Finance Act 2026: Kenya Expands the Definition of Royalty – What It Means for Software, SaaS and Digital Payments

The Finance Act, 2026 has introduced one of the most significant changes to Kenya’s cross-border taxation in recent years by significantly expanding the definition of “royalty” under the Income Tax Act.While the change appears technical, its practical impact on Kenyan businesses — especially those using cloud software, digital platforms, and IT services — will be substantial.What Changed?Section 2 of the Income Tax Act has been amended to broaden the meaning of royalty. The new definition now explicitly includes:

• Payments for the use or right to use any software, whether proprietary or off-the-shelf. This covers licence fees as well as development, training, maintenance, and support fees.
• Payments relating to proprietary digital payment card networks or platforms, including access, participation, or usage rights (even when described as service fees, transaction fees, network fees, or processing fees).

This expansion removes previous ambiguity around whether maintenance, support, and certain software-related payments qualified as royalty. Going forward, these payments are clearly caught.

Withholding Tax Implications

Because these payments are now classified as royalty, they become subject to withholding tax (WHT) under Section 35 of the Income Tax Act.

Under Section 35 of the Income Tax Act, any person making a payment that qualifies as royalty is required to withhold tax at source. The applicable rates are as follows:

• Payments to Kenyan residents: Withholding tax is charged at 5%.
• Payments to non-residents: Withholding tax is charged at 20%, unless a lower rate applies under a Double Tax Agreement (DTA).

This means Kenyan companies making payments for software licences, maintenance contracts, or SaaS subscriptions to both local and foreign providers will generally be required to withhold tax.

Real Impact on the IT and Digital Sector

The change significantly affects the IT and digital services industry in Kenya. Many commonly used tools now clearly fall under the expanded royalty definition, including:

• Google Workspace (including Google Meet)
• Microsoft 365
• Zoho applications
• Adobe Creative Cloud
• Salesforce, HubSpot, Zoom, Slack, and most other SaaS platforms

Practical Reality Check

Most multinational software companies do not accept net-of-tax payments. They expect to receive the full invoiced amount. This forces Kenyan businesses to gross up their payments.Example – Google Workspace Subscription

• Annual subscription invoice: USD 1,200
• WHT rate: 20%
• Gross amount the Kenyan company must pay: USD 1,500
• Amount paid to Google: USD 1,200
• WHT payable to KRA: USD 300

Result: The real cost of the subscription increases by 25%.

Who Bears the Cost?In almost all cases, the Kenyan business will bear the additional cost. This will lead to:

• Higher operational costs for companies relying on foreign software
• Budget overruns on already approved IT expenditure
• Increased cost of digital transformation for Kenyan businesses
• Potential shift toward local software alternatives (where available)

The impact is particularly felt by SMEs and startups that depend heavily on affordable cloud tools to remain competitive.What Should Businesses Do?Kenyan companies should take the following steps immediately:

1. Conduct a SaaS and Software Audit Identify all subscriptions and service agreements involving foreign providers.
2. Determine Withholding Tax Obligations Classify each payment under the new royalty definition and apply the correct rate (including DTA relief where available).
3. Update Financial Systems and Processes Configure accounts payable systems to automatically calculate and deduct withholding tax on qualifying payments.
4. Review and Renegotiate Contracts Include gross-up clauses in new agreements and discuss pricing adjustments with vendors.
5. Document Treaty Claims Properly For vendors from DTA countries (e.g., India), ensure proper documentation is obtained to apply reduced rates.
6. Revisit IT Budgets Factor in the additional 11–25% cost increase when planning software expenditure for the rest of 2026 and 2027.

This article is provided for general informational purposes only and does not constitute legal or tax advice. Tax laws and regulations are subject to change, and the application of tax rules depends on specific facts and circumstances. Readers should consult a qualified tax professional for advice regarding their particular situation.