The Finance Act, 2026 marks another significant milestone in Kenya's evolving tax landscape. Beyond introducing new tax measures, the Act reshapes compliance obligations, expands reporting requirements, refines tax administration, and introduces targeted incentives that will influence how businesses operate in the years ahead.
For business owners, finance teams, tax practitioners, investors, and policymakers, understanding these changes is no longer optional — it is essential. Overlooking one amendment can mean increased exposure, missed relief opportunities or costly compliance penalties.
At RWK Africa, we believe tax knowledge should empower businesses, not overwhelm them. This magazine translates complex legislation into clear, actionable insight.
Executive Summary
The Finance Act, 2026 at a Glance
Assented on 23 June 2026, the Finance Act, 2026 targets base broadening, digital economy taxation, and tighter tax administration to support the government's KES 3.533 trillion revenue target for FY 2026/2027.
Key Highlights
Accelerated Individual Filing
Deadline moved forward by two months to April 30th (four months post-year-end). Corporate deadlines remain unchanged.
Fintech & Card Payments Taxed
Withholding tax now applies to interchange and merchant service fees, expanding the definition of management fees.
Import Documentation
Mandatory export declarations from the origin country required for all imports starting 1 September 2026.
Tax Amnesty
Reintroduced for penalties and interest on liabilities accrued up to 31 December 2025, if principal tax is paid by 31 December 2026.
Key Tax Changes
Income Tax: Card fees reclassified as taxable management fees; a final withholding tax regime introduced for non-resident rental income; commercial banks can now deduct bad debts (principal and interest) in line with CBK guidelines.
VAT: VAT exemption removed for software-based financial platforms, payment gateways, and money transfer services; salaries in labour outsourcing contracts are treated as disbursements, removing VAT on the direct payroll portion.
Tax Administration: KRA will issue pre-populated returns; taxpayers have two months to dispute or accept.
Personal Income & Employment
Gratuity Restrictions: Tax exemption on gratuity now requires a minimum 3-year contract and is capped at 31% of emoluments.
Trust Taxation: Trust income tax is paid as a final tax by the trustee, preventing double taxation for beneficiaries.
Strategic Outlook
Businesses — especially in fintech, banking, and outsourcing — must immediately restructure contracts to accommodate new VAT and withholding tax rules. Individuals must prepare for earlier tax filing cycles in April.
03
Income Tax Act
How the new rules affect companies, individuals, financial institutions and cross-border arrangements.
The Act redefines key terms, expands the digital economy and virtual asset tax base, tightens withholding tax and anti-avoidance rules, and resets several filing deadlines.
Key Definitions (Section 2)
Issue
Change under the Finance Act, 2026
Summary Impact
Definition of "Immovable Property"
Replaces the word "and" with "or", making land-related interests and mining or petroleum interest alternative components of the definition rather than cumulative requirements.
Primarily a drafting clarification that simplifies interpretation and is expected to reduce disputes on Capital Gains Tax and other property-related rules.
Definition of "Management or Professional Fee"
Expanded to include interchange fees and merchant service fees arising from payment card transactions.
Brings these fees within the scope of withholding tax, reversing prior court decisions. Financial institutions, merchants and payment service providers face higher compliance and withholding costs.
Definition of "Royalty"
Broadened to include payments for the use of proprietary digital payment card networks or platforms, including access, participation and usage rights.
Expands the withholding tax base for digital payment networks and card-related transactions. Software distributors and resellers get certainty from the narrower scope.
Definition of "Withdrawals"
Revised to cover any cash, cash equivalent, or monetary value paid to a player by a person licensed under the Gambling Control Act, 2025.
Aligns the ITA with the new gambling regulatory framework and broadens the scope of taxable withdrawals.
Definition of "Winnings"
Reintroduces the definition of winnings but removes the Bill’s proposal to exclude the original stake or wager from the taxable amount.
Restores withholding tax on winnings and creates uncertainty over whether tax applies to gross payouts or only net winnings.
Non-Residents, Trusts & Deductions
Issue
Change under the Finance Act, 2026
Summary Impact
Non-Resident Rental Income Tax (Section 6B)
A final tax regime is introduced for non-residents earning rental income from property in Kenya. Must register under a simplified system and file monthly returns by the 20th of the following month.
Simplifies taxation of non-resident landlords; watch for further guidance on the rate.
