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Section 18

Ascertainment of gains or profits of business in relation to certain non-resident persons

(1)
Where a non-resident person carries on a business in Kenya which consists of manufacturing, growing, mining, or producing, or harvesting, whether from the land or from the water, a product or produce, and sells outside, or for delivery outside, Kenya that, product or produce whether or not the contract of sale is made within or without Kenya, or utilizes that product or produce in a business carried on by him outside Kenya, then the gains or profits from that business carried on in Kenya shall be deemed to be income derived from Kenya and to be gains or profits of such amount as would have accrued if that product or produce had been sold wholesale to the best advantage.

(2)
Where a bank which is a permanent establishment of a nonresident person holds outside Kenya any deposits, assets or property acquired from its operations in Kenya, the gains or profits accruing from such deposits, assets or other property held outside Kenya shall be deemed to be income accrued in or derived from Kenya.

(3)
Where a non-resident person carries on business with a related resident person or through its permanent establishment and the course of that business is such that it produces to the resident person or through its permanent establishment either no profits or less than the ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person or through its permanent establishment from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm's length. Finance Act 2010 Effective 11 June 2010     Finance Act, 2014 effective 01 January 2015

For the purpose of ascertaining the gains or profits of a business carried on in Kenya no deductions shall be allowed in respect of expenditure incurred outside Kenya by a non-resident person other than expenditure in respect of which the Commissioner determines that adequate consideration has been given; and, in particular, no deduction shall be allowed in respect of expenditure-
   (a) on remuneration for services rendered by the non resident directors (other than whole-time service directors) of a non-resident company the directors whereof have a controlling interest therein, in excess of five per cent of the total income of that company, calculated before the deduction of that expenditure, or of twenty-five thousand shillings, whichever is the greater, but no deduction in excess of one hundred and fifty thousand shillings shall be allowed;
   (b) on executive and general administrative expenses except to the extent that the Commissioner may determine that expenditure to be just and reasonable.
(5)
When a non-resident person carries on a business in Kenya through a permanent establishment in Kenya the gains or profits of the permanent establishment shall be ascertained without any deduction in respect of interest, royalties or management or professional fees paid or purported to be paid by the permanent establishment to the non-resident person and by disregarding any foreign exchange loss or gain with respect to net assets or liabilities purportedly established between the permanent establishment in Kenya and the foreign head office or other offices of a non-resident person. Finance Act, 2014 effective 01 January 2015
  • Provided that for the avoidance of doubt, the expression “non-resident person” shall include both the head office and other offices of the non-resident person.  
(6)
For the purposes of subsection (3), a person is related to another if -
(a) either person participates directly or indirectly in the management, control or capital of the business of the other; or
(b) a third person participates directly or indirectly in the management, control or capital of the business of both.
(c) An individual, who participates in the management, control or capital of the business of one, is associated by marriage, consanguinity or affinity to an individual who participates in the management, control or capital of the business of the other.  Finance Act 2010 Effective 11 June 2010  Deleted by (FA 2025-wef 1st July-2025 S12).

(7)
For the purposes of ascertaining the gains or profits of a petroleum company, as defined in the Ninth Schedule, paragraph (b) of subsection (4) shall not apply; but paragraph 5(2)(f) of that Schedule shall apply instead. Deleted by inance Act, 2014 effective 01 January 2015 

(8)
The Minister may, by rules published in the Gazette:-
  • (a) Issue guidelines for the determination of the arm’s length value of a transaction for purposes of this section; or
  • (b) Specify such requirements as he may consider necessary for the better carrying out of the provisions of this section.

(18A) Ascertainment of gains or profits of business in a non-preferential tax  regime.

