Significant Economic Presence Tax: Legal Framework and Compliance Considerations

Rule(s)

Description

Our comments

1. Citation and Commencement

These Regulations may be cited as Income Tax (Significant Economic Presence Tax) Regulations, 2025.

The citation is standard and clear.
The regulations should be easily accessible in the Kenya Law website after enforcement.

2. Interpretation

Digital asset refers to any item of value that exists in a digital form and is owned or controlled electronically, which can be used, transferred, or traded.

Digital marketplace has the meaning assigned to it in the Income Tax Act.

Service means a digital service or any service that is delivered or subscribed over the internet, an electronic network including through a digital marketplace.

The definitions show an expansion of scope.
The definition of "digital asset" is a necessary addition as it captures emerging business models in the digital economy such as NFTs and cryptocurrencies. These were not covered under the DST regulations.
The definition of service is broad, moving beyond the DST's focus on "digital service" delivered via a "digital marketplace" to "any service" delivered or subscribed over the internet.
The focus here is expanded reach.

3. Application of Significant Economic Presence Tax

1. Significant economic presence tax shall apply to the income of a non-resident person derived or accrued in Kenya from the provision of services through a business carried out over the internet or an electronic network including through a digital marketplace.
2. A person shall be deemed to have significant economic presence in Kenya where the user of the service is in Kenya.
3.  Significant economic presence tax shall be a final tax.

Deeming an SEP based solely on the location of the user effectively captures any non-resident business interacting with Kenyan users online.
Clarifying that the SEP tax is a final tax for non-resident persons without a Permanent Establishment (“PE”) provides certainty and prevents double taxation concerns under the domestic law for this specific tax. This is a continuation from the DST regime.

4. Scope of Taxable
Services

Significant economic presence tax shall be applicable on the following services;
a. Downloadable digital content including downloadable mobile applications, eBooks and films.
b. Subscription-based media including news magazines and journals.
c. streaming, listening, viewing or playing online digital content on any audio visual or electronic media including television shows, films, music, games, podcasts, webcasts and similar content.
d. Software programs including software, drivers, web site filters and firewalls.
e. Electronic data management including cloud computing services, website hosting, online data warehousing, file sharing and similar services.
f. Search engines and automated helpdesk services.
g. Artificial intelligence services.
h. Ticketing services for events, theatres, restaurants and similar services.
i. Online education programs including distance teaching programs through prerecorded media, eLearning, education webcasts, webinars, online courses and training services tailor made to suit the leaners program.
i. Services that link the supplier to the recipient including platforms for transport hailing, online travel, rental and accommodation marketplaces and any other platforms that facilitate the provision of services, goods or property.
j. Transmission of data collected about users which has been generated from such users’ activities on a digital marketplace, however monetized.
k. Facilitation of any online payment including, money transfer services and exchange or transfer of digital assets.
l. Any other service carried out over the internet or an electronic network including through a digital marketplace that is not exempt under the Act.

The list covers most modern digital economy activities.
It broadens the scope by adding services not mentioned in the DST regulations, such as Artificial Intelligence (“AI”) services and facilitation of online payment and transfer of digital assets (4(l)), which is prudent.
The phrase "any other service carried out over the internet... that is not exempt" provides the Commissioner with huge discretion. While useful for capturing future innovations, it could create uncertainty for taxpayers.
Guidance or examples from the Kenya Revenue Authority (“KRA”) would be beneficial.

5. Determination of
user location

A user of a service shall be deemed to be located in Kenya if;
a) The user accesses the digital interface through telecommunication or electronic devices from a terminal located in Kenya.
b) Payment for the services is made using a credit or debit facility provided by any financial institution or company in Kenya.
c) Services are acquired using an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya.
d) The user has a business, residential or billing address in Kenya.

The proxies for determining user location are practical and largely borrowed from the DST rules, which is positive for consistency. They include common digital footprints like IP addresses, payment methods and country codes. These are standard internationally accepted indicators.

