures consistency in taxation. It also prevents double taxation by making dividend and interest income final at trustee level. From a practical perspective, it increases compliance responsibility for trustees while simplifying tax outcomes for beneficiaries.
Date of Commencement: 1 July 2026
- Streamlining of Exemption Rules for Instalment Taxes
Section 12 of the ITA is amended to remove references to repealed Section 12D and to refine the exemption criteria for instalment tax. Taxpayers will be exempt from instalment tax where they reasonably expect to only earn employment income which is subject to PAYE.
This proposal enhances clarity and reduces interpretational uncertainty, particularly for individuals and small businesses, although taxpayers must carefully assess expected income sources to avoid incorrect classification.
Date of Commencement: 1 July 2026
- Broadening the Scope of Interest Restriction Exemption Rules for Lending and Leasing Businesses
The Bill replaces the phrase “lending and leasing business” with “lending or leasing; or both” under Section 16(2)(j)(iii)(E) of the ITA. The amendment broadens eligibility for exemption from interest restriction rules by lowering the threshold from dual activity to single-activity participation. Non-deposit-taking institutions engaged in either lending or leasing will now qualify. This expands the scope of the exemption and reduces structural limitations on financial institutions.
Date of Commencement: 1 July 2026
- Insurance Terminology Alignment
The Bill replaces the term “life insurance fund” with “statutory fund” under Section 19 of the ITA to align with terminology used in the Insurance Act. The amendment serves as a technical correction intended to cure the ambiguity created by the earlier introduction of the term “life insurance fund,” which was not fully aligned with the terminology used under the Insurance Act. This alignment will harmonise tax legislation with sector regulatory terminology.
Date of Commencement: 1 July 2026
- Minimum Deemed Dividend Threshold
Section 24(1) of the ITA is amended to replace the phrase “that part of the income” with “at least sixty percent of that part of the income,” thereby introducing a minimum threshold for deemed dividend treatment.
The amendment provides statutory clarity on the proportion of retained earnings that may be recharacterised as dividends. It effectively introduces a minimum 60% benchmark for deemed dividend assessment. This strengthens the Commissioner’s ability to address profit retention strategies that defer taxation and is likely to affect companies with significant accumulated earnings. Taxpayers will need to demonstrate substantive commercial reasons for retention of profits to mitigate exposure.
Date of Commencement: 1 July 2026
- Reduction of Income Tax Filing Timeline
The filing deadline for income tax returns is reduced from six months to four months after the end of the year of income. The amendment accelerates the compliance timeline and aligns tax filing requirements with other African countires. While it improves administrative efficiency for the tax authority, it reduces preparation time for taxpayers and may increase compliance costs and risk of late filing penalties.
Date of Commencement: 1 January 2027
- Reduced Timelines for Filing of Nil Returns
Taxpayers with nil tax liability will be required to file self-assessment returns within one month after year-end. This provision advances compliance timelines for non-taxpaying entities and individuals, enabling the tax authority to confirm non-liability earlier. However, it increases administrative pressure, particularly for entities in loss positions or with delayed year-end accounting processes.
Date of Commencement: 1 January 2027
- Exemption of Death Benefits
The Bill introduces an explicit exemption for benefits arising on death under the First Schedule to the ITA. This provides targeted tax relief to estates and beneficiaries by removing income tax exposure on death-related benefits. It supports equity in succession-related taxation and reduces administrative burden on grieving families.
Date of Commencement: 1 January 202
Withholding Tax
- Introduction of Gross Rental Withholding Tax on for Non-Resident Landlords
A dedicated withholding tax framework has been proposed for non-resident landlords earning rental income from property situated in Kenya. The regime imposes final tax on gross rental income at 30% for immovable property and 15% for other rental income. Non-residents will be required to register, file monthly returns, and remit tax unless they appoint a resident agent.
The proposal simplifies the tax compliance framework applicable to non-resident landlords by introducing a structured withholding tax regime. However, it also increases compliance obligations and burden as non-resident landlords will be required to account for and remit taxes on a monthly basis, unless they appoint a resident agent to manage their tax affairs in Kenya.
Date of Commencement: 1 July 2026
- Withholding Tax on Scrap Metal Sales and Gambling Winnings
The Bill proposes to amend Sections 10 and 35 of the Income Tax Act, as well as the Third Schedule, to bring income from scrap metal sales and gambling winnings within the withholding tax framework. The Bill further proposes a 1.5% withholding tax on gross scrap metal proceeds and a 20% withholding tax on gambling winnings applicable to both residents and non-residents. The amendment expands the withholding tax regime into sectors characterised by high informality and high turnover.
Date of Commencement: 1 July 2026
- Withholding Tax – National Carrier Services
The Bill proposes to delete Section 35(1)(a)(iii) of the Income Tax Act, thereby removing the exemption from withholding tax on payments made by the national carrier to non-resident service providers for specialised technical, maintenance, compliance, training, and digital systems support services.