(1) Where a resident entity operating in a preferential tax regime carries on business— 
(a) with a related resident person not operating in a preferential tax regime; and 
(b) the business produces to the resident person not operating in a preferential tax regime either no profits or less than the ordinary profits which would have been expected to accrue from that business if there had been no such relationship, 
then, the gains or profits of that resident person from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm’s length.
 (2) For the purposes of this section, the expression “preferential tax regime”, with respect to an item of income or profit, means any legislation, regulation or administrative practice which provides a preferential rate of taxation to such income or profit, including reductions in the tax rate or the tax base.
Finance Act, 2017 effective 3rd April 2017  18A Repealed by (Finance Act 2022-wef-01-January-2023) 

(18A) Ascertainment of gains and profits of business in a preferential tax regime. (Finance Act 2022-wef-01-January-2023) 

(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 nonresident 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 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—
I=(Q/T) × P
Where— 
Provided that for the purposes of this subsection intellectual property losses shall only be deducted against intellectual property income.  (Finance Act 2023 wef 1st-July-2023 S14*) 

18B.  Returns on activities in other jurisdictions.

(1) In this section
“multinational enterprise group” means a group that includes two or more enterprises which are resident in different jurisdictions including an enterprise that carries on business through a permanent establishment or through any other entity in another jurisdiction; and
“ultimate parent entity” means an entity that—
(a) is resident in Kenya for tax purposes;
(b) is not controlled by another entity; and
(c) owns or controls a multinational enterprise group.
(2) An ultimate parent entity of a multinational enterprise group shall submit to the Commissioner a return 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 taxable presence, not later than twelve months after the last day of the reporting financial year of the group.
(3) The return submitted under subsection (2) shall contain the prescribed information on the group’s aggregate information including information relating to 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 with regard to each jurisdiction in which the group operates.

18B: Application of sections 18C, 18D, 18E and 18F(Finance Act 2022-wef-01-July-2022) 

The provisions of sections, 18C, 18D, 18E, and 18F shall apply to returns for the year of income 2022 and subsequent years of income.

18C: Notification to the Commissioner (Finance Act 2022-wef-01-July-2022)

(1) A multinational enterprise group or a constituent entity, other than an excluded multinational enterprise group, that is resident in Kenya, shall notify the Commissioner, not later than the last day of the reporting financial year of that group—
  • (a) whether or not it is the ultimate parent entity of the group;
  • (b) in case it is not the ultimate parent entity of the group, whether or not it is a surrogate parent entity; or
  • (c) in case paragraphs (a) and (b) do not apply, the identity of the constituent entity which is the ultimate parent entity or surrogate parent entity and the tax residence of that constituent entity.
(2) The notification referred to in subsection (1) shall be made to the Commissioner in such form as the Commissioner may specify.

18D: Filing of country-by-country report, master file and local file.  (Finance Act 2022-wef-01-July-2022)

(1) An ultimate parent entity or a constituent entity of a multinational enterprise group with a gross turnover of ninety-five billion shillings (including extraordinary or investment income) that is resident in Kenya shall file a country-by-country report with the Commissioner of its financial activities in Kenya and for all other jurisdiction where the group has taxable presence.  Each ultimate parent entity that is resident in Kenya shall file a country-by-country report with the Commissioner in accordance with subsection (3).   Amended by (Finance Act 2023 wef 1st-July-2023 ) 

(1A*) A constituent entity that is resident in Kenya shall file a country-by-country report with the Commissioner in accordance with subsection (1B), if one of the following conditions applies— 
(a)the ultimate parent entity is not obligated to file a country-by-country report in its jurisdiction of tax residence; 
(b)the jurisdiction in which the ultimate parent entity is resident has a current international tax agreement which Kenya is a party to but does not have a competent authority agreement with Kenya at the time of filing the country-by-country report for the reporting financial year; or 
(c)there has been a systemic failure of the jurisdiction of tax residence of the ultimate parent entity that has been notified by the Commissioner to the constituent entity resident in Kenya.  (*Finance Act 2023 wef 1st-July-2023 S15) 

(1B*) The provisions of subsections (1) and (1A) shall apply to a multinational enterprise group whose total consolidated group turnover, including extraordinary or investment income, is at least ninety-five billion shillings during the financial year immediately preceding the reporting financial year as reflected in its consolidated financial statements for such preceding financial year.  (*Finance Act 2023 wef 1st-July-2023 S15) 

 (d)!in subsection (3), by deleting the words “In addition to the provisions in subsection (1)”. 