6. Exemption from
Significant Economic
Presence Tax

For the purpose of these Regulations, significant economic presence tax shall not apply to;
a) A non-resident person who offers the services through a permanent establishment in Kenya.
b) Income chargeable under section 9(2) or under section 10 of the Act.
c) A non-resident person providing digital services to an airline in which the government of Kenya has at least forty-five percent shareholding.

The exemptions are logical but require careful application.
The exemption for non-residents with a PE in Kenya is commended, as their income should be subject to the standard corporate income tax regime under Section 9(2) of the Income Tax Act, avoiding double taxation.
Referencing income chargeable under other sections ensures the SEP tax does not override specific existing rules for certain types of income

7. Registration

1. A non-resident person without a permanent establishment in Kenya who provides a service to a user in Kenya shall make an application for registration under the simplified tax registration framework in the prescribed form.
2. The application under paragraph (1) shall include the following information;
   1. • The name of the applicant’s business including its trading name.
      • The name of the contact person responsible for tax matters.
      • The postal and registered address of the business and its contact person.
      • The telephone number of the contact person.
      • The electronic address of the contact person.
      • The websites or uniform resource locator of the applicant through which business is conducted.
      • The certificate of incorporation issued to the applicant’s business.
      • Any other information that the Commissioner may require.
3. Upon registration, the Commissioner shall issue the applicant with a Personal Identification Number for the purpose of filing returns and payment of the tax.
4. The Commissioner may register a person who is eligible for registration, where the person fails to register within the timelines stipulated in Section 8 of the Tax Procedures Act, Cap. 469B.
5. A person registered under these Regulations who ceases to provide services in Kenya shall apply to the Commissioner for deregistration in the prescribed form as stipulated in section 10 of the Tax Procedures Act, Cap. 469B.

The draft states that a non-resident person "shall make an application," making it mandatory, whereas the DST regulations (Regulation 7(1)) used "may register." This is an important tightening of the compliance obligation.
The list of required information is comprehensive. It is positive that it aligns closely with the DST requirements (e.g., business details, contact person, websites). This ensures a smooth transition for existing registrants. For the Commissioner's Power to Register (7(4)), this power, derived from Section 8(8) of the Tax Procedures Act, is an important enforcement tool which allows the KRA to register non-compliant non-residents.

8. Appointment of Tax Representative

A non-resident person without a permanent establishment in Kenya who elects not to register in accordance with Regulation 7 shall appoint a tax representative in accordance with section 15A of the Tax Procedures Act, Cap. 469B.

This rule correctly provides an alternative to direct registration, as per Section 15A of the Tax Procedures Act (“TPA”).
The appointment of a local tax representative shifts the compliance burden and potential liability to that representative, making it an important decision for nonresidents. The regulation effectively incorporates this existing procedure from the parent Act.

9. Computation of Tax

1. For the purposes of computing the tax under these regulations;
   • •  The taxable profit of a person liable to pay the tax shall be deemed to be ten per cent of the gross turnover.
     •  The rate of tax shall be thirty per cent of the deemed taxable profit.
2. Gross turnover shall be the income of a non-resident person derived from or accrued in Kenya through a business carried out over the internet or an electronic network including through a digital marketplace and:
   • • In the case of the provision of the services, the payment received as consideration for the services.
     • In the case of a digital marketplace, the commission or fee paid to the digital marketplace provider for the use of the platform.
3. The gross turnover shall not include the value added tax charged for the service.

Unlike the DST regulations computation which was straightforward, regulation 9(1) these regulations outlines a two-step computation: a deemed profit of 10% of gross turnover, taxed at the corporate income tax rate of 30%, resulting in an effective tax rate of 3% (10% * 30% = 3%). The only problem here is taxpayers may find that the 10% deemed profit does not actually show the true picture of profitability.

