Auditors, regulators and industry groups are warning that Kenya’s proposal to ease corporate restructuring by providing tax relief could open a capital gains loophole, allowing companies to sidestep taxes through staged internal transfers without tighter safeguards.
- •At the center of the debate is the Income Tax (Amendment) Bill, 2026, a proposal before the National Assembly that would exempt certain internal corporate reorganizations from both capital gains tax and dividend-related withholding tax.
- •While broadly welcomed by professional services firms and business groups, the measure has triggered concern among fiscal authorities over its potential to erode public revenue if additional controls are not set.
- •Various stakeholders recommended structural guardrails such as minimum holding periods to prevent immediate post-restructuring asset sales, mandatory oversight for large transactions, and periodic reviews to assess the fiscal impact of the exemptions.
“Capital Gains Tax is a constitutionally sanctioned revenue stream appropriated through Finance Acts. A permanent CGT exemption for internal reorganisations, without a sunset clause or review mechanism, creates an open-ended revenue risk,” the Office of the Controller of Budget stated.
The Bill, sponsored by Molo MP Kimani Kuria, seeks to resolve a longstanding friction in Kenya’s tax system; where companies can incur tax liabilities when merely rearranging ownership of assets within the same economic group.
Under the existing framework in the Income Tax Act, transfers of property between a company and its shareholders can be treated either as taxable distributions, thus triggering withholding tax, or as disposals subject to capital gains tax, even where no real economic gain has occurred.
The proposed amendments attempt to draw a sharper distinction between genuine market transactions and internal reorganizations. The bill redefines certain transfers during restructuring so they are no longer classified as “distributions” under the tax law, removing exposure to dividend taxation. At the same time, it introduces a new exemption under the Eighth Schedule to shield qualifying transfers from capital gains tax.
To qualify, transactions must meet tightly defined criteria. Property must be transferred strictly in proportion to existing shareholding, ensuring that no shareholder receives a disproportionate economic benefit. Where shares are involved, they must relate to a subsidiary of the transferring company, anchoring the relief within corporate group structures.
Moreover, the definition of “internal reorganization” excludes any involvement of third parties, limiting the exemption to movements within the same ownership ecosystem. These provisions are designed to align tax treatment with economic substance, a principle widely adopted in other jurisdictions to facilitate corporate restructuring without penalizing firms for non-commercial asset movements.
Even though audit firms such as PwC, KPMG and Deloitte have indicated that the proposal would improve Kenya’s attractiveness to investors by reducing friction in reorganizing corporate structures, they identified that the absence of a “group existence” requirement in parts of the draft, potentially allowing entities outside formal corporate groups to access the exemption.
Another concern is the lack of consistency across provisions in the Eighth Schedule, which could create interpretive ambiguities and opportunities for aggressive tax planning.
Appearing before the Finance and National Planning Committee, opponents of the proposal argued that the bill does not adequately address the risk of sequential transactions; where assets are first reorganized internally to qualify for exemption, then sold to third parties shortly thereafter. Without a minimum holding period or residency requirement, such strategies could effectively convert taxable disposals into tax-free transfers.
To counter this, proposals under consideration include requiring reorganized entities to remain tax-resident in Kenya for a defined period, mandating advance rulings from the Kenya Revenue Authority (KRA) for high-value restructurings, and introducing statutory reviews of the exemption’s fiscal impact.
Some stakeholders have also called for harmonization with other tax regimes, including stamp duty, to ensure that reorganizations are either fully tax-neutral or consistently treated across different tax heads.
