Kenya issues Minimum Top-Up Tax Regulations

Kenya has issued the Income Tax (Minimum Top Up Tax) Regulations, 2026 (the Regulations) through Legal Notice No. 189 of 2026.

The Regulations set out how taxpayers must calculate, report, and pay the minimum top-up tax introduced under section 12G of the Income Tax Act by the Tax Laws (Amendment) Act, 2024. The minimum top-up tax draws on the Organisation for Economic Co-operation and Development (OECD) Pillar Two Global Anti-Base Erosion (GloBE) Rules, which seek to ensure that large multinational enterprise (MNE) groups pay an effective tax rate of at least 15% in each jurisdiction where they operate. Broadly, the tax applies a 15% minimum rate to the excess profit of covered persons in Kenya, based on their combined effective tax rate and subject to the detailed adjustments, exclusions, safe harbours, and additional top-up tax provisions in the Regulations. The tax uses modified financial accounting results rather than taxable profits under the Income Tax Act and therefore often produces a different outcome from an ordinary corporation tax calculation.

The Regulations apply to tested years of income occurring on or after 1 January 2025.

What this means for your group

Scope and threshold

The scope test is met where the MNE group’s consolidated annual turnover was at least EUR750 million in at least two of the four years immediately before the tested year. Each of the four preceding years is tested separately. Groups should also test the statutory exclusions in section 12G for each Kenyan entity.

If a year of income is longer or shorter than 12 months, the group must prorate the threshold:

Prorated threshold = EUR750 million × A ÷ 365
A is the number of days in the relevant year of income.

The Regulations also prescribe separate threshold rules for mergers, demergers, and specified transactions through which an entity joins or leaves an MNE group. 

How the calculation works under the Regulations

The effective tax rate uses adjusted covered taxes and adjusted accounting income, rather than the headline corporate tax rate. Tax incentives, permanent differences, losses, tax credits, deferred tax adjustments, and the allocation or exclusion of cross-border taxes may affect the effective tax rate. A Kenyan top-up tax liability may therefore arise even though the ordinary statutory corporate income tax rate exceeds 15%.

The calculation starts with the financial accounting net income or loss of each covered person used to prepare the ultimate parent entity’s consolidated financial statements. This amount is determined before consolidation adjustments that eliminate intragroup transactions and without adjustments to income or expenses attributable to purchase accounting for an acquired business. The Regulations then prescribe adjustments to income and covered taxes. At a high level, the calculation asks four questions:

• What is the Kenyan group's adjusted accounting income?
• What is the Kenyan group's adjusted covered tax?
• Is the resulting effective tax rate below 15%?
• If so, how much profit remains after the substance-based income exclusion (allowance for eligible employee costs and qualifying tangible assets)?

The table below provides a simplified illustration of the computational framework for determining the minimum top-up tax under the Regulations

The substance-based income exclusion reduces the amount of net income exposed to the top-up tax percentage. For a year beginning in 2026, the substance-based income exclusion equals 9.4% of eligible employee costs plus 7.4% of the average net book value of qualifying tangible assets. The Schedule reduces these percentages until both reach 5% for years beginning in 2033 and later.

Where two or more covered persons belong to the same MNE group in Kenya, the Regulations calculate the minimum top-up tax on a combined basis and allocate the liability among the covered persons in proportion to their net income after the substance-based income exclusion, unless the Commissioner approves another allocation. Separate rules apply to joint ventures, minority-owned covered persons, permanent establishments, and other specified structures.

Deferred tax: where a deferred tax expense relates to covered taxes imposed at a rate above 15%, the Regulations recast the expense at 15%. Subject to the specified exclusions, a deferred tax liability taken into account in adjusted covered taxes that does not reverse within the following five years is recaptured. The group must then reduce covered taxes for the fifth preceding year and recalculate that year’s effective tax rate and top-up tax.

International shipping: qualifying international shipping income and qualified ancillary international shipping income are excluded from qualifying income or loss only where the covered person meets the detailed conditions. These conditions require the strategic or commercial management of the relevant ships to be carried on effectively from or within Kenya.

Insurance: an insurer must exclude amounts charged to policyholders for taxes that the insurer pays in respect of policyholder returns. It must also include specified policyholder returns that are absent from its financial accounting net income or loss to the extent that the corresponding movement in the policyholder liability is recorded there.