The removal of this exemption broadens the withholding tax base and increases the tax cost of procuring foreign specialised services. This is particularly significant in aviation, where certain technical, compliance, and systems support services are typically sourced from accredited international providers. The amendment may increase operational expenditure for the national carrier and potentially influence procurement structures, including pricing adjustments to account for withholding tax obligations.
Date of Commencement: 1 July 2026
- Removal of East African Community (EAC) Preferential Dividend Withholding Tax Rate
The Bill proposes to delete the preferential withholding tax rate of 5% applicable to dividends payable to citizens of East African Community Partner States under the Third Schedule of the Income Tax Act.
The removal of the preferential rate results in dividends paid to EAC investors being subject to the standard non-resident withholding tax rate. This increases the tax burden on cross-border investors within the region and may reduce the attractiveness of Kenya as an investment destination within the EAC bloc. From a policy perspective, the amendment signals a shift away from regional tax harmonisation incentives towards a uniform withholding tax framework.
Date of Commencement: 1 July 2026
Capital Gain Tax
- Capital Gains Tax (CGT) Exemption for REIT Transfers
The Bill exempts capital gains arising from the transfer of property into a Real Estate Investment Trust registered (REIT) under Section 20(1) of ITA. The exemption removes tax friction on asset transfers into REIT structures and is expected to promote participation in the REIT market. It enhances liquidity in the real estate sector and supports structured investment vehicles.
Date of Commencement: 1 January 2027
- Expansion of CGT on Indirect Transfers for non-residents
The Bill expands CGT provisions to capture gains arising from indirect transfers of Kenyan assets by non-residents, including share disposals where value is derived from Kenya or where ownership of Kenyan assets changes.
This provision strengthens Kenya’s taxing rights over offshore transactions involving Kenyan economic interests. It prevents avoidance through foreign holding structures and aligns the CGT regime with international principles on indirect transfers.
Date of Commencement: 1 July 2026
Employment Taxes (PAYE)
- Tightening of Gratuity Exemption Rules
The Bill proposes to amend the exemption framework for employer-paid gratuities contributed to registered pension schemes. The proposal introduces a minimum service period of three consecutive years, caps total contributions at 31% of basic salary, and excludes individuals eligible for relief under Section 22A.
The amendment tightens eligibility conditions for tax-exempt gratuity contributions and aligns relief with long-term employment relationships. It limits the scope for short-term or highly structured gratuity arrangements designed to maximise tax efficiency. While the measure enhances integrity of retirement benefit taxation, it reduces flexibility for employers and may limit high-value retirement planning for senior employees. It also introduces administrative requirements to track eligibility thresholds and contribution caps.
Date of Commencement: 1 July 2026
Indirect Taxes – VAT and Excise Duty
- Input VAT Clawback on Transition to Exempt Supplies
The Bill proposes to introduce Section 17A into the VAT Act requiring taxpayers to account for input tax previously claimed on stock that becomes exempt where such stock remains unsold at the time of change in tax status.
The amendment introduces a formal clawback mechanism to prevent retention of input VAT credits on goods that transition from taxable to exempt status. It ensures that VAT recovery aligns strictly with taxable consumption. Businesses will be required to conduct stock reviews at the point of transition and adjust previously claimed input VAT accordingly. This increases compliance complexity, particularly for businesses with large or slow-moving inventory.
Date of Commencement: 1 July 2026
- VAT Extension of Claim Period for VAT Refund on Bad Debts
The Bill proposes to extend the period within which taxpayers may claim VAT refunds on bad debts from two years to three years.
The extension delays VAT recovery timelines, thereby increasing working capital pressure for businesses exposed to credit risk. It also reverses the reduction introduced under prior amendments, reinstating a longer administrative threshold for refund eligibility. Taxpayers will need to adjust cash flow planning accordingly, particularly in sectors with high credit exposure.
Date of Commencement: 1 July 2026
- Expansion of Tax Invoice Requirement for all persons
The Bill proposes to amend the VAT Act to require issuance of tax invoices for all supplies of goods and services by any person, expanding the obligation beyond registered persons.
The amendment broadens invoice compliance obligations and strengthens transaction traceability across the economy. It aligns VAT legislation with electronic invoicing frameworks under the Tax Procedures Act and eTIMS regime. This enhances data visibility for the tax authority and supports audit and reconciliation processes, but increases compliance obligations across the supply chain.
Date of Commencement: 1 July 2026
- Increase in VAT-Free Allowance for Returning Passengers
The Bill proposes to increase the VAT-free allowance for returning passengers from USD 300 to USD 2,000. The amendment significantly raises the threshold for duty-free imports by passengers, reducing tax burdens associated with personal travel goods. It reflects an adjustment to inflationary and economic conditions.