(2) An ultimate parent entity or a constituent entity* shall file the country-by-country report referred to under subsection (1) not later than twelve months after the last day of the reporting financial year of the group. (*Finance Act 2023 wef 1st-July-2023 S15)
(3) In addition to the provisions in subsection (1)*, an ultimate parent entity or a constituent entity of a multinational enterprise group shall file a master file and a local file to the Commissioner in such manner as the Commissioner may specify. *Finance Act 2023 wef 1st-July-2023 S15)
(4) The master file and the local file shall be filed not later than six months after the last day of the reporting financial year of the multinational enterprise group.
(5) A country-by-country report filed under subsection (1) shall consist of—
  • (a) the information relating to the identity of each constituent entity, its jurisdiction of tax residence, if different, jurisdiction where such entity is organized, and the nature of the main business activity or activities of such entity;
  • (b) the group's aggregate information including information relating to 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 with regard to each jurisdiction where the group has taxable presence; and
  • (c) any other information as may be required by the Commissioner.
(6) A master file under subsection (3) shall contain—
  • (a) a detailed overview of the group;
  • (b) the group’s growth engines;
  • (c) a description of the supply chain of the key products and services;
  • (d) the group’s research and development policy;
  • (e) a description of each constituent entity’s contribution to value creation;
  • (f) information about intangible assets and the group intercompany agreements associated with them;
  • (g) information on any transfer of intangible assets within the group during the tax period, including the identity of the constituent entities involved, the countries in which those intangible assets are registered and the consideration paid as part of the transfer;
  • (h) information about financing activities of the group;
  • (i) the consolidated financial statements of the group;
  • (j) tax rulings, if any, made in respect of the group; and
  • (k) any other information that the Commissioner may require.
(7) A local file under subsection (3) shall contain —
  • (a) details and information on the resident constituent entity’s activities within the multinational enterprise group;
  • (b) management structure of the resident constituent entity;
  • (c) business strategies including structuring, description of the material-controlled transactions, the resident constituent entity’s business and competitive environment;
  • (d) the international transactions and amounts paid to the resident constituent entity or received by the entity; and
  • (e) any other information that the Commissioner may require.
(8) Where there are more than one constituent entities of the same multinational enterprise group that are resident in Kenya, the multinational enterprise group may designate one of such constituent entities as a surrogate parent entity *to file a country-by-country report and notify the Commissioner in such form as the Commissioner may specify. Amended by (FA 2025-wef 1st July-2025 S13*).
(9) A resident surrogate parent entity of a multinational enterprise group shall not be required to file a country-by- country report with the Commissioner with respect to the reporting financial year of the group, if—
(a) the ultimate parent entity is obligated to file a country-by-country report in its jurisdiction of tax residence;
(b) the jurisdiction in which the ultimate parent entity is resident for tax purposes has an international agreement and a competent authority agreement in force; and
(c) the Commissioner has not notified the resident constituent entity in Kenya of a systemic failure, if any. Deleted by (FA 2025-wef 1st July-2025 S13).
(10) A resident constituent entity of a multinational enterprise group shall not be required to file a country-by-country report with the Commissioner with respect to the reporting financial year of the group, if —
  • (a) a non-resident surrogate parent entity files the country-by-country report on the group with the competent authority of the tax jurisdiction of the entity;
  • (b) the jurisdiction in which the nonresident surrogate parent entity is resident requires the filing of country-by-country reports;
  • (c) the competent authority of the jurisdiction in which the nonresident surrogate parent entity is resident and Kenya have a competent authority agreement for the exchange of information;
  • (d) the competent authority in the jurisdiction where the non-resident surrogate parent is resident has not notified Kenya of a systemic failure; or
  • (e) he non-resident parent entity has notified the competent authority in the jurisdiction of its tax residence that the entity is the designated surrogate parent entity of the group.
(11) The Commissioner shall maintain the confidentiality of the information contained in a return submitted in accordance with section 6(1) and section 6A(2) of the Tax Procedures Act, 2015.

