EXPLAINER: What to know about Finance Bill, 2025

The Finance Bill, 2025, was officially released on April 30, 2025 and is now open for scrutiny, with public participation forums on course.

The National Assembly Committee on Finance and National Planning is on Tuesday, June 3, 2025 holding public hearings on the Finance Bill, 2025 in the counties.

The committee, which has been receiving views from various stakeholders in Nairobi for about seven days, will hold public hearings in Busia and Migori, then in Trans Nzoia and Nandi on Wednesday, June 4, 2025.

This legislative proposal is set to introduce significant amendments to the tax framework, aimed at sealing loopholes and enhancing efficiency, as stated by the National Treasury.

The committee’s vice chairman, Benjamin Langat, underscored the significance of public participation in the legislative process, saying all views will be integrated into the final report presented to the House.

“This is not an exercise in futility, it’s a very important exercise. This Finance Bill is a proposal to the National Assembly, and it has to undergo the necessary legislative process, including public participation, to become law,” Langat explained on June 2, 2025.

Langat urged the public to consider the current Bill not in isolation, but in conjunction with the proposed budget estimates.

“I want to implore the public to desist from looking at the Finance Bill in isolation. When you tell us to employ junior secondary school teachers, or even more nurses, the money to cater for that must come from somewhere. This Bill is the instrument we use to raise such funds,” he said.

On Saturday, various stakeholders presented their views on the Finance Bill, 2025.

Grant Thornton conducted an in-depth analysis of the Finance Bill, 2025, evaluating its impact on businesses and individuals across various sectors.

The detailed review breaks down each tax change, highlighting key implications on income.

Income Tax

1.     Extensive definition of royalty payments.

The Bill proposes to include “the distribution of software where regular payments are made for the use of the software through the distributor” in the definition of royalty.

 Implication

This proposal widens the scope of royalty payments to encompass regular payments made to distributors. Though the proposal clarifies that the distribution of software qualifies as a royalty, its implementation will increase the compliance burden and erosion of economic benefits.

2.     Minimum top-up tax due date

The Bill proposes that taxpayers eligible for the minimum top-up tax will be required to make a payment by the end of the fourth month after the end of the year of income.

Implication

This proposal seeks to bring clarity on the due dates for payment of the minimum top-up tax introduced by the Tax Laws Amendment Act 2024.

3.     Repeal of 100% and 150% investment allowances

The Bill proposes to delete the 100% and 150% investment deduction rates for investments in a particular year of income where:

The cumulative investment value in the preceding 3 years outside Nairobi City County and Mombasa County is at least Sh1 billion.

· The cumulative investment in the year that a person is claiming the investment allowances is at least Sh 250 million;

· The person has incurred an investment in a special economic zone.

Implication

Investors will no longer be economically motivated to absorb the higher costs of investing outside Nairobi and Mombasa counties if this proposal is enacted, leading to a significant negative impact on investment in those regions

4.     100% Capital allowance on non-machinery items

The Bill seeks to clarify the percentage rate of allowance on any implement, utensil or similar article, employed in the production of gains or profits, not being machinery or plant, deductible under the second schedule at 100% in that year of income.

Implication

This proposal is a welcome move as it will allow businesses to claim full costs of such items, thereby simplifying tax compliance and ensuring certainty.

5.     Removal of deductibility of sports sponsorship expenditure

The Bill proposes to delete the current provision allowing deduction of expenditure incurred by a person sponsoring sports, with the prior approval of the Cabinet Secretary responsible for sports.

 Implication

Implications are to redirect these funds towards activities considered deductible under the Income Tax Act.

If enacted, the proposal will have a negative impact on nurturing sports and talent, especially on betting firms that have been at the forefront of sports sponsorship.

6.     Tax deductibility of expenditure on the construction of a public sports facility

The Bill proposes to allow deduction of expenditure incurred in the construction of a public sports facility in such year of income.

Implication

The proposal is intended to incentivise taxpayers to contribute to the development of public sports facilities by allowing a tax deduction for related expenditure.

7.     Limitation on carrying over tax losses

The Bill proposes to limit the carryover of tax losses back to 5 years.

Implications 

This proposal will negatively affect capital-intensive projects that take more than 5 years to be commercially viable and therefore could potentially discourage both foreign and local investment.

8.     Deletion of the provision providing for capital losses deduction against future capital gains.

The Bill proposes to delete the provision that allows taxpayers to deduct any capital loss realised in accordance with the provisions of the Eighth Schedule against any future capital gains realised.

 Implication

Adoption of this proposal would unfairly burden taxpayers with capital gains tax on the sale of a particular property despite recent significant capital losses upon transfer or sale of a prior property.

9.      Deletion of the double tax relief provision on capital gain tax

The Bill intends to delete the Income Tax provision that exempts income from capital gains tax to the extent that it is chargeable to tax under any other provision.

Implication

Taxpayers may now face double taxation on capital gains due to this provision being deleted.

10.  Clarity regarding CbCR filing for constituent entities based in Kenya

The Bill proposes to provide clarity on CbCR filing where there is more than one constituent entity of an MNE who are resident in Kenya, by stating that the MNE Group may designate one of the entities to file a CbCR in Kenya.

Implication

Clarity on the obligations of filing CbCR in Kenya for resident entities

11.   Repeal of CbCR filing exemptions for resident surrogate parent entity

The bill proposes to delete CbCR filing exemptions for resident surrogate parent entities.