Tax on Income of Non-Resident Ship Owners (Section 9)
Tax must now be paid within five days after payment is received or before the vessel leaves the port of loading, whichever is first.
Strengthens collection by requiring direct payment before a ship exits Kenya.
Scrap Metal & Winnings as Kenyan-Source Income (Section 10)
Income from scrap metal sales and winnings is expressly classified as Kenyan-source income.
Provides a clearer legal basis for withholding tax, particularly for non-resident payments.
Taxation of Trust Income (Section 11)
Income received by trustees, executors or administrators continues to be taxed at that level; beneficiaries are not taxed again once tax is paid.
Minimizes double taxation risk and enhances certainty for trustees.
Instalment Tax (Section 12)
Individuals whose only taxable income is employment income are excluded from instalment tax obligations.
Reduces unnecessary compliance for PAYE-only employees.
Deductibility of Bad Debts (Section 15)
Licensed lenders, banks and regulated financial institutions may now claim deductions for bad debts comprising principal, interest and related amounts, subject to Commissioner’s guidelines.
Resolves long-standing uncertainty on deductibility of loan principal.
Carry Forward of Tax Losses for Large Investments (Section 15)
Investors who had invested at least KES 10 billion before 1 July 2025 may continue utilizing pre-existing tax losses until fully exhausted.
Protects the value of accumulated tax losses for major capital investments.
Interest Deductibility for Non-Deposit Taking Institutions (Section 16)
Clarifies that the relevant provisions apply to institutions engaged in lending, leasing, or both.
Removes ambiguity for standalone lending or leasing businesses.
Reporting, Anti-Avoidance & Withholding Tax
Issue
Change under the Finance Act, 2026
Summary Impact
Country-by-Country Reporting (Sections 18D & 18F)
Technical amendments correct statutory cross-references and revise definitions relating to CbC reports.
No new reporting obligations, but improves clarity and aligns with the OECD BEPS Action 13 framework.
Insurance Companies (Section 19)
References to "life insurance fund" replaced with "statutory fund" to align with the Insurance Act.
Harmonizes tax and insurance legislation for long-term insurance business.
Repeal of Section 23 (Anti-Avoidance Rule)
Repealed, with anti-avoidance provisions now incorporated into the Tax Procedures Act.
Legislative harmonization — KRA retains broad powers to challenge avoidance under the TPA.
Section 35 — National Carrier Payments
Keeps a narrow carve-out for a designated national carrier for proprietary digital platforms and payment systems.
Protects the national carrier from extra tax on aviation payment infrastructure.
Section 35 — Scrap Metal, Winnings & Ship Income
Deletes the withholding rule for certain non-resident ship income; introduces withholding tax on scrap metal sales and winnings.
Collection becomes more targeted and easier to enforce.
Sections 52 & 52B — Filing Deadlines
Individuals must file self-assessment returns by the last day of the fourth month after year-end; other persons by the sixth month. Commencement: 1 January 2027.
Gives fixed deadlines requiring earlier preparation of returns and up-to-date records.
Section 18A — Anti-Tax Avoidance Rules
Introduces a broad anti-avoidance rule allowing the Commissioner to disregard tax-motivated arrangements, with written reasons required within 30 days.
Strengthens enforcement against avoidance while adding fairness and certainty.
Schedules, Exemptions & Employment Income
Issue
Change under the Finance Act, 2026
Summary Impact
First Schedule — Death Benefits & REIT Transfers
Benefits paid on death are exempt from tax; capital gains on qualifying transfers of property to a registered REIT are also exempt.
Eases the burden on beneficiaries and supports REIT growth.
Second Schedule — Investment Allowance
Confirms the 10% allowance on industrial building capital expenditure is claimed in equal annual instalments; adds a 100% first-year allowance for qualifying petroleum or gas storage facilities costing over KES 10 billion.
Removes timing uncertainty and gives a strong cash-flow incentive for large energy storage investments.
Third Schedule — Tax Rates
Keeps the 1.5% withholding rate on scrap metal sales and 20% on winnings; removes the preferential 5% dividend rate for EAC Partner State citizens, replacing it with the standard 15% non-resident rate.
Cross-border EAC investors face a higher dividend tax burden.
Eighth Schedule — Capital Gains Tax
Broadens CGT to cover gains by non-residents on share disposals where shares derive value from Kenya, or where the transaction changes control of a Kenyan resident company or property interest.
Expands Kenya’s taxing rights over indirect transfers.
