18A. Ascertainment of gains and profits of business in a preferential tax regime

Edition: 2026-07-01 · In force

18A. Ascertainment of gains and profits of business in a preferential tax regime

(1)Where–(a)a resident person carries on business with a related resident person operating in a preferential tax regime; or(b)a resident person carries on business with–(i)a non-resident person located in a preferential tax regime; or(ii)an associated enterprise of a non-resident person located in a preferential tax regime; or(iii)a permanent establishment of a non-resident person operating in Kenya where the non-resident person is located in a preferential tax regime, and the business produces no gains or produces less gains than those which would have been expected to accrue from that business if the business activity was not with a party in a preferential tax regime, the gains of that resident person from that business shall be deemed to be the amount which would have been expected to accrue if that business had been conducted by an independent person dealing at arm’s length, or if none of the parties were located in a preferential tax regime.

(2)For the purposes of this section, "preferential tax regime” means–(a)any Kenyan legislation, regulation or administrative practice which provides a preferential rate of tax to such income or profit, including reductions in the tax rate or the tax base; or(b)a foreign jurisdiction which–(i)does not tax income;(ii)taxes income at a rate that is less than twenty per cent;(iii)does not have a framework for the exchange of information;(iv)does not allow access to banking information; or(v)lacks transparency on corporate structure, ownership of legal entities located therein, beneficial owners of income or capital, financial disclosure, or regulatory on supervision.

(3)For the purposes of this section, qualifying intellectual property income that subject to the preferential tax rate shall be determined using the following formula–Where-I is income receiving tax benefits;Q is the research and development expenditures made by the taxpayer, excluding acquisition costs and related party outsourcing costs;T is the research and development expenditures made by the taxpayer, including acquisition costs and related party outsourcing costs; andP is intellectual property income including royalties, capital gains and any other income from the sale of an intellectual property asset including embedded intellectual property income calculated under transfer pricing principles:Provided that for the purposes of this subsection intellectual property losses shall only be deducted against intellectual property income[Act No. 15 of 2017, s. 13, Act No. 22 of 2022, s. 10, Act No. 4 of 2023, s. 14]