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Section 16

Deductions not Allowed. 

(1)
Save as otherwise expressly provided, for purposes of ascertaining the total income of a person for a year of income, no deduction shall be allowed in respect of –
(2)
Notwithstanding any other provision of this Act, no deduction shall be allowed in respect of –
(a) expenditure incurred by a person in the maintenance of himself, his family or establishment or for any other personal or domestic purpose including the following –
  • (i) entertainment expenses for personal purposes; or 
  • (ii) hotel, restaurant or catering expenses other than for meals or accommodation expenses incurred on business trips or during training courses or work related conventions or conferences, or meals provided to employees on the employer's premises;
  • (iii) vacation trip expenses except those customarily made on home leave as provided in the proviso to section 5(4)(a) and aa;   Finance Act, 2014 effective 13 June 2014
  • (iv) educational fees of employee's dependents or relatives; or
  • (v) club fees including entrance and subscription fees except as provided in section 15(2)(v)  Deleted by (Finance Act 2023 wef 1st-January-2024 s12) 
(b) expenditure or loss which is recoverable under any insurance, contract, or indemnity;

(c) income tax or tax of a similar nature, including compensating tax* paid on income;
 but, save in the case of foreign tax in respect of which a claim is made under section 41, a deduction shall be allowed in respect of income tax or tax of a similar nature paid on income which is charged to tax in a country outside Kenya to the extent to which that tax is payable in respect of and is paid out of income deemed to have accrued in or to have been derived from Kenya; Deleted by (FA 2025-wef 1st July-2025 S11*).

(d) sums contributed to a registered or unregistered pension, savings, or provident scheme or fund, except as provided in section 15(2)(o), or any sum paid to another person as a pension;

(e) a premium paid under an annuity contract;

(f) expenditure incurred in the production of income deemed under section 10 to have accrued in or to have been derived from Kenya where that expenditure was incurred by a non-resident person not having a permanent establishment within Kenya;

(fa) any expenditure incurred in the production of dividend income deemed under paragraph (a) of subsection (1), of section 7 to have been derived from Kenya where such expenditure was incurred by a non-resident person not having a permanent establishment within Kenya;**

(g) (Deleted by 8 of 1978 s. 9);

(h) a loss incurred in a business which, having regard to the nature of the business, to the principal occupation of the owner, partners, shareholders or other persons having a beneficial interest therein, to the relationship between those persons or to any other relevant factor, the Commissioner considers it reasonable to regard as not being carried on mainly with a view to the realization of profits; and, without prejudice to the generality of the foregoing, a business shall be deemed not to be carried on for any year of income with a view to the realization of profits where more than one quarter of the amount of the revenue expenditure incurred in that business in that year relates to goods, services, amenities or benefits, or to the production of goods, services amenities or benefits, which are of a personal or domestic nature enjoyed by the owner, partners, shareholders or other persons having a beneficial interest in the business or a member of the family or the domestic establishment of any such person;

(i) expenditure payable by a person on or after 18 th June, 1976, under contract of hiring of a road vehicle other than a commercial vehicle; Deleted by 10 of 2006 s. 22

(j*)interest payments in proportion to the extent that the highest amount of all loans held by the company at any time during the year of income exceeds the greater of –
(i) three times the sum of the revenue reserves and the issued and paid up capital of all classes of shares of the company; or
(ii) the sum of all loans acquired by the company prior to the 16 th June, 1988 and still outstanding in that year,
or an amount of deemed interest where the company is in the control of a non-resident person alone or together with four or fewer other persons and where the company is not a bank or a financial institution licensed under the Banking Act; and for the purposes of this paragraph "control" shall have the meaning ascribed to it in paragraph 32 (1) of the Second Schedule;
Provided that this paragraph shall also apply to loans advanced to the company by a non resident associate of the non-resident company controlling the resident company.
Provided that this paragraph
(i) shall apply to loans advanced to the company by a non-resident associate of the non-resident company controlling the resident company; and
(ii) shall not apply to a company implementing a project under an affordable housing scheme upon recommendation by the Cabinet Secretary responsible for housing. Deleted by (Finance Act 2021- wef-01Jan2022*)

(j*) gross interest paid or payable to related persons and third parties*** a non-resident in excess of thirty per cent of earnings before interest, taxes, depreciation and amortization of the borrower in any financial year:
Provided that—
  • (i) any income which is exempt from tax shall be excluded from the calculation of earnings before interest, taxes, depreciation and amortization; and
  • (ii) this paragraph shall apply to—
    • (A) interest on all loans;
    • (B) payments that are economically equivalent to interest; and
    • (C) expenses incurred in connection with raising the finance.
  • (iii) this paragraph shall not apply to —
    • (A) banks or financial institutions licensed under the Banking Act; and
    • (B) micro and small enterprises registered under the Micro and Small Enterprises Act, 2012;
    • (C**) microfinance institutions licensed and non-deposit taking microfinance businesses under the Microfinance Act, 2006
    • (D**) entities licensed under the Hire Purchase Act
    • (E**) non-deposit taking institutions involved in lending and leasing business; 
    • (F**) companies undertaking the manufacture of human vaccines;
    • (G**) companies engaged in manufacturing whose cumulative investment in the preceding five years from the commencement of this provision is at least five billion shillings;***
    • (H**) companies engaged in manufacturing whose cumulative investment is at least five billion shillings: Provided that the investment shall have been made outside Nairobi City County and Mombasa County; *** and 
  • (iv) any interest in excess of thirty per cent of earnings before interest, taxes, depreciation and amortization shall be an allowable deduction in ascertaining the total income of a person in the subsequent three years of income to the extent that the deduction of interest on loans from non-resident persons does not exceed the thirty percent threshold provided under this section; *** and 
  • (v) this provision shall not apply where the interest is exempt from tax under this Act.*** (Finance Act 2021- wef-01Jan2022*),   (Finance Act 2022-wef-01-July-2022**) (Finance Act 2023 wef 1st-January-2024 s12***) 
(ja) an amount of deemed interest where the person is controlled by a non-resident person alone or together with not more than four other persons and where the company is not a bank or a financial institution licensed under the Banking Act. (Finance Act 2021- wef-01Jan2022)

(k) (Deleted by 8 of 1997, s. 33);
(l) (Deleted by Finance Act 2009, s. 23)

(3)
For the purpose of subsection (2), the expression
“all loans” means loans, overdrafts, ordinary trade debts, overdrawn current accounts or any other form of indebtedness for which the company is paying a financial charge, interest, discount or premium but shall not include local loans* ;  (Finance Act 2023 wef 1st-January-2024 s12*) 
“deemed interest” means an amount of interest equal to the average ninety-one day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loans have been provided free of interest.Finance Act 2010 Effective 11 June 2010  
Deleted by Finance Act, 2016 Effective 9th June 2016 

(4)
For the avoidance of doubt, the expression “revenue reserves” under subsection (2) includes accumulated losses. Deleted by (FA 2025-wef 1st July-2025 S11).
 
(5)
The Commissioner shall prescribe the form and manner in which the deemed interest shall be computed and the period for which it shall be applicable. Finance Act 2012 09 June 2011

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