Capital Gains Tax ("CGT") is a tax generally levied on the gain made from the disposal of various capital properties. Kenya operates a source-based tax system. The levying of CGT in Kenya should, therefore, be primarily based on whether the underlying asset giving rise to the gain has a sufficient nexus to Kenya.
Forms of CGT and the Indirect Disposal Tests
Paragraph 2 of the Eighth Schedule of the Kenya Income Tax Act contemplates three categories of gains subject to CGT in Kenya: (a) gains on the direct transfer of property situated in Kenya; (b) gains on the alienation of shares or comparable interests where, within the preceding 365 days, the shares derived more than 20% of their value directly or indirectly from immovable property situated in Kenya (the "Immovable Property Test"); and (c) gains from the alienation of shares in a Kenya-resident company where the alienator held, directly or indirectly, at least 20% of the capital of that company within the preceding 365 days (the "Ownership Test").
Paragraphs (b) and (c) constitute Kenya's indirect disposal provisions extending CGT beyond purely domestic transactions. The Immovable Property Test targets offshore share disposals that are in economic substance, disposals of Kenyan real estate, subject to a 20% value threshold. The Ownership Test captures significant shareholdings in Kenyan-resident companies, with a notification obligation to the Commissioner by the alienator of the shares where the underlying ownership changes by at least 20%.
The Finance Act, 2026
The Government has through the Finance Act, 2026 introduced a further limb to Paragraph 2 through the introduction of a new subparagraph (d) which would extend CGT to gains derived from the alienation of shares by a non-resident person where the shares derive their value from Kenya, or where the alienation results in a change of group membership of a Kenya-resident company or of ownership of, title in, or interest in property located in Kenya.
This amendment is ambitious as it seeks to capture all offshore share disposals by non-residents where any value is derived from Kenya, or where any change in group membership of a Kenyan entity results. Notably, the draft provision contains no value threshold analogous to the 20% floor under the Immovable Property Test, nor does it define what constitutes "value derived from Kenya" or a "change in group membership." Without a minimum threshold, the provision could technically apply to every non-resident holding company that counts a Kenyan subsidiary among its assets, regardless of how marginal Kenya's contribution to value is.
Implications for Foreign Exits
The existing indirect disposal provisions and the new paragraph (d) create a challenging environment for foreign exits from Kenyan investments. Private equity sponsors, development finance institutions, and multinational groups must now grapple with CGT exposure not merely at the level of direct asset disposals, but at multiple layers of the holding structure.
The absence of clear guidance from the revenue authority on what constitutes value derived from Kenya, the applicable threshold, and the meaning of a change in group membership is a recipe for dispute with the Authority. Until these gaps are addressed, cross-border investors would be well advised to factor potential Kenyan CGT exposure into exit modelling and deal structuring from the outset.