Ninth Schedule — Extractive Industries
Lowers the non-resident contractor tax rate from 37.5% to 30% and sets a 15% repatriated-income tax for licensees and contractors (from 1 January 2027).
Makes Kenya more competitive for extractive projects.
Section 5(1) & 5(4)(g) — National Carrier Staff & Gratuity
Exempts foreign employment income of non-resident national carrier staff; exempts gratuity contributions where the contract lasts at least 3 years and does not exceed 31% of emoluments.
Targeted relief for aviation talent and qualifying gratuity arrangements.
Virtual Assets (Sections 3(1), 6C & 6D)
Defines "virtual asset" and "virtual asset service provider" by reference to the Virtual Asset Service Providers Act, 2025; VASPs must file annual information returns.
Brings virtual asset activity into the tax reporting system.
Tax Administration Highlights
Section 23B — Importers must obtain and retain export declarations for five years.
Section 29A — Commissioner may issue assessments based on available information after 30 days' notice; objection rights retained.
Section 37E — Tax amnesty debt cut-off moves to 31 December 2025; principal tax payment deadline extended to 31 December 2026.
Section 39B — Commissioner may recover unpaid fees, levies and charges with summary recovery up to KES 100,000.
Section 75 — Pre-populated tax returns formally introduced, issued by end-January, with two months to review, confirm or amend.
Section 86 — Electronic tax system penalty revised to the higher of 5% of tax due, KES 100,000 (companies) or KES 10,000 (individuals).
Section 89(5A)&(5B) — Commissioner may waive penalties/interest from e-system errors up to KES 2 million.
Proposals not adopted: removal of withholding relief for agents, counting weekends/holidays in objection timelines, agency notices after adverse court outcomes, and stopping VAT-on-imports offsets.
04
Value Added Tax
Understand the impact on digital finance, outsourced staff, exemptions and day-to-day VAT treatment.
The Act narrows several exemptions, expands VAT into digital payment services, and introduces new relief for infrastructure and healthcare-related goods and services.
Administration & Input VAT
Issue
Change under the Finance Act, 2026
Summary Impact
Deletion of Certain Definitions (Section 2)
Deletes the definitions of assessment, information technology, and tax computerized system.
Aligns the VAT Act with the Tax Procedures Act and reduces duplication.
Labour Outsourcing Costs (Section 13(5A)&(5B))
Employee-related costs in labour, outsourcing, or employee placement services are treated as disbursements made on behalf of the client.
VAT applies only to the supplier’s fee or margin, resolving disputes over labour outsourcing arrangements.
Hire Purchase Finance Charges (Section 13(6)(a))
The VAT exclusion for financial charges is limited to supplies by licensed hire purchase businesses under registered agreements.
Narrows the relief and excludes instalment/credit sales outside the regulated hire purchase framework.
Inputs for Supplies to KDF, DEFWES, NIS & NPS (Section 17)
Allows input VAT recovery on exempt supplies made to these entities.
Improves cash flow for suppliers and removes a key cost burden.
Clawback on Exempt Reclassification (Section 17A)
New rule requiring reversal of input VAT where taxable supplies become exempt while still unsold.
Creates an immediate tax cost and cash flow pressure when reclassification occurs.
Bad Debt Refund Period (Section 31)
Minimum period for claiming VAT relief on bad debts restored from two years to three years.
Delays access to VAT refunds, increasing cash flow pressure.
Invoice Rules (Section 42)
Keeps the rule that a tax invoice may only be issued for a taxable supply.
VAT invoicing stays limited to taxable supplies and registered persons.
Tax Avoidance Schemes (Section 66)
Section 66 of the VAT Act is repealed.
Anti-avoidance enforcement now handled under the Tax Procedures Act.
Exemptions Added, Removed & Retained
Issue
Change under the Finance Act, 2026
Summary Impact
Dropped Proposals
The shift from zero-rating to exemption for motorcycles, electric bicycles, animal feed inputs, sugarcane transport, locally assembled phones, solar/lithium-ion batteries and electric buses were all not adopted.
Current VAT treatment for these items remains unchanged.
Chapter 88 Goods & Direction-Finding Compasses
Goods under Chapter 88 (excluding helicopters) and direction-finding compasses are removed from the exempt list.
Standard-rated unless another relief applies, increasing costs for aviation sectors.
