The Finance Act, 2021 (the Act) was assented to by the President and passed into law on 29th June 2021.

We are pleased to share with you, our views and comments on the salient changes that the Act has introduced below.


Provision Amended   Amendment Our Comments
S.2(a) Amends Section 2 of the ITA

Inclusion of the definition of “control” in scenarios where:

  • a person holds at least 20% of the voting rights of a company whether directly or indirectly;
  • a person advances a loan facility constituting at least 70% of the total book value of the assets of a company or guarantees 70% of the total debt of the debtor (excluding loans from unrelated financial institutions);
  • a person appoints more than half of the board of directors of another entity or at least one director or executive member of the governing board of that entity;
  • a person owns intellectual property rights which a company wholly depends on in the manufacture or processing of goods or articles carried on by the person;
  • a person who supplies at least 90% of the sales of an entity and upon assessment by the Commissioner, the person influences the price or other conditions relating to the supply or purchases by the other person;
  • a person who purchases or designates a person to purchase at least 90% of the sales of another person and upon assessment, the Commissioner deems influence in the price or any other conditions of the sales of another person;
  • a person who has any other relationship, dealing or practice with another person that the Commissioner may deem to constitute control.
The term “control” was previously defined under the Second Schedule of the Income Tax Act to mean the holding of 25% or more of the shares or voting rights within a company. The provision was subsequently deleted by the Tax Laws (Amendment) Act, 2020. This amendment is geared towards reintroducing the definition of the word “control” and expanding its scope in light of the introduction of beneficial ownership disclosure under the Companies Act. It, therefore, expands the scope of those in control of a company from ordinary shareholders to include suppliers, financiers, guarantors and even consumers provided that they exercise control in companies.

Additionally, a related company that supplies another company with at least 90% of its sales will have to comply with the transfer pricing rules under the Income Tax Act.

Further, the last amendment gives the Commissioner a wide discretion to determine what constitutes control of another person. This creates a level of uncertainty for taxpayers on the criteria used for determination of control.

These amendments will affect the application of the law on thin capitalisation and transfer pricing to include a wider range of transactions between related parties which were not clear or expressly provided for thus widening the taxable income base.

Introduction of the definition of “infrastructure bond” to mean a bond issued by the government for the financing of a strategic public infrastructure facility including a road, hospital, port, sporting facility, water and sewerage system, communication network or energy project. This will improve certainty for potential investors  whose listed bonds are infrastructure bonds, hence exempt them from paying income tax on the accruing interest.

For purposes of taxation, it is extremely useful and necessary to have express definitions for avoidance of doubt and to provide clarity.

The amendment redefines a “permanent establishment” (PE) as follows:

paragraph (a) has expanded the definition to include a warehouse (in relation to persons providing storage facilities to others), a farm, plantation or any other place where agricultural, forestry plantation or related activities are carried on as well as a sales outlet;

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

paragraph (c) lists the provision of services (including consultancy), through employees or other persons only where such services are related to business in Kenya for an aggregate period of at least 91 days in any 12-month period or ending in the year of income concerned;

paragraph (d) also classifies an installation/structure used in the exploration of natural resources for a period of not less than ninety-one days as a PE;

paragraph (e) also includes a dependent agent of a principle for activities the principal undertakes in Kenya (including habitually concluding contracts, playing the principal role leading to the conclusion of contracts without material modification by the person).

A fixed place of business through which business is wholly or partly carried on; and 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 183 days.

Paragraph (a) expands the definition of a PE to include sales outlets, farms, plantations or any place where related activities are carried out irrespective of the duration of activity.

Paragraph (b) seeks to quell the mischief of persons carrying out building & construction projects in Kenya:

a.  using different related entities for short periods each to avoid being deemed to be operating in Kenya for more than one hundred and eighty-three days; or

b.  by carrying out projects intermittently using a single entity to avoid carrying out business for a continuous period of one hundred and eighty-three days.

By deeming such to be PEs for purposes of income tax.

Paragraph (c): Service provision for an aggregate of 91 days in any 12-month period shall be regarded as a PE. This will affect the way non-resident service providers do business with resident entities.

Paragraph (d):Installations/structures used in natural resource exploration are now PEs if they are up for a period exceeding ninety-one days.

Paragraph (e): Non-residents acting through local agents to habitually conclude business in Kenya shall be deemed to have a PE in Kenya.

However, the determination of a PE excludes certain activities of a preparatory or auxiliary character.

