The Kenyan Government Gazettes Finance Act 2021

The Kenyan Government Gazettes Finance Act 2021

On 30th June 2021, the Treasury Cabinet Secretary Ukur Yatani has gazetted the Finance Act 2021. The Bill was presented to Parliament on 04 May 2021 and assented by the President on 29 July 2021.

Generally, the date of commencement is 1 July 2021. 

However, for sections 9, 10, 13, 14, 19, 21(a), 21(b), 21(e), 40, 50, 58, 60, 73, 75, and 76, these will take effect on the 1 January 2022. We shall highlight these in our analysis below.

This article summarises the key fiscal changes brought forward by the Finance Act 2021. 

We have identified 16 important fiscal changes to the Income Tax Act, 3 fiscal changes to the Value Added Tax (VAT) Act and 2 fiscal changes to the Tax Procedure Act.


Income Tax Act


1. Amendment To The Definition of Control 


The Act amends the definition of “control”. This measure is effective as from 1 July 2021. The Finance Act provides that “control” arises in the following circumstances:

(a) that the person, directly or indirectly, holds at least twenty percent of the voting rights in a company.

(b) a loan advanced by the person to another person constitutes at least seventy percent of the book value of the total assets of the other person excluding a loan from a financial institution that is not associated with the person advancing the loan.

(c) a guarantee by the person for any form of indebtedness of another person constitutes at least seventy percent of the total indebtedness of the other person excluding a guarantee from a financial institution that is not associated with the guarantor.

(d) the person appoints more than half of the board of directors of another person or at least one director or executive member of the governing board of that person.

(e) the person is the owner of or has the exclusive rights over the know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of a similar nature, on which another person is wholly dependent for the manufacture or processing of goods or articles or business carried on by the other person.

(f) the person or a person designated by that person— 

(i) supplies at least ninety percent of the supply of the purchases of another person; and 

(ii) upon assessment, the Commissioner deems influence in the price or other conditions relating to the supply of the purchases of another person.

(g) the person purchases or designates a person— 

(i) to purchase at least ninety percent of the sales of another person; and 

(ii) upon assessment, the Commissioner deems influences in the price or any other conditions of the sales of another person.

(h) the person has any other relationship, dealing or practice with another person which the Commissioner may deem to constitute control.


2. Amendment To The Definition of Permanent Establishment


The Act widens the scope of what constitutes Permanent Establishment. The old definition was deleted and replaced by the following:

“Permanent establishment” includes— 

(a) a fixed place of business through which business is wholly or partly carried on and includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction or exploitation of natural resources, a warehouse in relation to a person whose business is providing storage facilities to others, a farm, plantation or other places where agricultural, forestry plantation or related activities are carried on and a sales outlet.

(b) a building site, construction, assembly or installation project or any supervisory activity connected to the site or project, but only if it continues for a period of more than one hundred and eighty-three days. 

(c) the provision of services, including consultancy services, by a person through employees or other personnel engaged for that purpose, but only where the services or connected business in Kenya, continue for a period of, or periods exceeding in the aggregate, ninety-one days in any twelve-month period commencing or ending in the year of income concerned.

(d) an installation or structure used in the exploration for natural resources: Provided that the exploration continues for a period of not less than ninety-one days.

(e) a dependent agent of a person who acts on their behalf in respect of any activities which that person undertakes in Kenya including habitually concluding contracts or playing the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the person.


3. Definition of A “Digital Marketplace”


A “digital marketplace” means an online or electronic platform that enables users to sell or provide services, goods or other property to other users.


4. Amendment To Section on Trust Income, etc., Deemed Income of Trustee, Beneficiary


The Finance Act amends section 11 of the Income Tax Act by inserting a new subsection 3A as follows:

In the case of a registered trust, sub-section (3) shall only apply to— 

(a) any amount that is paid out of the trust income on behalf of any beneficiary and is used exclusively for the purpose of education, medical treatment or early adulthood housing.

(b) income paid to any beneficiary which is collectively below ten million shillings in the year of income. 

(c) such other amount as the Commissioner may prescribe from time to time and at such rate as prescribed in paragraph 5 of the Third Schedule.