Tourism Facilities & Affordable Housing
Exemptions for goods used in constructing tourism facilities, recreational parks, convention/conference facilities, and affordable housing are deleted.
New VAT exemption introduced for dialyzers; scrap metal is made VAT-exempt.
Lowers dialysis equipment costs and supports formalisation of scrap metal recycling.
PPP & National Infrastructure Fund Projects
New exemptions for goods used directly and exclusively in approved PPP projects and National Infrastructure Fund-funded projects.
Reduces project costs and supports private-sector participation.
Pharmaceutical Inputs & BEV Stoves
Both moved from zero-rated to exempt status.
Manufacturers/suppliers lose input VAT recovery.
Aircraft Parts & Traveller’s Baggage
Aircraft parts exemption broadened; traveller’s baggage duty-free/VAT threshold raised from USD 300 to USD 2,000.
Widens relief for aircraft operators and returning travellers.
Digital Payment Services
Core money-transfer services remain exempt, but payment processing, settlement, merchant acquiring, gateway and aggregation services are carved out and taxed.
Brings fintech and payment intermediaries into the VAT net.
Tour Operators & Tourism Construction
Only licensed tour operators qualify for exemption, with "in-house supplies" excluded; the tourism construction services exemption is removed.
Narrows relief and may increase VAT costs for tourism developers.
Capital Goods for Manufacturing & LPG Storage
New exemption for Cabinet Secretary-approved capital goods (investment of at least KES 2 billion); new exemption for LPG storage infrastructure (KES 5 billion threshold).
Targets large-scale manufacturing and energy investments.
Electric Bicycles & Solar/Lithium Batteries
Zero-rating narrowed to specific tariff headings (8712.00.00 for e-bikes; 8507.60.00 for batteries).
Improves certainty but limits the incentive to specific classified products.
05
Excise Duty
A practical view of the products, services, rates and compliance areas affected by the Act.
A mix of new import duties on construction and electronics inputs, higher duty on sugar and tobacco, and several proposals that Parliament chose not to adopt.
Issue
Change under the Finance Act, 2026
Summary Impact
Antique, Vintage & Classic Vehicles
Excise duty at 50% of excisable value on vehicles first registered at least 30 years before purchase and valued at KSh 10 million or more.
Raises the cost of acquiring such vehicles and creates clearer treatment for luxury collector vehicles.
Telephones & Cellular Phones (proposals dropped)
The Bill’s proposal to tax phones at activation, and to raise the rate from 10% to 25%, were both not adopted.
No change — imported mobile phones remain at 10% excise.
Sweetened & Unsweetened Juices
Two-tier structure: KSh 14.14/litre (unsweetened) and KSh 20/litre (sweetened).
Sweetened juice becomes more expensive, potentially encouraging reformulation.
Bottled Drinking Water
Removed from excise duty.
Lowers the tax burden and supports affordability and access.
Small Independent Brewers & Extra Neutral Alcohol
Reduced rates retained: KSh 10/centilitre of pure alcohol (small brewers); KSh 80/litre (extra neutral alcohol for licensed manufacturers).
Protects small brewers and compliant producers.
Tobacco Products
Excise increased; new rate of KSh 2,000/kg introduced for oral smokeless tobacco products.
Tobacco becomes more expensive, which may reduce consumption.
Imported Sugar
Excise raised from KSh 7.50 to KSh 40 per kilogram (exemptions retained for registered pharmaceutical manufacturers and licensed sugar refiners).
Supports local sugar production but raises input costs for manufacturers.
Imported Plastic Articles, Gas Cylinders & Ceramic Products
Plastics retained at 10% (imports only); gas cylinders clarified under tariff 7311.00.10; ceramics get a hybrid rate of 5% of excisable value or KSh 50/kg, whichever is higher.
Reduces classification disputes and safeguards revenue against undervaluation.
EAC Excise Relief & Sugar Confectionery
Broad proposal to remove EAC relief was largely rejected (only float glass loses the exclusion); "imported" sugar confectionery keeps its KSh 85.82/kg rate.
Maintains regional trade relief while protecting local confectionery manufacturers.
Imported Wood, Timber & Plastic Sheeting
30% excise on imported MDF boards, particle boards, plywood and specified timber products; new excise on banner sheeting, flex banners, PVC sheeting and selected plastic sheets.
Encourages local production but raises costs for businesses reliant on imports.
Imported Sanitary Fittings & Chip Modules
35% excise on imported shower heads/heating elements; new 10% excise on pre-personal chip modules.