S.3 The Act expands the scope of income to be subject to income tax by including income accrued from business carried out over the internet or electronic networks, including through a digital marketplace. This amendment subjects income from business carried out online to income tax. Previously, only income from a digital marketplace was subject to income tax.
The Act now defines a “digital marketplace” as an online or electronic platform which enables users to sell or provide services, goods or other property to other users. The amendment brings certainty as to what constitutes a digital marketplace.

However, the Digital Marketplace Regulations have not yet been enacted. Therefore, there is no clear mode of collecting taxes accruing from a digital marketplace.

S.11 The Act introduces section 11(3A) to the Income Tax Act to require the application of section 11(3) to registered trusts in the following instances:

a) any amount 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 Kshs. 10 million in the year of income;

c) such other income as may be prescribed by the Commissioner from time to time and at such rate as prescribed in paragraph 5 of the 3rd Schedule.

This amendment exempts all amounts paid out by a registered trust (to or on behalf of a beneficiary) except for:

a.  payments from the trust for the exclusive purpose of education, medical treatment or early adulthood housing;

b.  income paid to a beneficiary that amounts to less than KES ten million per year of income;

c.  any other amount prescribed by the Commissioner.

The amendment has restricted the applicability of income tax payments out of a registered trust that meet the above conditions. This will ultimately reduce tax collections on payments by trusts to beneficiaries. This amendment may be erroneous.

S. 12D The Act introduces subsection (1A) to exempt the following persons from paying minimum tax:

a) persons engaged in business whose retail price is controlled by the Government;

b) persons engaged in insurance business;

c) persons engaged in manufacturing and their cumulative investment in the preceding 4 years from assent is at least KES. 10 billion shillings;

d) persons licensed under the Special Economic Zones Act, 2015; and

e) persons engaged in distribution business with income based solely on a commission.

This amendment is a welcome move seeking to exempt the following persons from payment of minimum tax:

a.  businesses whose retail price is regulated by the government e.g. petrol stations;

b.  those in insurance business e.g. agents & brokers;

c.   manufacturers who have invested a sum of at least KES ten billion within the preceding four years;

d.   Special Economic Zone (SEZ) operators; and

e.   distributors who earn only commissions.

S.12E The Act states that non-resident persons whose income is derived or accrues in Kenya through a business carried out over the internet or an electronic network including a digital marketplace shall be subjected to Digital Service Tax (DST). Such non-resident persons shall be required to remit the DST on or before the twentieth day of the following month. Additionally, income subject to Withholding Tax shall not be further subjected to DST. This amendment restricts the applicability of Digital Service Tax (DST) to non-residents.

The amendment further provides that DST returns are to be filed and DST paid before the twentieth day after the end of the month when the service was offered (similar to the filing deadline for VAT, WHT and excise duty).

However, DST shall not apply to income subject to WHT or income from provision of radio, television or internet services.

S. 15 The phrase assigning the meaning of “control” as per the Second Schedule of the Act is deleted.

The Act also removes the cap of 10 years for offsetting taxable losses to an indefinite period.

For purposes of Section 15, “control” shall take up the definitions listed in Section 2 above. This expands the definition of control and creates consistency in its definition.

This amendment removes the 10-year restriction on carrying forward tax losses, thus enabling businesses to infinitely carry forward business losses.

S. 16 The Act prohibits payment of gross interest to related persons and third parties exceeding 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) of the borrower in any financial year. Further, any income exempt from tax is proposed to be excluded from the calculation of EBITDA.

The above provision shall apply to interest on all loans; payments that are economically equivalent to interest; and expenses incurred in connection with raising the finance.

Thin capitalization will now be determined by the total value of loans as a percentage of EBITDA, a change from the previous position where loans were compared to the total equity in the balance sheet.

This will change the thin capitalisation rule of debt-to-equity ratio of 3 to 1 to a restriction of payment of gross interest at not more than 30% of EBITDA. Related companies that are thinly capitalised will have to make necessary adjustments based on EBITDA. This amendment also encompasses any payments equivalent to interest, thereby sealing the loopholes resulting from persons declaring interest in other forms/classifications.

However, banks and financial institutions licensed under the Banking Act and Micro and Small Enterprises registered under the Micro and Small Enterprises Act, 2012 shall be exempt from this provision.

