Does Kenya’s Transfer Pricing Regime Apply to My Foreign-Owned Subsidiary?

If your Kenyan company buys from, sells to, borrows from, or pays management fees to its foreign parent or an affiliate, Kenya’s transfer pricing rules apply to that relationship. Nothing in the Rules exempts small companies. What changes with size is how closely the Kenya Revenue Authority (KRA) is likely to look, and how much documentation you should have ready. The governing rules were replaced in 2026, so guidance written before then needs checking.

The Legal Basis for Kenya Transfer Pricing Rules

Kenya applies the arm’s length principle through section 18(3) of the Income Tax Act. Where a non-resident carries on business with a related resident person and the business produces no profits, or less than the ordinary profits expected, the resident’s profits are deemed to be what would have accrued had the business been conducted by independent persons dealing at arm’s length. The detailed rules are now the Income Tax (Transfer Pricing) Rules, 2026 (Legal Notice No. 186 of 2026), made on 12 August 2026. Rule 12 revokes the Income Tax (Transfer Pricing) Rules of 2006, so any analysis built on the old rule numbers should be redone.

The 2026 Rules apply to transactions contemplated by sections 18, 18A and 18B to 18F of the Act. A “controlled transaction” is any transaction between related persons.

Which Transactions and Pricing Methods Apply

Rule 5 lists the transactions subject to adjustment. They include the purchase, sale, transfer or use of tangible and intangible property, the provision of services, financing transactions (borrowing, lending and guarantees), insurance and reinsurance, business restructurings, cost distribution arrangements and derivatives, plus any other transaction that may affect profit or loss. Management fees, intra-group loans and royalty payments to a foreign parent all fall within this list.

Rule 6(1) sets out the accepted methods: the comparable uncontrolled price method, the resale price method, the cost-plus method, the profit split method, the transactional net margin method, and any other method the Commissioner prescribes where none of the five can determine the arm’s length price. Under rule 7(2) the taxpayer applies the method most appropriate to its enterprise, having regard to the nature of the transaction and the functions each party performs.

Documentation: What You Actually Need to Have Ready

The Rules work on a request basis. Under rule 9, a person who asserts that its pricing is at arm’s length must develop an appropriate transfer pricing policy, determine the arm’s length price in accordance with the Rules, and make documentation available to the Commissioner on request. Rule 8 lets the Commissioner require books of account and related documents, including those showing why the method was chosen, how it was applied, the group’s global organisation structure and the assumptions behind the pricing.

Rule 8(3) and (4) list in detail what the Commissioner can ask for: contracts, intra-group payment and receipt figures by jurisdiction, a functional analysis, a comparability analysis, and audited financial statements. Rule 8(6) requires the books and documents to be in English, or translated, and prepared at the time the transfer price is arrived at.

The consequences sit in rules 10 and 11. The Tax Procedures Act provisions on fraud, failure to furnish returns and underpayment of tax apply to transfer pricing, and tax due and unpaid in a transfer pricing arrangement is deemed additional tax for the purposes of section 38 of the Tax Procedures Act.

Country-by-Country Reporting, Master File and Local File

Sections 18B to 18F of the Income Tax Act set up the group reporting framework for returns for the year of income 2022 and later years. A multinational group that is not an excluded group must notify the Commissioner under section 18C. Under section 18D(1B), the country-by-country report (CbCR) duty applies to a group whose total consolidated turnover in the preceding financial year was at least KES 95 billion, and the report is due within twelve months after the end of the reporting financial year.

Section 18D(3) and (4) separately require a master file and a local file, filed within six months after the end of the group’s reporting financial year in the manner the Commissioner specifies. The KES 95 billion figure appears in subsection (1B), which on its face governs the CbCR duties in subsections (1) and (1A). Subsection (3) is drafted without that threshold, so a subsidiary of a foreign group should confirm its position rather than assume it is exempt from the master file and local file. Section 18E makes non-compliance with sections 18C and 18D an offence, with penalties under the Tax Procedures Act.

The Three Documents in Practice

The master file (section 18D(6)) gives the group-wide picture: a business overview, supply chain, research and development policy, each entity’s contribution to value creation, intangibles, financing activities, consolidated financial statements and any tax rulings. The local file (section 18D(7)) is specific to the Kenyan entity: its activities within the group, management structure, business strategies, material controlled transactions and amounts paid or received in international transactions. The CbCR (section 18D(5)) allocates revenue, profit or loss, tax paid and accrued, employees and tangible assets across each jurisdiction where the group has a taxable presence.

Advance Pricing Agreements

Section 18G, inserted by the Finance Act, 2025, allows the Commissioner to enter into an advance pricing agreement with a person undertaking a transaction contemplated under section 18(3) or 18A. The agreement fixes the arm’s length amount, can run for no more than five consecutive years, and is void if obtained through misrepresentation of facts. A subsidiary planning a significant related-party restructuring should consider whether an agreement is worth pursuing before the transaction. For the wider context on structuring a Kenyan subsidiary, see our guide to Kenya market entry for foreign investors.