1. Introduction
Kenya is regarded as Africa’s crypto pioneer. A 2022 report by the United Nations highlighted that Kenya has the highest percentage of cryptocurrency users in Africa. While cryptocurrency provides Kenyans with more financial possibilities, it also presents significant risks in terms of financial stability and tax security. To mitigate these risks and ensure financial stability, the Kenyan government has been enhancing legislation to create a secure cryptocurrency ecosystem. Additionally, the Central Bank of Kenya (CBK) is actively exploring the issuance of a Central Bank Digital Currency (CBDC). These developments reflect Kenya’s strong adaptability to emerging financial technologies.
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2. Overview of Kenya’s Tax System
Kenya’s tax system is relatively complex, primarily based on a territorial tax system with certain elements of a residence-based tax system. The tax system includes various types of taxes, exemptions, zero-rated items, tax incentives, and refunds. The primary taxes in Kenya include income tax, value-added tax (VAT), customs duties, and excise duties. All income-related taxes in Kenya are collected by the central government, meaning county governments do not levy income taxes. However, local governments are authorized to collect property and entertainment taxes.
2.1 Income Tax
Income tax is the most significant tax category in Kenya. It applies to individuals and corporations (both residents and non-residents) on all income earned within or derived from Kenya. Different types of income are taxed in different ways.
2.1.1 Corporate Income Tax
Corporate income tax in Kenya applies to all legal entities on income generated within Kenya. Companies incorporated in Kenya are considered tax residents. Additionally, foreign companies registered outside Kenya but managed and controlled within Kenya during a given tax year are also deemed tax residents.
Regarding tax rates, resident corporations (including subsidiaries of foreign companies in Kenya) are subject to a corporate income tax rate of 30%, whereas branches and permanent establishments of foreign companies in Kenya are taxed at 37.5%. Certain resident and non-resident businesses meeting specific conditions may qualify for preferential tax rates, though the details are complex and not enumerated here.
Taxable income for corporations includes all types of revenue, such as income from the sale of goods, contract work, and service provision. Additionally, taxable income includes but is not limited to dividends, bonuses, interest income, royalties, rental income, and foreign earnings. Some income categories are tax-exempt, such as:
Dividends paid by a resident company to another resident company that holds at least 12.5% of its shares.
Dividends paid by registered venture capital firms.
Income from securities held for no more than 24 months and traded on the Nairobi Securities Exchange.
Income generated by unit trusts or collective investment schemes set up by employers.
Non-resident corporations are only liable for tax on income earned in Kenya or sourced from Kenya. Non-resident companies earning dividends, interest, royalties, or rental income through a permanent establishment in Kenya are subject to taxation. Capital gains from Kenyan assets owned by non-residents are also subject to capital gains tax.
2.1.2 Withholding Tax
Kenya levies withholding tax on both resident and non-resident companies, with rates ranging between 3% and 30%. The 2017 Finance Act introduced tax incentives for businesses, developers, and operators within special economic zones, including:
Exemption of withholding tax on dividends paid to non-residents.
A 5% withholding tax on payments made to non-residents for management fees, professional fees, training fees, and royalties.
A 5% withholding tax on interest payments to non-residents.
Subsequent finance acts (2018 and 2019) established a 5% withholding tax on insurance premiums, with aircraft insurance being exempt. Reinsurance payments, including those made to non-resident reinsurance firms, are also subject to a 5% withholding tax.
Kenya has signed double taxation agreements (DTAs) with over ten countries, including Canada, Denmark, France, Germany, India, Iran, Norway, Qatar, South Africa, South Korea, China, and Sweden, with withholding tax rates ranging from 0% to 20% under these agreements.
2.1.3 Individual Income Tax
According to Kenya’s Income Tax Act, Kenyan residents must pay income tax on their global employment income and any other income derived from or earned in Kenya. Non-residents are only required to pay income tax on their Kenyan-sourced income.
Different sources of income are taxed separately, with only expenses directly related to the income source being deductible. Taxable income includes employment income, business income, rental income, dividends, interest, licensing or contract-based earnings, agricultural income, capital gains, pension income, and digital economy earnings. Kenya applies progressive tax rates ranging from 10% to 30% for individuals.
Kenya has a unique approach to determining tax residency. In addition to the standard 183-day presence rule within a single tax year, an individual is also considered a tax resident if they lack a permanent residence in Kenya but have been present in the country for an average of at least 122 days over the preceding two years.