10. Accounting and Payment

A person liable to pay significant economic presence tax or its appointed Tax Representative shall submit a return in the prescribed form and remit the tax due on or before the twentieth day of the month following the end of the month in which the service was offered.

The requirement to file and pay by the 20th day of the following month is consistent with the DST and other monthly taxes like VAT.
This creates a great ongoing compliance burden for non-residents, requiring robust systems to track Kenyan-sourced turnover in real-time.

11. Amendment of Returns

1. Amendment to a return submitted under these Regulations shall be in accordance with section 31 of the Tax Procedures Act, Cap. 469B.
2. Where an amendment results in an overpayment of tax, the amount overpaid shall be retained as a credit and offset against the significant economic presence tax payable in the subsequent tax period.
3. Where an amendment results in an overpayment and the non-resident person is ceasing business in Kenya, a refund will only be available if the non-resident person has a bank account with an institution registered and licensed under the banking Act, in Kenya and the transfer of the refund may be made into a holding company, a subsidiary or fellow subsidiary’s banking account or account with a similar institution in Kenya, upon written notification to the Commissioner and indemnification of the Commissioner against any loss as a result of such instruction.

This rule appropriately incorporates the general provisions of Section 31 of the TPA.
The restriction on cash refunds for non-residents ceasing business is a notable limitation.
The condition for a cash refund, requiring a Kenyan bank account, is a practical measure to manage fiscal risk but could be a hurdle for nonresidents winding up operations.

12. Keeping of Records

A person required to deduct, account and remit the significant economic presence tax to the Commissioner under these Regulations shall be required to keep records in accordance with Section 23 of the Tax Procedures Act, Cap. 469B.

By mandating record keeping in accordance with Section 23 of the TPA the rule imposes an important obligation on non-residents.
Section 23(2A) of the TPA specifically allows non-residents to maintain records in a "convertible foreign currency," which is a helpful and pragmatic provision for foreign businesses.

13. Powers to collect tax from persons owing money to the Taxpayer

1. The Commissioner may by notice in writing require any person including financial institutions, customers, agents or related parties to deduct all taxes due and remit the tax on behalf of the taxpayer in accordance with Section 42 of the Tax Procedures Act, Cap. 469B.
2. The Commissioner shall credit any amount paid by the person so appointed against the tax owed by the taxpayer.
3. A person appointed under paragraph (1) who without reasonable cause fails to comply with a notice or a requirement by the Commissioner under this Regulation shall be personally liable for the amount specified in the notice or requirement in accordance with Section 42 of the Tax Procedures Act, Cap. 469B.

Granting the Commissioner the power to compel third parties to deduct and remit taxes on behalf of a taxpayer may be seen as overreaching, especially if those third parties are not directly involved in the taxpayer’s tax affairs.
The provision assumes that third parties can act as de facto tax collectors, which may not be feasible or legally appropriate in many cases.

14. Penalties and Interest

A person who fails to comply with the provisions of these Regulations will be liable to the penalties and interest prescribed under the Tax Procedures Act, Cap. 469B.

Linking penalties and interest to the TPA is standard and creates a robust compliance regime.
Non-residents must be aware of the specific penalties for late registration (Section 81), late filing of returns (Section 83), late payment (Section 83A) and tax shortfalls (Section 84), which can be substantial.
The general interest rate for late payment is 1% per month under Section 38.

15. Transitional Provisions

A person registered under the Income Tax (Digital Service Tax) Regulations, 2020 shall be deemed registered under these Regulations.

This is a well-drafted and important provision for administrative continuity.
It ensures that businesses already registered for DST are automatically migrated to the SEP regime, avoiding the need for re-registration and preventing a gap in tax liability.

16. Revocation N.L. 207/2020

The Income Tax (Digital Service Tax) Regulations, 2020 are revoked.

The explicit revocation of the DST Regulations provides legal certainty, confirming that the SEP Tax Regulations are intended as a full replacement, not a parallel regime.