Ruto signs sweeping economic reform laws

President William Ruto has assented to the law, the Income Tax (Amendment) Bill, the Special Economic Zones (Amendment) Bill, and the Technopolis Bill.

President Ruto said that the government was out to streamline the laws to strengthen Kenya’s position as an attractive investment destination by creating a more efficient, predictable and competitive business environment. 

Ruto said that the Income Tax Act seeks to rationalise the administration of Capital Gains Tax and align Kenya’s tax regime with international best practice and principles of taxation, while reinforcing the gains made in improving the ease of doing business.

“The Special Economic Zones Act seeks to enhance Kenya’s competitiveness by expanding the scope of special economic zones to include oil and gas zones, and harmonising the tax incentives applicable to entities undertaking activities within the zones,” said Ruto.

He said the law strengthens the special economic zones framework by aligning with operational realities of large-scale capital investments through the provision of a minimum licence tenure of 10 years to accommodate long project cycles associated with such investments.

Ruto said the legislation further expands the scope of special economic zones to support strategic sectors of the economy, including agro-processing, manufacturing, mining, advanced technology production, and petroleum operations.

The President, in a ceremony held at State House, Nairobi, on Monday morning, said that the Technopolis Act establishes a comprehensive legal framework for the creation, development, and governance of technopolises in Kenya.

 “The law seeks to position Kenya as a leading destination for technology-driven enterprises, innovation, and research by establishing integrated one-stop hubs for the efficient delivery of government services,” said Ruto.

The President said that the framework is expected to attract global investment, talent and innovation while accelerating Kenya’s transition into a knowledge-based digital economy.

The Income Tax Bill had sought to amend the Income Tax Act to provide for the exemption of capital gains tax in the transfer of property by a company to its shareholders as an internal reorganisation or transfer of property to the company by shareholders as consideration for the transfer.

The Bill sponsored by Molo MP Kuria Kimani introduces a new exemption to provide that transfers of property between a company and its shareholders, as part of an internal reorganisation, shall not be subject to Capital Gains Tax, provided certain conditions are met.

“These conditions include that property must be distributed in proportion to the shareholders' existing shareholding immediately before the transfer and where shares are involved, they must relate to а subsidiary of the company undertaking the reorganisation,” said Kimani.

The National Assembly Finance Committee Chairman said that currently, transfers of property between a company and its shareholders are generally subject to Capital Gains Tax where such transfers result in a disposal for tax purposes.

This means that even where a company undertakes internal restructuring involving the transfer of assets within the same economic group, such transactions may still attract Capital Gains Tax if they fall within the definition of a chargeable transfer.

The Bill also defines internal reorganisation under the Bill, internal reorganisation is defined as any restructuring of the ownership, control or assets of a company that does not involve a transfer of property to a third party.

“The effect of this definition is to limit the exemption strictly to intra-group transactions, thereby ensuring only genuine internal restructuring exercises qualify for relief while excluding transactions involving external parties.”

Under the current provisions of Section 7 of the Income Tax Act, certain distributions made by a company to its shareholders may be treated as dividends for income tax purposes and therefore subject to taxation.

The principal objective of the Special Economic Zones Bill was to amend the Special Economic Zones Act in order to strengthen the framework and align it with the operational requirements of large-scale capital investments, including investments in midstream and upstream petroleum operations.

The Bill sponsored by National Assembly Majority Leader Kimani Ichungwah seeks to implement the observations and recommendations contained in the Joint Report of the National Assembly Energy Committee and the Senate Energy Committee.

“The joint report by the National Assembly and Senate Energy Committees is on Consideration of the Field Development Plan and Production Sharing Contracts for Blocks T6 and T7 in South Lokichar Basin, Turkana County,” said Ichungwah.

The Report made proposals on the need to extend the ambit of special economic zones' legal and regulatory regime to midstream and upstream petroleum operations and extend fiscal incentives and concessions to investors in midstream and upstream petroleum operations, which was adopted by the Houses of Parliament on February 25 this year.

Parliament recognised the need for the formulation of a legal framework in order to actualise proposals and observations made in the Report addressing identifiable gaps in the prevailing legal framework to facilitate the commercial development of oil discoveries and exploratory activities in the Lokichar Basin.

Ichungwah said that the Bill, which is now an Act of Parliament, is intended to facilitate strategic investments in midstream and upstream petroleum operations by improving the legal and fiscal environment within Special Economic Zones.

“The Bill seeks to ensure that the Special Economic Zones regime accommodates the structure and operational needs of capital-intensive projects, including those undertaken under petroleum exploration agreements,” said Ichungwah.

The Bill further proposes consequential amendments to the Value Added Tax Act, the Income Tax Act and the Miscellaneous Fees and Levies Act in order to align the fiscal incentives available under those laws with the Special Economic Zones legal and regulatory regime.

The Bill, which is now an act of Parliament, proposes the establishment of the Technopolis Development Authority, a state agency tasked with the planning, development and management of technopolises, which is tasked with allocating land to investors within technopolises, establishing governance structures, setting up science museums, ICT parks, science parks, innovation centres and promoting and facilitating Kenya's digital economy through emerging technologies.

The Authority will also be mandated to host strategic government infrastructure, including data centres, research hubs, and centres of excellence, while promoting tech-driven creative industries and coordinating innovation ecosystems in collaboration with research institutions.

In addition, the Authority will market and promote technopolises to investors, coordinate and administer investment incentives and operate a one-stop shop for government services for technopolis-based businesses.

Other functions will be to facilitate research and innovation programmes and regulate the business processing outsourcing and IT-enabled services sector in partnership with relevant stakeholders.

The Cabinet Secretary responsible for ICT will also have the power to assign additional responsibilities to the Authority under any written law.