Key deadlines

Tax and finance teams should add the following dates to the group’s reporting calendar and appoint a Kenyan entity to coordinate the work:

a.    Initial notification: a person that was covered when the Regulations commenced must notify the Commissioner within 60 days after Gazette publication. A person that becomes covered later must notify the Commissioner before the end of its year of income. One designated Kenyan entity may notify on behalf of the group

b.    Payment: section 12G requires payment by the end of the fourth month after the year of income. Payment must be made in Kenyan shillings using the average exchange rate for that year

c.    Minimum top-up tax return: each covered person must file by the last day of the sixth month after the end of the year of income

d.    GloBE Information Return: the deadline is 18 months after the first year in scope and 15 months after each later year. A Kenyan entity may avoid a duplicate local filing only where the ultimate parent entity or designated filing entity files the return in a jurisdiction that has an applicable information-exchange agreement with Kenya and the other prescribed conditions are met

e.    Transition payment: regulation 33 states that a person covered on 27 December 2024 whose year began on 1 January 2025 had to pay by 30 April 2026. The Regulations do not explain how the Kenya Revenue Authority (KRA) will administer obligations that arose before publication. Affected groups should assess the filing, payment, interest, and penalty position promptly

f.    Records and sanctions: each covered person must keep the records needed to determine the tax. Non-compliance attracts the applicable sanctions under the Tax Procedures Act.

Safe harbours and elections

A covered person may elect to use the Transitional Country-by-Country Reporting Safe Harbour until the first year of income that commences on or after 1 July 2029. If the relevant test is met, the current top-up tax for the Kenyan covered persons may be treated as zero for that year. The Regulations also permit an election to use the Non-Material Constituent Entity simplified calculations.

Kenya does not permit covered persons to make the de minimis exclusion election under Article 5.5 of the GloBE Model Rules. A group may still rely on an available transitional safe harbour or simplified calculation if it meets the relevant conditions.

Net loss election: a covered person with a net loss may elect to create a deferred tax asset equal to 15% of that loss. The asset may be used against net income in later years, subject to the prescribed limits. The election must accompany the first GloBE Information Return and applies to each covered person in the same MNE group.

What you should do now

We recommend that affected groups:

a.    Confirm scope: test the threshold for each of the preceding four years, apply the statutory entity exclusions, and prorate the threshold for a short or long year of income

b.    Confirm current compliance: identify the designated Kenyan entity, establish the notification deadline, and determine whether any payment or return is due or overdue

c.    Model the effective tax rate: reconcile accounting income, current and deferred tax, and GloBE adjustments. Identify consolidation and top-side entries attributable to Kenyan entities. Review taxes connected with permanent establishments, transparent entities, and distributions.

d.    Review incentives: assess how tax holidays, reduced rates, investment deductions, allowances, and credits affect GloBE income or adjusted covered taxes

e.    Calculate the substance-based income exclusion: validate eligible employee costs and the average net book value of qualifying tangible assets. For a year beginning in 2026, the rates are 9.4% for employee costs and 7.4% for qualifying tangible assets

f.    Prepare the data: confirm that systems can produce entity-level information that reconciles to the consolidated financial statements. Capture tax movements, adjustments recorded in equity or other comprehensive income, payroll costs, tangible assets, permanent establishment allocations, and expected deferred tax reversal periods

g.    Protect transition records: preserve opening deferred tax balances and review relevant asset transfers made after 30 November 2021 and before the transition year. The Regulations may require the acquiring entity to use the transferor’s carrying value

What to watch

Data: For many groups, the greatest challenge may be obtaining the required data rather than performing the calculation itself. Groups should assess whether consolidation systems currently capture the information needed to calculate GloBE income, adjusted covered taxes, payroll costs, tangible assets, and deferred tax adjustments at entity level. 

International recognition: Although the regime is modelled on Pillar Two principles, the Regulations do not themselves confirm whether Kenya's domestic minimum top-up tax will be recognised as a Qualified Domestic Minimum Top-up Tax or qualify for associated safe harbour treatment under the Inclusive Framework process, groups should retain the data needed to compare the Kenyan calculation with any relevant Income Inclusion Rule or Undertaxed Profits Rule calculation.

KRA forms and systems: KRA has yet to prescribe the form, content, and filing method for the GloBE Information Return. Groups should monitor KRA notices and prepare data that can support both the Kenyan filing and the group return.