5. Amendment To Section 12 of The Income Tax Act – Exclusion From Payment of Minimum Tax

A person shall not pay minimum tax if that person— 

(a) is engaged in business whose retail price is controlled by the Government.

(b) is engaged in insurance business.

(c) is engaged in manufacturing and that person’s cumulative investment in the preceding four years from assent is at least ten billion shillings.

(d) is licensed under the Special Economic Zones Act, 2015.

(e) is engaged in distribution business whose income is wholly based on a commission.

6. Amendment To Section 12E of The Kenya Income Tax Act – Digital Service Tax

The new section 12(E)(1) reads as follows: 

(1) Notwithstanding any other provision of this Act, a tax to be known as digital service tax shall be payable by a non-resident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over the internet or an electronic network including through a digital marketplace.

The main change is that the word person has been replaced by “non-resident” person.


7. Digital Service Tax – Timing of Payment and Submission of Returns

Previously the tax was payable at the time of the transfer of the payment. The Finance Act 2021 amends this provision and provides that:

1. A person subject to digital service tax shall submit a return.

2. Payment of the tax due should be made on or before the twentieth day of the month following the end of the month in which the digital service was offered.

3. The digital service tax shall not apply to income chargeable under section 9(2) or section 35.

8. Tax Losses Carried Forward For A Limitless Number of Years

Section 15 (4) of the Income Tax Act is deleted and replaced by:

“Where the ascertainment of the total income of a person results in a deficit for a year of income, the amount of that deficit shall be an allowable deduction in ascertaining the total income of such person for that year and the succeeding years of income.”

This change provides that as of 1 July 2021, tax losses can be carried forward for a limitless number of years. Previously, tax losses could only be carried forward for 10 years. 

9. Interest Expense Capped To 30% EBITDA

This measure will only be applicable as from 1 January 2022.

The Finance Act amends the thin capitalization provision from the 3:1 ratio to 30% of EBITDA.

EBITDA is defined as earnings before interest, taxes, depreciation and amortization.

It should be noted that this applies to 

(a) interest on all loans.

(b) payments that are economically equivalent to interest.

(c) expenses incurred in connection with raising the finance. 

10. Country by Country Reporting (CbCR)


The effective date is 1 January 2022.

A. Definitions

The Finance Act defines two terms: “multinational enterprise” and “ultimate parent entity.

“Multinational enterprise group” means a group that includes two or more enterprises which are resident in different jurisdictions including an enterprise that carries on business through a permanent establishment or through any other entity in another jurisdiction.

“Ultimate parent entity” means an entity that—

(a) is resident in Kenya for tax purposes.

(b) is not controlled by another entity.

(c) owns or controls a multinational enterprise group.

B. Changes

The Finance Act provides that the ultimate parent entity of a multinational enterprise is required to file a return describing the group’s financial activities in Kenya where its gross turnover exceeds the prescribed threshold and this not later than 12 months after the last day of the reporting financial year of the group. 

Although the Finance Act mentions a “prescribed threshold” no such threshold has been provided. We believe that regulations will be published shortly.

The Finance provides that the return should contain the following information:

  • the amount of revenue. 
  • profit or loss before income tax.
  • income tax paid.
  • income tax accrued.
  • stated capital.
  • accumulated earnings.
  • number of employees and tangible assets other than cash or cash equivalents.

11. Set-off Tax Rebate For Apprenticeships

The Finance Act amends Section 39B of the Income Tax Act by widen the term university to include “technical and vocational education and training.”

The effective date is 1 January 2022.

12. Double Taxation Treaty – Special Arrangements

Whereas the bill proposed that Section 41(5) would amend the word ‘individual’ to ‘person’, thereby widening the scope and applicability of section 41.

The Finance Act 2021 deletes the whole section 41 and replaces it with the following:

41. (1) Every special arrangement for relief from double taxation made with the Government of any country outside of the Republic of Kenya with a view of affording relief from double taxation in relation to income tax and any taxes of similar character imposed by the laws of that country shall, subject to subsection (2) but notwithstanding any other provision to the contrary in this Act or in any other written law, have effect in relation to income tax, and every such agreement shall be subject to the provisions of the Treaty Making and Ratification Act, 2012. 

