IT 11

Non-residents, the digital economy and international tax

1Scope and legal basis

A non-resident is taxed only on income accrued in or derived from Kenya. The Income Tax Act reaches that income in three ways: through a permanent establishment, taxed like a resident company at 30% plus the 15% repatriated income tax; through withholding tax at the non-resident rates as a final tax on payments from Kenya (IT 7); and through the special charges on the digital economy: the significant economic presence tax under section 12E (Tax Laws (Amendment) Act 2024, replacing the 1.5% digital service tax), the digital asset tax under section 12F (Finance Act 2023, reduced from 3% to 1.5% by the Finance Act 2025), and VAT on digital marketplace supplies by non-residents. Around these sit the rules that protect the Kenyan base against profit shifting: section 18(3) transfer pricing and the Transfer Pricing Rules, the 30% EBITDA interest limitation in section 16(2)(j), deemed interest under section 16(5), the section 41 limitation on treaty benefits, country-by-country reporting, and the minimum top-up tax under section 12G. Double taxation agreements allocate taxing rights and reduce withholding, and section 42 gives unilateral credit where a treaty applies.

2Key definitions

3Charge, computation and rates

The non-resident's possible Kenyan charges

Base protection rules

• Transfer pricing: a resident dealing with a related non-resident (or a Kenyan PE with its head office) must price at arm's length and keep contemporaneous documentation showing the analysis, methods and comparables; the Commissioner adjusts profits where the price is not arm's length and applies the 20% or 75% shortfall penalty. Groups with consolidated revenue of KES 95 billion or more file a country-by-country report (by the ultimate parent or a surrogate) and a master file and local file within six months of the year end, with notification by the year end. Advance pricing agreements are available from 1 January 2026 for up to five years.
• Interest limitation: interest on loans from non-residents (related or not) is deductible only up to 30% of EBITDA; the excess is carried forward for three years. Banks, insurers, micro and small enterprises and certain infrastructure companies are exempt. The old 3:1 debt-to-equity thin capitalisation rule was repealed in 2021.
• Deemed interest: where a non-resident person controlling the company lends interest-free, interest is deemed at the prescribed rate (8% for January to June 2026, set half-yearly) and withholding tax at 15% is payable on it, though the deemed interest is not itself a deduction.
• Foreign exchange losses on loans from related non-residents are deferred while the company is thinly capitalised under the interest cap, and realised losses on such loans are restricted.
• Anti-treaty-shopping: section 41(5) and the limitation-of-benefits articles in newer treaties; the KRA also examines substance (employees, decision-making, office) in the treaty state before granting the treaty rate.

Treaties, foreign tax credit and the minimum top-up tax

• Kenya's treaties in force (Canada, Denmark, France, Germany, India, Iran, Norway, Qatar, Seychelles, South Africa, South Korea, Sweden, the UAE, the UK, Zambia) follow the OECD and UN models: business profits taxable in Kenya only through a PE, reduced withholding on dividends, interest and royalties (and in some treaties management fees), employment income relief for short assignments, and a mutual agreement procedure. Kenya has also signed the Multilateral Instrument and the Multilateral Competent Authority Agreement on CbC exchange.
• Relief from double taxation: section 42 credits foreign tax against Kenyan tax on the same income where a treaty applies, limited to the Kenyan tax on that income; where no treaty applies, foreign tax on income also taxed in Kenya is a deductible expense at best. Because Kenya taxes residents mainly on Kenyan-source income, double taxation arises chiefly on foreign employment income and on business carried on partly abroad.
• Minimum top-up tax (section 12G): a member of a multinational group with consolidated revenue of at least EUR 750 million in two of the four preceding years pays a top-up where the group's combined effective tax rate in Kenya (covered taxes divided by net income, computed under the Pillar Two rules) is below 15%; the excess profit is net income less 10% of eligible payroll and 8% of the net book value of tangible assets, and the tax is due by the end of the fourth month after the tested year. Kenyan subsidiaries of large foreign groups that use incentives (EPZ, SEZ) are the main affected taxpayers.

4Compliance: returns, payment and penalties

• A PE registers for a PIN and files as a company (return within six months of the year end, four months from 2027; instalment tax; balance within four months), with the repatriated income computation and a transfer pricing local file where the thresholds are met.
• SEP tax: the non-resident registers on iTax (a tax representative is optional), files a monthly SEP return and pays by the 20th of the following month; where the non-resident does not register, the Commissioner may appoint a Kenyan payer as agent. Digital asset tax is remitted by the platform within five working days of the transfer; virtual asset service providers file annual information returns and face penalties for failure (Finance Act 2026).
• Withholding on payments to non-residents is remitted within five working days with the withholding return; treaty rates are applied on evidence of residence and beneficial ownership held by the payer.
• Transfer pricing documentation is produced within the time the Commissioner specifies on request (contemporaneous documentation is expected at filing); country-by-country reports and master and local files are filed within six months of the year end for groups above KES 95 billion; failure to file attracts a penalty of KES 1 million per return under the Tax Procedures Act.
• The minimum top-up tax return and payment are due by the end of the fourth month after the year end; late payment attracts the usual 5% penalty and 1% monthly interest.

5Examinable focus