Date of Commencement: 1 July 2026
- Excise Duty on Mobile Phones – Activation-Based Tax Point
The Bill proposes that excise duty on cellular phones and wireless network devices shall become payable upon activation on a telecommunications network rather than at importation or manufacture.The amendment shifts the tax point from importation to usage, aligning tax incidence with consumption rather than inventory holding. This may improve cash flow for importers by deferring tax liability until sale or activation. However, it introduces operational complexity requiring integration between telecommunications providers and tax systems to track activations and ensure compliance.
Date of Commencement: 1 July 2026
Tax Procedure
- Taxpayer Personal Identification Number (PIN) Reinstatement Framework
The Bill proposes that deregistered taxpayers who subsequently become liable for tax must apply for reinstatement of their PIN, with the same PIN being reissued upon approval rather than a new registration number being generated. The amendment strengthens taxpayer lifecycle management by ensuring continuity of taxpayer identity. It prevents fragmentation of compliance history and enhances traceability of historical tax obligations.
Date of Commencement: 1 July 2026
- Exemption from PIN Requirement for Non-Residents
The Bill proposes to exempt non-resident persons from the requirement to obtain a PIN when opening accounts with investment banks in Kenya. The amendment simplifies onboarding procedures for foreign investors and reduces administrative barriers to entry into Kenya’s capital markets. It is expected to enhance capital inflows and improve the ease of doing business for cross-border investment.
Date of Commencement: 1 July 2026
- Expansion of General Anti-Tax Avoidance Rule
The Bill proposes to empower the Commissioner to disregard, recharacterise, or adjust transactions where it is determined that a tax avoidance scheme exists and a principal purpose of the arrangement is to obtain a tax benefit.
The amendment significantly grants the Commissioner broader discretion to challenge arrangements lacking commercial substance. This is likely to affect cross-border structures, financing arrangements, and intercompany transactions, increasing the need for robust commercial justification and documentation to withstand scrutiny.
Date of Commencement: 1 July 2026
- Use of Third-Party and System Data for Assessments
The Bill proposes to empower the Commissioner to issue tax assessments based on third-party data and information derived from integrated tax systems and external data sources. The amendment formalises data-driven tax enforcement and expands the evidentiary base for issuing assessments. It integrates multiple data streams including financial institutions, employers, and digital platforms. This enhances compliance detection capabilities and reduces reliance on self-reported income declarations.
Date of Commencement: 1 July 2026
- Withholding Tax Liability – Principal Tax Recovery
The Bill proposes to delete Section 39A(2) of Tax Procedures Act (TPA), thereby allowing the Commissioner to recover principal tax from withholding agents who fail to deduct, withhold, or remit tax.
The amendment increases the liability exposure of withholding agents by holding them directly responsible for principal tax amounts not deducted or remitted. This shifts enforcement risk significantly to intermediaries. It strengthens compliance discipline within withholding tax systems but increases financial risk for employers and agents.
Date of Commencement: 1 July 2026
- Issuance of Agency Notices During Pending Appeals
The Bill proposes to delete Section 42(14)(e) of TPA, which previously restricted the Commissioner from issuing agency notices where a taxpayer has an active appeal.
The amendment removes procedural protection for taxpayers during disputes, allowing enforcement action to proceed notwithstanding pending appeals. This increases cash flow pressure and litigation complexity for taxpayers. It also raises procedural fairness considerations, as enforcement may proceed before final determination of disputes, potentially undermining the effectiveness of the appeal process.
Date of Commencement: 1 July 2026
- Use of Pre-Populated Tax Returns
The Bill proposes to empower the Commissioner to generate pre-populated tax returns using information available within KRA systems and third-party data sources.The amendment formalises a data-driven compliance model and reduces manual filing requirements. While it improves efficiency and reduces errors, taxpayers retain responsibility for verifying and correcting pre-filled information. This shifts compliance towards a hybrid model of automation and taxpayer validation.
Date of Commencement: 1 July 2026
- Computation of Time for Objections and Appeals
The Bill proposes to include Saturdays, Sundays, and public holidays in the computation of statutory timelines for filing objections and appeals. The amendment shortens effective filing timelines by removing previously excluded non-working days. This increases procedural pressure on taxpayers and raises the risk of missed deadlines, particularly in complex disputes requiring documentation and approvals.
Date of Commencement: 1 July 2026
- Waiver of Penalties and Interest relatied to Electronic System Malfunctions
The Bill proposes to recognise malfunction of electronic tax systems as a valid ground for waiver of penalties and interest. The amendment enhances fairness in tax administration by ensuring taxpayers are not penalised for system failures beyond their control. It provides formal statutory recognition of technology-related disruptions affecting compliance. Additionally, the waive of penalties and interest arising from system-generated errors, is capped to KShs 2 million.
Date of Commencement: 1 July 2026