(2) Subject to subsection (3), where an arrangement made under this section provides that income derived from Kenya is exempt or excluded from tax, or the application of the arrangement results in a reduction in the rate of Kenyan tax, the benefit of that exemption, exclusion, or reduction shall not be available to a person who, for the purposes of the arrangement, is a resident of the other contracting state if fifty per cent or more of the underlying ownership of that person is held by a person or persons who are not residents of that other contracting state for the purposes of the agreement.

(3) Subsection (2) shall not apply if the resident of the other contracting state is a company listed in a stock exchange in that other contracting state. (4) In this section, the terms “person” and “underlying ownership” have the respective meanings assigned to them in the Ninth Schedule.

13. Extension of Provisions following Repeal of the Second Schedule to the ITA

In 2020, the Tax Laws (Amendment) Act 2020 repealed the Second Schedule of the Income Tax Act. 

In line with the repeal, section 133 was amended to provide that notwithstanding the repeal, the provisions on paragraph 24E of the repealed Second Schedule shall continue to be in force until 31 December 2021. 

The Finance Act 2021 extends the due date from 31 December 2021 to 31 December 2022.

Note: Paragraph 24E relates to capital expenditure and a 150 percent investment deduction.

14. Income Exempt From Tax

The Finance Act amends the First Schedule of the Income Tax Act to add 3 new items:

Subsection 36 – New Item (g)15

(g) property, including investment shares, which is transferred or sold for the purpose of transferring the title or the proceeds into a registered family trust.

New Subsection 57 

The income or principal sum of a registered family trust. 

New Subsection 58

Any capital gains relating to the transfer of title of immovable property to a family trust.

15. Resident Withholding Tax Rates – Disbursement of Deemed Income To Beneficiaries

The Third Schedule of the Income Tax Act is amended to include a new subparagraph (jb):

In respect to the disbursement of deemed income to beneficiaries under section 11 (3) (c) (for trust income, etc., deemed income of trustee, beneficiary etc.) the rate of withholding tax is twenty-five percent.

16. Withholding Tax in The Mining and Petroleum Sector 

The Ninth Schedule of the Income Tax Act was amended and provides for two changes in rates.

There is an increase in the withholding tax rate from 5.625% to 10% for fees paid to a non-resident providing services to a licensee or a contractor operating in the mining or petroleum sector.

There is a decrease from 12.5% to 10% for payments for the provision of management, training, or professional fees for the mining and petroleum sector. 

The effective date is 1 July 2021.


Value Added Tax (VAT) Act

1. Conditions For A Supply of Imported Services

The Finance Act 2021 amends the definition of “supply of imported services” and provides that as in the case of a registered person, the person would not have been entitled to a full amount of input tax payable if the services had been acquired by that person in a taxable supply.

Carpus Comments:

This clarifies the ambiguity for persons not registered for VAT. Both registered and non-registered persons making a supply of imported services must account for reverse VAT where necessary.

2. Digital Marketplace

The Finance Act 2021 increases the definition of digital services to include supplies made “over the internet or an electronic network.”

The Finance Act 2021 also provides for a new definition of “digital marketplace”.

A “digital marketplace” means an online platform which enables users to sell or provide services, goods or other property to other users.

The effective date is 1 July 2021.

3. Tax Rate Change

The tax rate for exportation of taxable services has been amended from zero-rated to exempt. Therefore, no input VAT will be claimable in the supply of exported services. 

The tax rate for the transfer of assets and other transactions related to the transfer of assets into real estate investment trusts and asset-backed securities has been added to the list of exempt services. 

Transportation of sugarcane from farms to milling factories has been deleted from the list of exempt services. 

The effective date is 1 July 2021.


Tax Procedure Act

1. Non-Extension of Timeframe For Record-Keeping and Assessment

Although the Finance Bill proposed to amend tax procedures to extend record keeping and the revenue authority audit window from 5 years to 7 years.

The Finance Act 2021 did not enact these provisions. 

2. Refunds To Settle Outstanding Taxes

The Finance Act 2021 provides that where a tax refund application has been confirmed by the Kenya Revenue Authority and the Commissioner proceeds to apply the refund against outstanding tax, there shall be no penalties and interest in the intervening period. 

Interest and penalties would apply to the portion of outstanding tax in excess of confirmed refund. 

The effective date is 1 January 2022.

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