Kenya plans to abolish a preferential tax rate that has long favored East African investors, reverting the withholding tax on dividends paid to citizens of regional partner states to the standard 15% applied to all non-residents, a move that signals a clear shift away from intra-regional investment incentives.
- •The proposal, contained in the Finance Bill 2026, deletes a provision in the Income Tax Act that had granted East African Community citizens a reduced rate of 5% on dividend income.
- •If the tax bill is enacted unchanged, all non-resident investors, including those from within the East African Community. will face the same 15% withholding tax.
- •The change removes one of the few tangible tax advantages underpinning cross-border investment within the bloc, effectively treating regional capital no differently from foreign inflows originating outside the region.
For years, the 5% rate functioned as a policy lever tied to the EAC’s integration agenda, aimed at easing the movement of capital across member states and reducing the tax friction on profit repatriation. Its removal comes despite longstanding commitments under the EAC framework to harmonize tax regimes and promote intra-regional investment.
The shift is likely to affect a wide range of investors and institutions such as regional banks with subsidiaries across borders, pension funds allocating capital within East Africa, private equity firms, and individual shareholders holding equity in Kenyan companies will all face higher tax deductions on dividend income. Companies listed on the Nairobi Securities Exchange (NSE) with regional shareholder bases may also see reduced net returns to investors, potentially altering capital allocation decisions.
The impact extends beyond portfolio investors as multinational firms with regional holding structures, manufacturing groups operating across multiple EAC markets, and telecom operators with cross-border ownership will all need to reassess how profits are distributed within their corporate structures.
The amendment lands in a region where tax coordination has long been uneven. Uganda and Tanzania do not offer a similar preferential rate on dividends for EAC citizens, meaning Kenya’s move brings it closer to their approach. Rwanda maintains a reduced rate for regional investors, creating a divergence that could influence where capital is routed within the bloc.
Kenya’s decision also exposes a deeper structural gap in the region’s tax architecture. A proposed East African double taxation agreement, approved more than a decade ago, has never come into force after failing to secure ratification from most member states. In its absence, the 5% rate served as a partial substitute, cushioning investors from the risk of being taxed both in Kenya and in their home jurisdictions. Its removal revives that risk, raising the effective tax burden on cross-border investment income.
As the largest economy in the bloc, Kenya’s policy choices carry disproportionate weight. The country accounts for roughly half of the region’s economic output, and its capital markets act as a hub for regional investment flows. Changes to its tax regime therefore ripple across the EAC’s financial ecosystem.
