Minimum tax was introduced in Kenya through the Finance Act, 2020, as a measure intended to ensure that businesses contributed towards tax even where they reported little or no taxable profit. The tax was imposed at 1% of gross turnover under section 12D of the Income Tax Act, Cap. 470.
Why the Regime Faced Legal Challenges
The minimum tax regime faced considerable legal challenges, particularly in relation to its application to businesses that were operating at a loss. In Waweru & 3 Others v National Assembly & 2 Others, the High Court declared section 12D unconstitutional, raising concerns about the burden imposed on loss-making businesses. The decision was subsequently appealed by the Kenya Revenue Authority.
The 2025 Repeal: What Changed?
The Finance Act, 2025 repealed section 12D of the Income Tax Act with effect from 1 July 2025. As a result, the minimum tax regime that required qualifying taxpayers to pay tax based on gross turnover is no longer applicable.
Businesses should therefore no longer treat the former 1% minimum tax as a current tax obligation for periods falling after the effective date of the repeal.
What Does the Repeal Mean for Businesses?
The repeal is particularly significant for businesses operating on narrow margins or incurring losses. Under the former regime, such businesses could incur a minimum tax liability despite having little or no taxable profit.
With the repeal of section 12D, businesses should review their tax computations and ensure that minimum tax is not being factored into their current tax liabilities.
Minimum Tax vs Minimum Top-Up Tax
The repeal of minimum tax should not be confused with minimum top-up tax, which is provided for separately under section 12G of the Income Tax Act.
Minimum top-up tax forms part of Kenya’s implementation of the global minimum tax framework and generally applies to qualifying multinational groups whose effective tax rate falls below 15%, subject to the applicable statutory requirements and exclusions.
The two regimes therefore operate differently. While the former minimum tax was based on gross turnover, minimum top-up tax is concerned with the effective tax rate of qualifying multinational groups.
Practical Implications for Businesses
Businesses should review their current tax computations and internal compliance processes to ensure that the repeal of minimum tax is properly reflected in their tax affairs. Any existing tax planning based on the former minimum tax regime should also be reassessed.
Businesses forming part of multinational groups should separately consider whether they fall within the scope of the minimum top-up tax provisions and whether any additional compliance obligations arise.
Given the continued changes to Kenya’s tax framework, businesses should keep their tax positions under regular review to ensure compliance with the law currently in force.
Conclusion
The repeal of minimum tax marks a significant development in Kenya’s tax framework. Businesses should ensure that their tax planning and compliance practices reflect the law currently in force and seek professional advice where the application of the current tax framework is uncertain.
