Introduction
The National Assembly published the Finance Bill, 2025 (“the Bill”) on 6th May 2025 proposing various amendments that will improve tax administration and close loopholes rather than introduce new taxes.
The proposed changes are geared towards mainly aligning tax administration, procedures as well as regularizing inconsistencies in the various tax laws. However, certain proposals made will result in an increase in the cost of some commodities and business operations.
The proposed amendments are to come into force either on 1st July 2025 or 1st January 2026 as provided therein.
A. INCOME TAX
The Finance Bill 2025 proposes to amend the Income Tax Act, Chapter 470, (ITA) as follows:
1. Definitional Section
1.1 Loan and loan stock no longer categorized as debentures
The Bill proposes to amend the definition of the term “debenture” by removing the specific inclusion of loans and loan stock for the purposes of section 7(1)(d) and (e) of the Act. This amendment is to align the definition with the current provisions of the ITA as these sections have already been deleted.
1.2 Individual retirement fund
The Bill proposes to amend the definition of an “individual retirement fund” by deleting the phrase “subject to the Income Tax (Retirement Benefit) Rules”.
As a result of this amendment, the Income Tax (Retirement Benefit) Rules will no longer apply to individual retirement funds. This means that the specific requirements set out under those rules, such as those related to the registration of such funds, transfer of funds between qualified institutions, and mode of investments amongst others, will no longer be required.
1.3 Expanded definition of Royalty to include distribution of software
Effective 1st July 2025, the Bill proposes to expand the definition of “royalty” to include software distribution where regular payments are made for its use through a distributor.
This proposal appears to be a direct response to the High Court’s ruling in Seven Seas Technologies Limited v Commissioner for Domestic Taxes [2024], where the court held that payments for the distribution of computer software did not attract withholding tax (WHT), as they did not constitute royalties. The Kenya Revenue Authority had argued otherwise, seeking to classify such payments as royalties subject to WHT.
If passed, the amendment would bring software distribution payments within the scope of WHT, where regular usage payments are involved. However, this move departs from international tax norms, particularly Article 12 commentary to the OECD Model Tax Convention, which states that payments for software distribution without rights of commercial exploitation should be treated as business profits, not royalties, and therefore not subject to WHT.
1.4 Expanded definition of related persons
The Bill proposes to expand the definition of who a related person is.
This expanded definition widens the scope to include not just those involved in day-to-day management, but also individuals with indirect or familial influence. The expanded definition of a related person is welcome as it will now align the duplication of the definition of “related persons” in the ITA in Section 2 of ITA and Eighth Schedule of ITA.
The amendment reflects the Bill’s broader aim to improve tax administration and close loopholes, rather than introduce new taxes. It enhances clarity in determining related-party transactions, especially in cross-border contexts.
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