SEZ or EPZ? Choosing the Right Regime for Pharmaceutical Manufacturing in Kenya

Choosing SEZ or EPZ is the first structural decision a pharmaceutical manufacturer setting up production in Kenya has to make, between two zone-based incentive regimes: the Special Economic Zones framework and the older Export Processing Zones framework. Our earlier article on EPZ incentives covers that regime on its own; this one puts the two side by side, because they differ enough in structure, not just headline rate, that the right choice depends on how the business actually expects to sell what it makes.

Corporate tax: EPZ front-loads the holiday, SEZ smooths it

On the incentive structures currently published by the Special Economic Zones Authority, the Export Processing Zones Authority and the Kenya Revenue Authority, an EPZ enterprise gets a full ten-year corporate tax holiday, followed by a 25% rate for the next ten years, before reverting to the standard rate. An SEZ enterprise instead pays 10% for its first ten years and 15% for the following ten, before the same reversion. The practical difference is timing rather than total generosity: EPZ is the better regime in years one to ten if the business expects to be solidly profitable quickly, since 0% beats 10%, while SEZ becomes the better regime from year eleven onward, since 15% beats 25%. A manufacturer expecting a long runway to profitability, or a phased build-out where meaningful profit only arrives well into the second decade, should weigh that longer curve rather than defaulting to whichever regime has the more attractive-sounding headline holiday.

VAT and duty: the real difference is the domestic-market cap

Both regimes exempt imports of raw materials and capital equipment from import duty, VAT and excise duty, and both zero-rate domestic supplies made to the enterprise. Where they diverge is on selling into Kenya itself. An EPZ enterprise is capped, on EPZA’s own published guidance, at selling 20% of its output into the local or East African Community market; production sold beyond that share, or the local-sale portion generally, loses the exemption and is treated for duty and VAT purposes the way an ordinary import would be. No comparable statutory cap on domestic sales was identified for SEZ enterprises in the sources we reviewed; instead, local sales from an SEZ enterprise are treated as imports and taxed on their non-originating content. For a pharmaceutical manufacturer that expects the Kenyan or wider East African market to be a meaningful share of its output, rather than a business built primarily around export, that difference alone can make SEZ the more workable regime regardless of the tax-rate comparison above.

Withholding tax on payments to a foreign parent

Under SEZ, dividends paid to non-residents are exempt from withholding tax, and royalties, interest, and management or professional fees are exempt for the enterprise’s first ten years, with other payments such as rent or commissions taxed at 10%. For EPZ, the guidance we reviewed was not internally consistent: some official sources describe a twenty-year withholding tax holiday on remittances to non-residents, while others describe a ten-year holiday that excludes EPZ commercial-licence enterprises specifically. Rather than repeat either figure as settled, we would confirm the current position directly with the Kenya Revenue Authority before relying on a specific withholding tax number for an actual transaction under the EPZ regime.

SEZ or EPZ: who approves you, and is there a minimum investment

SEZ enterprises are licensed by the Special Economic Zones Authority, and EPZ enterprises by the separate Export Processing Zones Authority; a Kenya Economic Zones Bill proposing to merge the two authorities has been under consideration but had not passed Parliament as of this writing, so treat the two as distinct regulators for now. Neither Act sets a fixed statutory minimum investment amount in the text of the legislation itself. The Business Laws (Amendment) Act, 2024 gave the Special Economic Zones Authority and the Cabinet Secretary discretionary power to set investment thresholds and minimum acreage requirements, but we did not find a published figure exercising that power at the time of writing, so a specific current threshold should be confirmed directly with the Authority rather than assumed from older commentary.

Both require physical zone presence, for now

Under both regimes as currently enacted, an enterprise must actually operate within a gazetted zone to hold that status; neither Act permits a business to claim SEZ or EPZ benefits without a physical presence inside designated zone land. A Business Laws (Amendment) Bill, 2025 that was still pending at the time of writing would introduce a non-physical “SEZ business service permit” category, but that remains a proposal rather than current law, and should not be relied upon in structuring a transaction today.

Sector fit

Both regimes explicitly cover pharmaceutical and medical manufacturing; the Export Processing Zones Act lists manufacturing, commercial and service activities as eligible, and EPZA’s own guidance names pharmaceuticals specifically among its manufacturing sub-sectors. SEZ’s zone-type list is broader, covering industrial parks alongside ICT parks, science and technology parks, and business service parks, which makes it the more natural fit for an integrated pharma campus combining manufacturing with research and development or regional distribution and service functions, while EPZ remains built more squarely around export-oriented manufacturing on its own.