Kenya: local rules

Kenya's arm's length rule is in section 18(3) of the Income Tax Act (Cap. 470). It applies where a non-resident carries on business with a related resident and the business gives the resident no profit or less than expected: the resident's profits are set as if the two were independent. Section 18(5) treats a permanent establishment as separate from its head office, and section 18A applies the same idea to dealings with a preferential tax regime (including a foreign country that taxes at under 20%). The Income Tax (Transfer Pricing) Rules, 2026 (Legal Notice 186, made 12 August 2026 and published 18 September 2026) replace the 2006 Rules. They apply to transactions under sections 18 and 18A to 18F, and add financing, insurance and reinsurance, restructurings, cost distribution arrangements and derivatives. The Rules have no commencement clause. Kenya Law shows 18 September 2026, while one EY alert says 12 August 2026. The OECD guidelines are used for guidance and interpretation (Kenya's OECD country profile, October 2025).

The Transfer Pricing Rules 2026 do not set a master file or local file. Under rule 8 the Commissioner can ask for the method and reasons, calculations, group structure, contracts, a functional and comparability analysis, comparables, audited accounts and APA details, and rule 9 says a person claiming arm's length prices needs a policy and supporting documents on request. No response period is given. Separately, sections 18C and 18D of the Income Tax Act require any resident member of a multinational group to file a master file and local file within 6 months after the group's reporting year end, with no turnover threshold (KRA asks for them by email to cbcr@kra.go.ke). Groups with consolidated turnover of KES 95bn or more also send a CbC notification by the last day of the reporting year and a CbC report within 12 months. Records are kept for 5 years in English or Kiswahili (Tax Procedures Act s 23).

Rule 6 of the 2026 Rules lists the comparable uncontrolled price, resale price, cost plus, profit split and transactional net margin methods, plus any other method the Commissioner prescribes if none fits. The taxpayer picks the most appropriate method for the transaction, class of transactions or functions (rules 6 and 7). There is no method hierarchy. For commodity imports and exports, the price quoted publicly on the shipping date, averaged over 15 days before and after, is used unless the taxpayer shows an adjustment fits the arm's length principle (rule 6(1) proviso and 6(2)). Section 18G allows advance pricing agreements for up to 5 years, but the regulations to run them were still pending in October 2025.

The Transfer Pricing Rules 2026 have no penalty of their own. Rule 10 applies the Tax Procedures Act on fraud, failure to furnish returns and underpayment, and rule 11 treats unpaid tax as additional tax. Failing to follow sections 18C and 18D (notification, CbC report, master file, local file) is an offence with penalties set by the Tax Procedures Act (Income Tax Act s 18E). That Act gives KES 1,000 a day up to KES 50,000 for a late document that is not a return (s 83(2)), 5% of tax or KES 20,000 for a late return by a company (s 83(1)(d)(i)), 5% for late payment (s 83A), 1% a month interest (s 38) and 75% of the shortfall for a deliberate false statement (s 84). Which of these applies to a late master file or local file is not spelled out.

Kenya has a domestic minimum top-up tax only, in section 12G of the Income Tax Act (added by the Tax Laws (Amendment) Act 2024, Act 12 of 2024, and changed by the Finance Act 2025). It is payable by a resident company or permanent establishment in a group with revenue of EUR 750m or more in two of the four prior years, when its effective rate for the year is under 15%, for tested years of income occurring on or after 1 January 2025 (read here as years starting on or after that date). No income inclusion rule or under-taxed profits rule was found. The Income Tax (Minimum Top Up Tax) Regulations 2026 (Legal Notice 189, published 18 September 2026) set: a first notification within 60 days of publication (17 November 2026), a local minimum top-up tax return by the end of the 6th month after the year, and a GloBE Information Return 18 months after the first year and 15 months after later years. The tax itself is due by the end of the 4th month after the year. A transitional safe harbour election is open for years starting before 1 July 2029.

Weekend rule: Tax Procedures Act s 77(1) moves a due date for a return, notice, other document or payment that falls on a Saturday, Sunday or public holiday back to the previous working day. The date stays only for a tax return or objection filed electronically, or tax paid electronically. So the iTax corporate return keeps its date, and every other filing here is moved back, which is the safe choice. The corporate return is due on the last day of the 6th month after year end (Income Tax Act s 52B(1)(b)); KRA says the Finance Act 2026 does not change this for companies. Significant economic presence tax (s 12E) applies to non-residents earning from services over the internet, a digital marketplace or an electronic network from Kenyan users. It is on 10% of gross turnover, with a return and payment by the 20th of the next month, and is not modelled as a deadline. Interest above 30% of EBITDA is disallowed. Kenya has no formal safe harbours; the OECD profile says a transfer pricing adjustment is treated as a dividend to a non-resident shareholder (s 7), which was not checked in the text. Kenya is still considering Amount B.