2.2 Value Added Tax
VAT applies to the supply of taxable goods and services within Kenya as well as the importation of taxable goods and services. Businesses and partnerships may voluntarily register as VAT taxpayers, while businesses with an annual turnover exceeding KES 5,000,000 must register for VAT. The standard VAT rate is 16%, applicable to most goods and services. Some exported goods and services are zero-rated.Certain basic foodstuffs, medical supplies, and other specific goods and services are exempt from VAT.
It is important to note that Kenya’s 2019 Finance Act introduced VAT on digital marketplaces, but the implementation framework was to be determined separately.
To promote compliance, the Kenya Revenue Authority (KRA) operates a Withholding VAT System, appointing designated agents to withhold and remit VAT. These agents deduct VAT at the time of payment and submit it to KRA. To ensure security, taxpayers can verify the identity of these agents using the Agent Checker tool in KRA’s iTax system.
2.3 Consumption Tax
Consumption tax is levied by the Kenyan government on the production and importation of certain goods and services. Businesses and individuals that produce, supply, or import taxable goods or services are subject to this tax.Kenya applies excise duties on specific goods (e.g., alcohol, tobacco, fuel) and services (e.g., telecommunication services).Tax rates vary depending on the type of goods or services.Additionally, Kenya’s 2018 Finance Act introduced an annual inflation adjustment on excise tax rates.
Certain financial transactions are exempt from excise duty, including:
Loan interest, insurance premiums, and commissions arising from loans or profit-sharing agreements.
Insurance commissions within the statutory limits prescribed in the Insurance Act. However, amounts exceeding the prescribed limits are subject to excise duty.
2.4 Digital Service Tax
Kenya’s 2020 Finance Act introduced the Digital Service Tax (DST), which took effect on January 1, 2021. DST applies to individuals and businesses providing or facilitating digital services to users in Kenya. The tax is levied at 1.5% of gross turnover (excluding VAT). For Kenyan residents and businesses with a permanent presence, DST can be offset against their annual income tax liabilities. For non-resident businesses without a permanent establishment in Kenya, DST is considered a final tax liability.
DST applies to the following digital services:
Downloadable digital content, including e-books, movies, and mobile applications.
Subscription-based media services, such as newspapers and streaming platforms.
Music, games, concert, and restaurant e-tickets.
Ride-hailing services and other digital platforms.
Any other digitalized services.
Failure to comply with DST regulations may result in market access restrictions imposed by the Kenyan government.
3. Overview of Kenya’s Crypto Tax and Compliance Policies
3.1 Overview of Kenya’s Crypto Tax Policies
Before the enactment of the 2023 Finance Act, Kenya applied income tax to individuals actively trading cryptocurrencies and capital gains tax to long-term holders. However, in an effort to further regulate the crypto asset market, Kenya’s National Assembly Finance and National Planning Committee approved the 2023 Capital Markets (Amendment) Bill. This legislation places all cryptocurrency and blockchain-related activities under the regulatory oversight of the Capital Markets Authority (CMA).
The bill aims to introduce a taxation and regulatory framework for Kenya’s digital asset sector, marking a significant step toward formalizing the digital economy. Under the bill, the government imposes a 3% flat tax on all transactions involving non-physical assets (including cryptocurrencies, token codes, digital assets stored in electronic form, and blockchain-generated assets). This 3% tax is based on transaction volume rather than net profit.
3.2 Overview of Kenya’s Crypto Compliance Framework
In addition to its tax system, Kenya is actively building its regulatory framework for crypto-assets to address the substantial crypto-asset market within the country, which is valued at tens of billions of US dollars. To regulate the use and trading of crypto-assets, protect consumers, and promote the development of the digital economy, Kenya has taken a series of pioneering measures.
Under the guidance of the National Assembly’s Departmental Committee on Finance and National Planning, the Kenya Blockchain Association (BAK) has already begun drafting the bill for the Virtual Asset Service Providers Act. This legislative effort is a key step for Kenya to embrace the digital economy and maintain its significant position in the African crypto-asset space. The draft bill will cover the definition of crypto-assets, the regulation of currencies created through crypto-asset mining, and the responsibilities of trading individuals or businesses, including taxation, ownership issues, and measures to promote innovation in this field.
In particular, regarding the regulation of crypto-assets obtained through mining, the draft Virtual Asset Service Providers Act has stipulations on various aspects of mining activities. Kenya’s regulatory framework aims to ensure the legality of mining activities and provide clear legal guidance for them.