The Act introduces a new paragraph (ja) to Section 16 (2) to prohibit deductions on deemed interest where the person is controlled by a non-resident person alone or with not more than four other persons where the company is not a bank or financial institution licensed under the Banking Act. This provision already existed in Section 16(2)(j) and the amendment is for clarity purposes only.
S.18B The Act requires an ultimate parent entity of a multinational enterprise group to submit a return to the Commissioner describing the group’s financial activities in Kenya, where its gross turnover exceeds the prescribed threshold, and in all other jurisdictions where the group has a taxable presence.

The information to be provided in the returns include 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 regarding each jurisdiction in which the group operates.

Ultimate parent companies (that exceed a turnover threshold set by the Commissioner) must now file annual returns that include all the group’s financial activities in all other jurisdictions where the group has a taxable presence.

This will give the Revenue Authority first hand access to information on related parties.

S. 25 The Act refines the definition of the term “settlement” to include the phrase “through a registered family trust”. This amendment clarifies that registered family trusts are subject to income tax similar to other trusts.
S. 26 The definition of the term “settlement” is amended to include the words “other than a registered family trust” immediately after the word “covenant”. This excludes registered family trusts from the provisions of Section 26. As a result, income earned by a trust shall not be deemed as the taxable income of the creator of the trust.
S.31 Provision of insurance relief for contributions made to the National Hospital Insurance Fund (NHIF).


NHIF contributions shall now be allowable as insurance relief for resident individuals in their income tax returns, thus equalizing all tax payers when claiming relief on insurance.
S.39B Employers who engage at least 10 graduates from technical and vocational education and training as apprentices for a period of 6 to 12 months shall now also be eligible for a tax rebate the following year after such engagement. The amendment is meant to widen the scope of apprenticeship tax rebates to include employers offering 6–12-month apprenticeships to graduates from Technical and Vocational Education and Training (TVET) institutions, thus encouraging them to not only engage university graduates as apprentices but also graduates from TVETs.
S.41 The Act deletes the current section 41 of the Act and replaces it with a new section 41 that provides that any special arrangement for relief from double taxation between Kenya and another country shall have effect in relation to income tax and the said agreement shall be subject to the provisions of the Treaty Making and Ratification Act, 2012.

Additionally, where the agreement provides that the income derived from Kenya is exempt or excluded from tax, or the application of the arrangement results in the reduction of the rate of tax in Kenya, the arrangement shall not apply unless 50% or more of the underlying ownership of the entity is held by a person in the contracting state for the purposes of the agreement. However, this provision shall not apply if the resident of the other contracting state is a company listed in the stock exchange of the contracting state.

DTAs shall now come into effect upon compliance with the requirements of the Treaty Making and Ratification Act (parliamentary approval). This is a change from the previous position where DTAs came into effect upon issuance of a Notice by the Minister in charge of finance.
S. 41A The Act amends the provision by deleting the words “specified in the notice being arrangements”. This is an administrative amendment following the removal of the requirement of a Notice by the CS for a DTA to come into force.
S. 133 Subsection (6) of the section has been amended to extend the duration of application of paragraph 24E of the Second Schedule to 31st December 2022. The extension is as a result of the ongoing construction of the Standard Gauge Railways which entitles the making of deductions due to the ongoing works.
The Act amends section 133 by including subsection (7) which stipulates that subject to the provisions of section 12 of the Act, any investment allowance shall be claimed on a straight-line basis. The mode of calculating written down values for purposes of investment allowance shall be straight-line only. This allows persons investing to claim investment allowance within a shorter period.
Paragraphs 36, 57 and 58 of the 1st Schedule Paragraph 36 is amended by inserting sub-paragraph (g) to include property, including investment shares, which is transferred or sold for the purpose of transferring the title or the proceeds into a registered family trust. The following income tax exemptions have been added under the 1st Schedule to the ITA:

a.  property transferred or sold by an individual for the purpose of transferring them to a registered family trust;

b. income of a registered family trust;

c.  capital gains resulting from transfer of immovable property t a family trust.

The amendment expands the scope of income exempt from income tax to dealings relating to registered family trusts.

Inclusion of paragraph 57 to exclude the income or principal sum of a registered family trust.
The Act has included paragraph 58 to exclude capital gains relating to the transfer of title of immovable property to a family trust.
Paragraph 1 of the 2nd Schedule


The Act amends the Investment Allowance rates. The words “on a reducing balance” have been deleted and replaced with the words “in equal instalments” under sub-paragraphs (a), (b), (c) and (d) of Paragraph 1 to the 2nd Schedule.