Implication

Clarity on the wording of the law with intent to align with the exemption criteria per BEPS Action 13.

12.   Introduction of Advance Pricing Agreements

The Bill proposes to allow a taxpayer to enter into an advance pricing agreement for a fixed price, subject to a maximum period of 5 consecutive years.

Implication

This proposal reduces the administrative tax burdens for taxpayers on transfer pricing between related parties by minimising costly and time-consuming litigation or adjustments by agreeing on arm’s length pricing upfront.

13.   Withholding tax on payments to charterers and ship owners

The Bill proposes to subject gains or profits derived from the business of a nonresident ship owner or charterer other than transhipment to withholding tax.

Implication

This proposal widens the tax base to encompass income from non-resident ship owners or charterers, therefore increasing government collection. If passed, it could lead to higher cost of doing business and possible re-routing of shipping activity.

14.   Automatic approval of a change in accounting periods

The Bill proposes that a taxpayer’s application for a change of the accounting period shall be deemed to have been approved if the commissioner does not revert within a period of six (6) months.

Implication

This proposal provides certainty to taxpayers on the approval of the change of accounting period by the commissioner by preventing administrative delays and unfair penalties.

15.   Tax exemption of gains on transfer of securities

The Bill proposes to exempt gains on the transfer of securities traded on any securities exchange licensed by the Capital Markets Authority.

Implication

This proposal will attract foreign investment through securities, considering such gains on the transfer of securities will be exempt from tax.

16.   Tax exemption of dividends paid by a company certified by NIFCA

The Bill proposes to exempt dividends paid by a company certified by the Nairobi International Financial Centre Authority where the company reinvests at least Sh250 million in that year of income.

Implication

This proposal will incentivise companies to reinvest more than Sh250 million to qualify for such exemptions. This will balance tax incentives with economic development.

17.   Tax incentives for companies certified by NIFCA

The Bill proposes to reduce the corporate income tax rate for companies certified by the Nairobi International Financial Centre Authority to 15% for the first 10 years and 20% for the subsequent 10 years, where such a company:

· invests at least Sh3 billion in the first 3 years of operation

· is a holding company, and at least 70% of its employees in senior management are employees of Kenya

· The regional headquarters of the company is in Kenya, and at least 60% of the employees in senior management are citizens of Kenya.

In the case of start-ups certified by NIFCA, the Bill proposes to reduce the corporate income tax rate to 15% for the first 3 years and subsequently 20% for the succeeding 4 years.

Implication

This proposal encourages investors to set up within the Nairobi International Financial Centre while attracting foreign direct investment and helps startups to preserve cash flow for growth.

18.  Digital asset tax reduced to 1.5%

The Bill proposes to reduce the digital asset tax rate from 3% to 1.5% of the transfer or exchange value of the digital asset.

Implication

This proposal reduces the tax burden for businesses engaging in digital asset transfers, or engages further stimulation higher trading volumes in Kenya’s digital asset market by making transactions more cost-effective.

19.   Extensive definition of Significant Economic Presence Tax

The Bill proposes to expand the scope of significant economic presence tax to include business carried out over the internet or an electronic network, including through a digital marketplace.

Implication

This definition brings clarity to taxpayers subject to the SEP Tax with respect to income earned through digital platforms.

20.  Removal of the threshold for the applicability of Significant Economic Presence Tax.

The Bill proposes to delete the provision exempting non-resident persons with an annual turnover of less than Sh5 million from Significant Economic Presence Tax.

Implication

This proposal is likely to increase compliance costs for non-resident persons with minimal turnover and may potentially discourage businesses from providing digital services in the Kenyan market since the economic benefits derived may not be commensurate with the compliance costs incurred.

21.   Fringe benefit taxed at a resident corporate tax rate

The Bill proposes to charge to tax fringe benefits at the prevailing resident corporate income tax rate.

 Implication

This simplifies tax compliance on the computation of fringe benefit tax, which eases the administrative burden on such obligation.

22.  Requirement to include the dividend distributed out of untaxed gains in the tax return.

The Bill proposes that every company shall, in its return, include details of any dividend distributed out of untaxed gains in a particular year of income.

Implication

The Bill seeks to bring clarity on the declaration of dividends distributed out of untaxed gains, which will be made through the income tax return.

23.  Withholding tax on the sale of scrap and the supply of goods to a public entity

The Bill proposes to include payments for the sale of scrap and supply of goods to a public entity under the ambit of withholding tax.

 Implication

This alignment with section 35 of the Income Tax Act provides clarity that income from such supplies and the sale of scrap is subject to tax.

 Personal tax

24.   Increase of per diem threshold

The Bill proposes to increase the allowable cash benefit limit from Sh2,000 to Sh 10,000 on the amount received by an employee as reimbursement in respect of a period spent outside his usual place of work while on official duties.

 Implication

This proposal is a welcome relief to employees since it is commensurate with the current economic conditions and increased cost of living.

25.   Employee reliefs and deductions

The Bill proposes to grant employees all applicable deductions, exemptions and reliefs under the Income Tax Act, before computation of PAYE.

Implication

The proposal intends to ensure employers effect deductions, exemptions and reliefs on the employee’s taxable income before deducting PAYE.