Since 27 December 2024, a non-resident business with no physical presence in Kenya can owe Kenyan income tax purely because Kenyan users pay for its digital services. The Significant Economic Presence Tax, introduced by the Tax Laws (Amendment) Act, 2024 and expanded by the Finance Act, 2025, replaced the 1.5% Digital Service Tax with a broader charge that no longer exempts smaller non-resident suppliers. For any business selling software, cloud services, digital content, online marketplaces access, or similar services to persons in Kenya over the internet, this is now a live tax obligation, not a proposal.
The Legal Basis: Section 12E of the Income Tax Act
The Significant Economic Presence Tax is charged under section 12E of the Income Tax Act, Cap. 470, a provision inserted by the Tax Laws (Amendment) Act, 2024. The Act was assented to on 11 December 2024 and came into force on 27 December 2024, repealing the Income Tax (Digital Service Tax) Regulations, 2020 and the 1.5% Digital Service Tax they implemented. Section 12E charges tax on income derived by a non-resident person from a business carried out over the internet or an electronic network where that person has a “significant economic presence” in Kenya, and section 12E(6) authorises the Cabinet Secretary for the National Treasury to make regulations for the tax’s administration.
How the Tax Is Calculated
The mechanics work through a deemed profit, not a direct turnover levy. The taxable profit of a person liable to the tax is deemed to be ten percent of that person’s gross turnover from the Kenyan business, and the applicable rate is thirty percent of that deemed taxable profit, the ordinary corporate income tax rate. Ten percent multiplied by thirty percent produces an effective rate of three percent of gross turnover. Value Added Tax is excluded from the gross turnover figure used in the calculation. A non-resident earning KES 50 million in gross turnover from Kenyan users, for example, would on this formula face an effective Significant Economic Presence Tax liability of roughly KES 1.5 million, before any exemption applies.
Who Is Caught: The Finance Act 2025 Threshold Removal
When the tax was first introduced, non-resident persons with an annual turnover from Kenya below KES 5 million were exempt from it. The Finance Act, 2025 deleted that exemption, meaning the threshold no longer shields smaller non-resident digital suppliers from the charge. In practice, this removes the main carve-out that previously kept early-stage or low-volume foreign digital businesses out of the Kenyan tax net, and it substantially widens the pool of non-resident businesses now expected to register and account for the tax, regardless of how small their Kenyan customer base is.
What the Draft Regulations Would Add
Section 12E itself charges the tax, but the operational detail, how a non-resident registers, what counts as a taxable digital service, and which categories are exempt, was still being worked out in the Income Tax (Significant Economic Presence Tax) Regulations, 2025 as this article was written. The Kenya Revenue Authority published the draft regulations for public comment on 22 September 2025, with a submission deadline of 7 October 2025, and as of writing they had not been finalised or gazetted. The draft regulations propose exempting non-resident persons who operate through a permanent establishment in Kenya, income already subject to sections 9(2) or 10 of the Income Tax Act, and digital services supplied to an airline in which the Kenyan government holds at least 45% ownership. Because these remain proposals rather than settled law, a business relying on any exemption category should confirm the regulations’ final form before assuming it applies.
What This Means for Non-Resident Businesses Now
A non-resident business selling digital services into Kenya should not treat the pending regulations as a reason to wait. The charging provision in section 12E is already in force, the effective three percent rate is already fixed by statute, and the Finance Act 2025 has already removed the small-supplier exemption that might otherwise have applied. The practical uncertainty sits in registration mechanics and the precise scope of exemptions, not in whether the tax applies at all. Businesses with material Kenyan revenue from digital services should be modelling their exposure now, reviewing whether any of the proposed exemption categories plausibly applies to their structure, and watching for the regulations’ final publication rather than assuming the current draft language will survive unchanged.
How We Can Help
Clay & Associates Advocates advises non-resident digital businesses and their Kenyan counterparties on Kenya Revenue Authority compliance and cross-border tax structuring. See our companion piece on registering for and complying with the Significant Economic Presence Tax for the practical registration and compliance mechanics this charge sits alongside. Contact our Regulatory & Compliance or Corporate & Commercial practice to assess your exposure under the new regime.
Sources: Income Tax Act, Cap. 470, section 12E; Kenya Revenue Authority, Draft Income Tax (Significant Economic Presence Tax) Regulations, 2025; Kenya Revenue Authority, Public Notice on the Draft SEP Tax Regulations; Bowmans, Kenya: The Finance Act, 2025; SNG Grant Thornton, Significant Economic Presence Tax: Legal Framework and Compliance Considerations.
Frequently asked questions
Does the Significant Economic Presence Tax replace VAT on digital services in Kenya?
No. It replaces the 1.5% Digital Service Tax and is a separate charge from VAT on digital marketplace supplies, which continues to apply under its own rules. VAT is specifically excluded from the gross turnover figure used to calculate the Significant Economic Presence Tax.
Is there still a turnover threshold that exempts small non-resident digital businesses?
No. The original KES 5 million exemption for non-residents was deleted by the Finance Act, 2025, so the tax now applies regardless of how small a non-resident’s Kenyan turnover is, subject only to the exemptions proposed in the draft regulations.
What is the effective tax rate?
Three percent of gross turnover, calculated as thirty percent of a deemed taxable profit equal to ten percent of gross turnover.
Is the Significant Economic Presence Tax already enforceable if the regulations are still in draft?
Yes. Section 12E of the Income Tax Act has been in force since 27 December 2024 and charges the tax on its own terms. The draft regulations would add registration and administrative detail, but the underlying liability does not depend on their finalisation.
