How 15pc global tax affects Kenyan firms

This top-up tax ensures that the effective corporate tax rate reaches the agreed global minimum of 15 percent. Put simply, if a Kenyan subsidiary has an Effective Tax Rate (ETR) of three percent, it will pay an additional 12 percent to reach the 15 percent floor.

The idea behind the Minimum TopUp Tax stems from the Organisation for Economic Co-operation and Development (OECD’s) global minimum tax initiative, also known as Pillar 2, which aims to stop the long-running “race to the bottom” in corporate tax rates.

For years, countries have competed for foreign direct investment by offering lower corporate tax rates, a strategy that tends to disadvantage low and middle-income countries that cannot afford such rates.

By introducing a global minimum rate of 15 percent and allowing countries to apply a top up tax, the system aims to ensure that large corporations pay a fairer share of tax wherever they operate hence reducing the need for governments to attract investments primarily through tax competition

How does a Kenyan entity end up with an ETR as low as three percent when the headline corporate tax rate in Kenya is 30 percent? The answer lies in Kenya’s preferential tax regimes such as the Special Economic Zones (SEZs), Export Processing Zones, Nairobi International Financial Centre and Local Motor Vehicle Assembly Regime, where reduced rates or tax holidays often results low or no corporate taxes.

It is interesting that while tax regimes such as SEZs are intentionally designed to lower tax burdens and attract investment, Kenya’s Minimum Top‑Up Tax requires these same companies to pay top-up tax where their effective rate falls below 15 percent, creating an interesting policy tension between investment incentives and emerging global tax standards.

A Kenyan entity comes within scope if its results are consolidated under accounting standards into a group whose total global turnover exceeds 750 million euros. This relatively high threshold was deliberately chosen because large MNE groups are often viewed as the primary drivers of base erosion and profit shifting.

Their scale, international structures, and planning opportunities allow them to move profits to low-tax jurisdictions in ways smaller entities cannot.

When the OECD began the Base Erosion and Profit Shifting project in 2013, it estimated that groups above this threshold accounted for more than 90 percent of global corporate tax revenue therefore making them the biggest contributors to potential tax base erosion.

Although the rules exclude certain types of entities such as government bodies, nonprofits, pension funds, investment funds, and some asset holding entities, there are no specific in-scope industries.

However, US technology companies often feature discussions around Minimum Top-Up tax as many of the world’s largest MNEs, are US headquartered technology companies that frequently exceed the threshold.

For years, the US expressed concerns that the OECD framework could conflict with its tax system or impose additional burdens on US multinationals. To resolve this, the US negotiated a Side-by-Side Agreement within the OECD Inclusive Framework and in January 2026, the OECD recognised the US’s Global Intangible Low-Taxed Income as functionally equivalent to the OECD’s Minimum Top-Up Tax rules.

This exempts US parent companies from additional top-up tax abroad. However, this recognition does not override local Minimum Top-Up Tax rules, meaning Kenya may still impose a top-up tax, where a US-owned Kenyan subsidiary has an ETR below 15 percent.

To ease the compliance burden in the early years post enactment, the rules include transitional safe harbours for financial years beginning on or before July 1, 2028.

During this period, an entity may be treated as having zero top-up tax if it meets specific conditions, such as having profits no greater than five percent of payroll costs and tangible assets or achieving a simplified ETR of at least 16 percent for 2025.

These temporary measures are intended to focus early efforts on entities with little economic substance because parameters such as having no assets or no payroll costs are often indicative of lack of economic substance and such companies are more likely to be involved in aggressive tax planning that erodes the tax.

The Finance Act, 2025 requires taxpayers to pay the top up tax by the end of the fourth month after their financial year. Entities within scope should now model their effective corporate tax rates, assess whether they qualify for transitional safe harbours and prepare for the accompanying tax liabilities and compliance burden.