Background
As mandated under Section 12E (6) of the Income Tax Act (ITA), the Cabinet Secretary, National Treasury and Economic Planning published the draft Significant Economic Presence Tax (SEPT). SEPT was introduced into the Income Tax regime vide the Tax Laws (Amendment) Act, 2024 effective 27th December 2024, repealing the Digital Services Tax regime as part of Kenya’s initiative to update its tax system in line with the expansion of the digital economy.
These regulations also repeal the Income Tax (Digital Services Tax) Regulations, 2020 and seek to broaden the scope of services subject to Significant Economic Presence Tax (SEPT). Following the public participation that was undertaken by the CS late 2025, it is expected that the final Regulations will be gazetted soon.
Detailed Analysis
Application of SEPT
The regulations expand Kenya’s taxing rights to income earned by non-resident persons from digital services provided over the internet or electronic networks, with a significant economic presence deemed to arise where the user is in Kenya.
Treating the Significant Economic Presence Tax (SEPT) as a final tax simplifies compliance by eliminating further computations, though it may increase the effective tax burden for low-margin digital businesses.
This reflects Kenya’s shift towards market-based taxation of the digital economy, consistent with approaches adopted in jurisdictions such as India and Nigeria, and reinforces the country’s intent to tax value derived from the Kenyan market irrespective of physical presence.
Scope of Taxable Services
The SEP tax applies to a broad range of services provided over the internet or an electronic network, including:
- Downloadable digital content, such as mobile applications, eBooks, and films
- Subscription-based media, including news magazines and journals
- Streaming, listening, viewing, or playing online digital content on any audiovisual or electronic media, including television shows, films, music, games, podcasts, webcasts, and similar content
- Software programs, including software, drivers, website filters, and firewalls
- Electronic data management, including cloud computing services, website hosting, online data warehousing, file sharing, and similar services
- Search engines and automated helpdesk services
- Artificial intelligence services
- Ticketing services for events, theatres, restaurants, and similar venues
- Online education programs, including distance teaching through pre-recorded media, eLearning, educational webcasts, webinars, online courses, and training services tailored to the learner’s program
- 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
- Transmission of data collected about users, which has been generated from such users’ activities on a digital marketplace, however monetized
- Facilitation of any online payment, including money transfer services and the exchange or transfer of digital assets
- Any other service carried out over the internet or an electronic network, including through a digital marketplace, that is not exempt
The breadth of services captured under SEPT reflects an intentional design to future-proof Kenya’s digital tax framework, bringing within scope both established digital business models and emerging technologies such as artificial intelligence, online payment facilitation, and digital asset transfers. The inclusion of a residual catch-all provision ensures continued relevance as the digital economy evolves, but also shifts a greater interpretive burden onto taxpayers in determining whether new or hybrid services fall within scope. In the absence of detailed administrative guidance, non-resident digital service providers may need to adopt a more conservative risk assessment when evaluating their Kenyan tax exposure.
Determination of User Location
The user of the service will be deemed to be located in Kenya if:
- The user accesses the digital interface through telecommunication or electronic devices from a terminal located in Kenya;
- The payment for the services is made using a credit or debit facility provided by any financial institution or company in Kenya;
- The services are acquired using an internet protocol (IP) address registered in Kenya or an international mobile phone country code assigned to Kenya; or
- The user has a business, residential or billing address in Kenya.
SEPT determines a user’s location using practical, widely recognized digital indicators like IP addresses, payment details, and country codes, ensuring consistency with previous DST rules while reflecting international standards.
Exemptions
The draft rules exempt:
- A non-resident person who offers the services through a permanent establishment (PE) in Kenya, since their income is subjected to normal corporate tax in Kenya through the PE.
- Income chargeable under section 9(2) or section 10 of the ITA — for example income from message transmission services such as cable, radio, optical fibre, internet, satellite, and television broadcasting, as well as management or professional fees, royalties, and interest, which are subject to the withholding tax regime.
- A non-resident person providing digital services to an airline in which the Government of Kenya has at least forty-five percent shareholding, such as Kenya Airways.
Computation of Tax
For SEP tax purposes, the tax is calculated as a percentage on the deemed profit derived from Kenya.
The taxable profit is deemed to be 10% of the gross turnover, and the tax rate is 30% of the deemed taxable profit. This mechanism results in an effective tax rate of 3% of the gross turnover, excluding value-added tax (VAT) on the service. Notably this is an increase from the repealed DST, which was levied at 1.5% of the gross transactional value.
Separately, non-resident providers are also obligated to charge VAT at 16% on all their supplies. While the burden of SEPT is on the supplier and the burden of VAT is on the customer, the total effective tax burden on a specific service would be 19% of gross turnover, substantially increasing the overall cost of supplying digital services to Kenyan consumers by non-resident players.
Compliance and Administration
Any person to whom SEPT applies may appoint a tax representative in Kenya for purposes of compliance with these regulations. The person may also elect to register directly with the Kenya Revenue Authority through a simplified registration framework, submit monthly returns, and remit the SEP tax by the 20th day of the following month.
A person who fails to comply with SEPT obligations is liable for penalties and interest under the Tax Procedures Act. Failing to register or deregister on time can attract KES 100,000 per month, capped at KES 1,000,000 (Section 81). Late submission of returns or required documents can incur penalties ranging from 5% of the tax payable or KES 2,000–20,000 depending on the type of return, while failure to submit other documents may result in KES 1,000 per day up to a maximum of KES 50,000 (Section 83). Late payment of taxes carries a penalty of 25% of the tax due (Section 83A), and deliberate or negligent misstatements leading to tax shortfalls can attract penalties of 20%–75% of the underpaid tax, with additional increases for repeated offenses and reductions for voluntary disclosure (Section 84). Interest on overdue payments is charged at 1% per month (Section 38), highlighting the financial impact of non-compliance and the importance of timely registration, filing, and payment for non-resident digital service providers.
Conclusion
The proposed SEPT regulations represent a significant shift in Kenya’s approach to taxing the digital economy and materially increase the compliance obligations for non-resident digital service providers.
Affected non-resident entities should:
- Assess whether their services fall within the expanded definition of taxable digital services;
- Evaluate their Kenyan user base against the prescribed user-location criteria; and
- Prepare for registration or the appointment of a local tax representative if they are yet to do so.
Early engagement and readiness will be critical to managing compliance risks and ensuring a smooth transition to the SEP tax regime.
Disclaimer
The information provided in this article is based on the facts, assumptions, and sources available at the time of publication. We have assumed that these facts and assumptions are correct, complete, and accurate. The guidance presented reflects current law and administrative practices, as well as prevailing judicial interpretations, as of the publication date. Any changes in the facts, assumptions, law, or interpretations (including retroactive changes) may affect the relevance or accuracy of the information provided. This article does not constitute binding advice and should not be relied upon as a substitute for professional tax or legal advice. Readers are encouraged to seek professional guidance for their specific circumstances.
Contact Information
For any questions or further clarification on this topic, please feel free to contact our team: Joseph Owande at jowande@keldinellp.com or Faith Mungai at fmungai@keldinellp.com.