Increases cost of imported fittings and selected electronic components.
Coal (proposal rejected)
Parliament rejected the proposed 5% excise duty on coal.
Maintains the current position, avoiding extra costs for energy-intensive industries.
Excise Duty Act — Part II
Excisable Services
Issue
Change under the Finance Act, 2026
Summary Impact
Betting & Gaming Deposits
Broadens the definition of taxable deposits to amounts made available for betting or gambling purposes, and widens "amount deposited" to include cash, cash equivalents, credits, incentives, tokens, chips and similar instruments.
Significantly widens the excise duty base; operators face higher liabilities.
Recognition of Virtual Assets
Incorporates statutory definitions of virtual assets and virtual asset service providers by referencing the Virtual Asset Service Providers Act, 2025.
Provides legal certainty for taxing digital assets.
NIS Excise Duty Exemption
Goods supplied for official use by the National Intelligence Service are now included among entities eligible for excise duty exemption.
Harmonizes treatment of national security agencies.
07
Fees & Levies
The changes affecting import documentation, declarations, exemptions and infrastructure-related levies.
The Finance Bill proposed reducing the share of IDF receipts paid into the PFM Fund from 20% to 10% and removing the 10% ring-fenced allocation for revenue enforcement. The Finance Act, 2026 dropped that proposal and kept existing allocations unchanged.
Stability and predictability maintained by preserving the post-2025 funding structure.
Continued ring-fenced support for revenue enforcement and KRA's compliance work.
Change Retained
Application of EACCMA Provisions — Section 9
The Act adopts the Bill's proposal to apply East African Community Customs Management Act valuation, collection and enforcement rules to all fees and levies in Part III of the MFLA.
Strengthens the legal basis for customs valuation and enforcement across a wider set of levies.
Taxpayers should expect more consistent and robust assessment, collection and enforcement at import.
Changes Made
Exemptions from IDF and RDL — Second Schedule (Parts A & B)
The Act narrows Chapter 88 exemptions for both IDF and RDL to specific tariff headings (larger aircraft and aircraft parts); a new targeted exemption was added for goods used in LPG storage tank construction (KES 5 billion minimum investment).
Narrowing Chapter 88 relief focuses benefits on aircraft parts and larger aircraft, aligning with VAT policy changes.
IDF and RDL continue to apply to imported phones.
08
Stamp Duty
A focused explanation of the treatment of qualifying transfers and investment structures.
Section 96A — Transfers to Real Estate Investment Trusts
The Finance Act, 2026 kept the Finance Bill's amendment to Section 96A by adding a new paragraph (c) to cover instruments whose effect is to transfer a beneficial interest in property to a REIT, even where legal title is not directly transferred.
Reduces uncertainty in REIT transactions by clarifying that beneficial-interest transfers qualify for stamp duty relief.
Makes REITs more attractive to property owners, developers and investors as a vehicle for holding real estate.
09
Road Maintenance Levy
What the revised allocation framework means for the administration of road maintenance funds.
The Finance Act, 2026 retains a change from the Finance Bill that reduces the share of the Road Maintenance Levy allocated to the Road Annuity Fund from KES 3.00 to KES 1.50 per litre of petroleum sold.
This amendment only reallocates existing levy revenue and does not lower the overall levy charged at the pump.
Funding available for Road Annuity Programme projects will fall unless the government provides additional budgetary support or alternative financing.
RWK Africa
Tax knowledge made practical
Our role is to translate technical legislation into decisions businesses can act on with confidence.
RWK Africa is a tax, audit, and advisory firm based in Ruiru, Kenya, dedicated to helping businesses and individuals navigate an increasingly complex regulatory environment. We combine deep technical expertise with a practical, client-first approach to deliver solutions that matter.
From tax compliance and advisory to audit and assurance services, RWK Africa supports businesses at every stage of growth. Whether you're a growing SME or an established enterprise, we're committed to being a trusted partner in your compliance and growth journey.
RWK Africa Newsletter
Stay informed as the tax environment changes.
Receive practical tax alerts, KRA updates, new RWK Africa resources and invitations to our webinars and masterclasses.
Relevant updates only. Unsubscribe at any time.
Thank You for Reading RWK Tax Magazine
We hope this edition helps you navigate the Finance Act 2026 with clarity and confidence. For personalized tax advice or to discuss how these changes affect your business, reach out to our team.