Investment deduction (ID) on commercial buildings, machinery & purchase/acquisition of indefeasible rights to a fibre-optic cable by a telecommunications operator shall be on a straight-line basis; a change from reducing balance. However, the allowance rates on the same will not change.

In addition, ID will now be allowable on exploration machinery whether or not such operations are being carried out under a mining right.

The amendment also includes machinery used for electricity production whether or not the electricity is supplied to the national grid.

The amendment has also defined:

a.  civil works for purposes of ID. This definition is inclusionary and thus to the benefit of taxpayers.

b. Farm works for the purposes of ID are now defined in the Act.

Paragraph 1A of the 2nd Schedule The Act introduces paragraph 1A to the 2nd Schedule to stipulate that the investment deduction shall be at 100% in the following circumstances:

a) where the cumulative investment value in the preceding 3 years outside Nairobi County and Mombasa County is at least 2 billion shillings;

Provided that where the cumulative value of investment for the preceding 3 years of income was 2 billion shillings on or before the 25th April 2020 and the applicable rate of investment deduction was 150%, that rate shall continue to apply for the investment made on or before 25th April, 2020.

b) where the investment value outside Nairobi County and Mombasa County in that year of income is at least 250 million shillings; or

c) where the person has incurred investment in a special economic zone

ID shall be allowed at 100% on investments outside Nairobi & Mombasa counties if such investment is cumulatively at least KES Two Billion for the preceding three years.

However, where such investment cumulated to at least KES Two Billion for the three preceding years before 26th April 2020, an ID rate of 150% shall continue to apply on investments made before 26th April 2020.

ID shall be allowed at 100% for investments outside Nairobi & Mombasa counties if they amount to at least KES Two Hundred and Fifty Million in that year of income.

ID shall be allowed at 100% on investments in an SEZ.

S. 133 a) subsection (6) is amended by deleting the expression “31st December, 2021” and substituting therefor the expression “31st December, 2022”;

b) the following new subsection has been inserted immediately after subsection (6)

“(7) Subject to the provisions of section 12 of this Act, any investment allowance on any written down values as at the date of commencement of this Act, shall be claimed on a straight-line basis.”

This extends the applicability of ID on construction of bulk storage & handling facilities for SGR support to 31st December 2022 from the previous cut-off date of 31st December 2021.

The above-mentioned ID is at 150%.

Subject to S. 12 of the ITA, any ID is to be claimed on a straight-line basis.

Paragraph 5 of the 3rd Schedule The Act introduces sub-paragraph (jb) to apply a rate of 25% income tax in respect to the disbursement of deemed income under section 11(3)(c) of the Act. Income tax rate on payments from a trust to a beneficiary in the form of annuities or other such payments designated to be paid free/net of tax shall be 25%.
9th Schedule


The provisions on the taxation of the extractive industries have been amended as follows:

a) reduction in the rate of depreciation for machinery first used to undertake operations from 100% to 50% in the first year of use and 25% per year, in equal instalments;

b) reduction in the rate of depreciation for machinery first used to undertake exploration activities from 100% to 50% in the first year of use and 25% per year, in equal instalments;

c) increase in withholding tax for non-resident subcontractor for the provision of services to either a licensee or a contractor from 5.625% to 10%;

d) reduction of the deductible withholding tax by a contractor in cases of management, training or professional fees from 12% to 10% of the gross amount of the management or professional fees payable.

This amendment is to ensure conformity of ID rates by reducing ID on prospecting & exploration equipment from 100% to 50% in the first year and 25% per year on a straight-line basis (as per the 2nd Schedule).

WHT on service fees due to non-resident contractors by licensees and contractors in mining/petroleum operations has been increased from 5.625% to 10%.

WHT on payments to non-resident contractors with a PE in Kenya for management & professional services has been reduced from 12.5% to 10%.




Para 18 of the 9th Schedule The amendment deletes it and replaces it with the following new paragraph:

“The provisions of section 16(2)(j) shall apply to a contractor or a licensee.”

Thin cap provisions on deductibility of interest shall apply to contractors and licensees.

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The content of this alert is for general information purposes and should not be relied upon without seeking specific legal advice on the matter. If you have any queries or need clarifications, please do not hesitate to contact Renee Omondi (, Wanjala Opwora ( ) and Nzioka Wang’ombe (, or your usual contact at our firm for legal advice relating to the Finance Act and how the same might affect you.

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