According to the draft, first, mining companies may need to comply with international standards, including Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT). Second, Kenya may implement tax policies requiring crypto miners to declare and pay taxes on their mining proceeds to ensure that the government can collect taxes from crypto-asset mining activities. Third, environmental impact is also an important factor considered by Kenya in regulating mining activities. Given the potential environmental impact of mining, Kenya may require crypto miners to use renewable energy or ensure the energy efficiency of mining activities. Fourth, technical standards and security measures are equally important. Kenya may establish relevant rules to protect mining activities from cyber-attacks and theft, ensuring the security and reliability of the mining process. Finally, consumer protection is a key part of Kenya’s regulatory framework, aimed at preventing consumers from being affected by fraud and unfair trading practices related to mining. This includes providing clear risk disclosures and dispute resolution mechanisms. At the same time, Kenya’s regulatory framework will maintain a certain degree of flexibility to adapt to the rapid development of crypto-asset mining technology and changes in market conditions, seeking to encourage technological innovation and industry best practices through incentives, research and development support, and cooperation opportunities.
In the process of advancing its crypto-asset regulatory framework, Kenya has faced significant challenges, especially regarding the controversial digital identity crypto project “Worldcoin (WLD).” The project plans to distribute currency to global users and requires retinal scans to create digital identities, which has raised serious concerns from the Kenyan government about personal privacy and data security. In response, Kenya has taken a firm stance, deciding to shut down the operations of “Worldcoin” in the country. This decision reflects the Kenyan government’s prudent attitude in regulating emerging technologies and its commitment to protecting citizens’ privacy rights and security. Additionally, the Kenyan government has emphasized the importance of public education to raise citizens’ awareness of the risks associated with crypto-assets and to seek a balance between promoting technological innovation and ensuring regulatory compliance. Kenya’s regulatory framework demonstrates adaptability and flexibility, enabling it to quickly respond to emerging technologies and market changes, in line with the growing global focus on data privacy (for example, the strict protection of personal data under the European Union’s General Data Protection Regulation (GDPR)) and security. This stance may provide a reference for other countries dealing with similar projects, prompting global regulators to place greater emphasis on personal privacy and data protection while promoting technological innovation.
Moreover, the Central Bank of Kenya (CBK) is also actively exploring the possibility of a Central Bank Digital Currency (CBDC) to address the emergence of private crypto-assets and to focus on the business opportunities and risks they bring. This exploration reflects the CBK’s open attitude towards emerging payment technologies, while also demonstrating its active role in maintaining financial stability and preventing illegal activities.
In 2024, with the development of AI technology, the Kenyan government plans to develop a real-time tax system integrated with crypto-asset exchanges and markets to monitor and record transaction details, ensuring effective regulation of crypto-asset transactions, improving tax efficiency, and ensuring that income related to crypto-assets is not overlooked. Starting from December 25, 2024, the Kenyan government plans to use M-PESA Paybills (a widely used mobile payment platform in Kenya) and transaction digital identification codes (Till Numbers) as Virtual Electronic Tax Registers (ETRs). This initiative is part of Kenya’s tax reform, enhancing the transparency of crypto-asset transactions through digital means, expanding the tax base, and addressing tax evasion issues.
4. Conclusion and Outlook
The Kenyan government has demonstrated a cautious yet open stance in the field of crypto-assets. In terms of tax and regulatory policies, Kenya’s adjustments reflect the government’s careful balancing act between promoting economic growth, ensuring social equity, and responding to international pressures. Through these policy adjustments, the Kenyan government has shown a high degree of sensitivity and adaptability to changes in domestic and international economic conditions, while also playing an active role in advancing the country’s modernization process.
Looking ahead, Kenya is expected to collaborate with other countries and international organizations to jointly address the challenges and opportunities brought by crypto-assets. It will continue to strengthen tax administration, optimize the tax structure, and promote the healthy development of fintech within the regulatory framework. Kenya is anticipated to clarify the legal status of crypto-assets, establish more detailed regulatory rules, and implement stricter supervision over crypto-asset exchanges and trading activities. Drawing on the experiences of South Africa and Nigeria, Kenya is likely to become a leader in Africa in establishing a regulatory framework for crypto-assets. Additionally, Kenya may advance tax policy reforms to enhance tax compliance in crypto-asset transactions. These measures will help Kenya find a balance between financial innovation, financial security, and economic development, providing a solid foundation for the sustainable development of the crypto-asset industry.