18E: Offences and penalties.  (Finance Act 2022-wef-01-July-2022)

A person who fails to comply with the provisions of sections 18C and 18D commits an offence and shall be subject to the penalties prescribed under the Tax Procedures Act, 2015.

18F: Definitions.(Finance Act 2022-wef-01-July-2022)

For the purposes of sections 18C, 18D and 18E —
  • “competent authority agreement” means an agreement between authorized representatives of jurisdictions which are parties to an international agreement that requires the exchange of country-by-country reports;
  • “consolidated financial statements” means financial statements of a multinational enterprise group in which the assets, liabilities, income, expenses and cash flows of the ultimate parent entity and the constituent entities are presented as those of a single enterprise;
  • “constituent entity” means—
    • (a) any separate business unit of a multinational enterprise group that is included in the consolidated financial statements of the multinational enterprise group for financial reporting purposes, or which would be so included if equity interests in such business unit of a multinational enterprise group were traded on a public securities exchange;
    • (b) any such business unit that is excluded from the multinational enterprise group’s consolidated financial statements solely on size or materiality grounds;
    • (c) any permanent establishment of any separate business unit of the multinational enterprise group included in paragraphs (a) or (b) provided that the business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting, or internal management control purposes;
  • “a country-by-country report” means a report filed under section 18D(1) describing the financial activities of each constituent entity in all the jurisdictions where the group has taxable presence;
  • “excluded multinational enterprise group” means, with respect to any financial year of the group, a group having total consolidated group revenue of less than the amount specified in section 18D(1);
  • “group” means a collection of enterprises related through ownership or control such that it is either required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange and includes a single enterprise with one or more foreign permanent establishments;
  • “international agreement” means a bilateral or multilateral tax agreement to which Kenya is a party which provides for the exchange of tax information between Kenya and other jurisdictions;
  • “local file” means a file under section 18D(7) containing material transactions of the local taxpayer;
  • “master file” means a file under section 18D(6) containing standardized information relevant for all multinational enterprise group members;
  • “multinational enterprise group” means a group that includes two or more enterprises which are resident in different jurisdictions including an enterprise that carries on business through a permanent establishment or through any other entity in another jurisdiction;
  • “reporting financial year” means an annual accounting period with respect to which the ultimate parent entity of the multinational enterprise group prepares its financial statements;
  • “surrogate parent entity” means one constituent entity of the multinational enterprise group appointed by such group to file the country-by-country report in that constituent entity’s jurisdiction of tax residence, on behalf of the group;
  • “systemic failure” means failure to comply with the competent authority agreement for reasons other than those provided in the agreement;
  • “ultimate parent entity*” means an entity that—
    • (a) is resident in Kenya for tax purposes;
    • (b) is not controlled by another entity; and
    • (c) owns or controls a multinational enterprise group.  

18G. Advance pricing agreement.  

(1) The Commissioner may enter into an advance pricing agreement with a person who undertakes a transaction contemplated under section 18(3) or section 18A. 
(2) The amount which would have been expected to accrue if that business had been conducted by an independent person dealing at arm’s length contemplated under section 18(3) or section 18A, shall be determined in accordance with the advance pricing agreement entered into under subsection (1). 
(3) The advance pricing agreement entered into under subsection (1) shall be valid for a period not exceeding five consecutive years. 
(4) Where the Commissioner determines that the person referred to in subsection (1) entered into the advance pricing agreement through misrepresentation of facts, the agreement shall be void and the Commissioner shall issue a written notice to the person. 
(5) The Cabinet Secretary may make regulations for the better implementation of this section, within six months from the commencement of this provision.  

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