Kenya’s New Tax Relief for Internal Corporate Reorganisations

A company reorganising its group structure in Kenya, whether by distributing an asset or a subsidiary’s shares out to its shareholders, or by having shareholders contribute property back into the company as part of that same reorganisation, used to face a real tax cost: the transfer could be treated as a taxable distribution attracting withholding tax, and separately as a disposal attracting capital gains tax. The Income Tax (Amendment) Act, 2026 changes that for genuine internal reorganisations. This article covers what the new relief actually does, the conditions attached to it, and what a group should check before relying on it.

The New Law: The Income Tax (Amendment) Act, 2026

The Income Tax (Amendment) Act, 2026 (Act No. 11 of 2026) was assented to on 11 May 2026 and came into operation on publication. It makes two connected changes to the Income Tax Act: one to section 7, and one to the Eighth Schedule, which governs capital gains tax.

Section 7: Internal Reorganisation Transfers Are Not a Distribution

Section 2 of the Amendment Act inserts a new provision into section 7 of the Income Tax Act stating that a transfer of property falling within paragraph 6(2)(i) of the Eighth Schedule is not to be deemed a distribution for the purposes of the Act. This matters because a distribution by a company to its shareholders is ordinarily treated as a dividend, which can attract withholding tax. Without this exclusion, a company distributing an asset or subsidiary shares to its own shareholders as part of a reorganisation would risk having that distribution taxed as if it were a dividend payment, even though no profit was actually being paid out to shareholders in the ordinary sense.

The Eighth Schedule: A New Capital Gains Tax Exemption

Section 3 of the Amendment Act inserts a new subparagraph into paragraph 6 of the Eighth Schedule, immediately after existing subparagraph (2)(h), which lists categories of property transfer that are not treated as a chargeable transfer for capital gains tax purposes. The new subparagraph (2)(i) adds to that list the transfer of property by a company to its shareholders as part of an internal reorganisation, and the transfer of property to the company by its shareholders as consideration for that same transfer. In other words, both legs of a typical internal reorganisation, the company distributing the asset out and the shareholders contributing property back in, are covered.

The Two Conditions That Must Be Met

The relief is not automatic for any transfer a group chooses to call a reorganisation. Two conditions apply. First, the property must be transferred to the shareholders in proportion to their shareholding in the company immediately before the transfer; a distribution that favours one shareholder over another in a way that does not track existing shareholding percentages falls outside the exemption. Second, where the property being transferred consists of shares, those shares must relate to a subsidiary of the company carrying out the transfer. A transfer of shares in an unrelated third-party company would not qualify. Both conditions need to be satisfied together; meeting one does not excuse a group from meeting the other.

Why This Matters for Group Restructurings

Kenyan groups routinely need to reorganise for entirely commercial reasons: hiving off a subsidiary ahead of a sale, consolidating operating companies under a single holding structure ahead of an investment round, or unwinding a joint venture by distributing shared assets back to the original shareholders in their existing proportions. Before this amendment, each of these steps carried a double tax exposure, a possible dividend withholding tax charge on the distribution and a capital gains tax charge on the underlying transfer, even though the group’s overall ownership had not economically changed. The new relief removes that double exposure for reorganisations that meet the pro-rata and subsidiary-shares conditions, which should make straightforward internal restructurings materially cheaper to execute correctly rather than working around the tax cost through less clean structures.

What a Group Should Still Check

The relief is narrow by design. It does not cover a distribution that departs from existing shareholding proportions, a share transfer involving anything other than a subsidiary of the transferring company, or a transfer to an unrelated third party dressed up as a reorganisation. A group planning to rely on this relief should document the reorganisation clearly, confirm the shareholding percentages used for any in-specie distribution match the register immediately before the transfer, and keep in mind that this relief addresses income tax and capital gains tax exposure only, it does not by itself remove stamp duty on the instruments used to carry out the transfer. Stamp duty relief for company reconstructions and amalgamations is a separate, longer-standing regime under the Stamp Duty Act, covered in our companion article.