KRA recently via a public notice that provided deemed interest rate to be used for the last quarter of 2025 (October-December) set at 8%.
- Deemed interest applies when related-party loans or intercompany balances carry zero or below-market interest rates, triggering tax adjustments and withholding tax.
- KRA treats interest-free or long-overdue intercompany receivables as financing arrangements with taxable deemed interest.
- KRA applies arm’s length principles using market benchmarks for interest rates, with rules on interest deductibility and withholding tax to consider.
- Strong documentation like loan agreements, pricing benchmarking studies and payment evidence are essential in avoiding audit risks.
Understanding Deemed Interest in Kenya
Deemed interest is KRA’s way of treating zero or low-interest loans between related parties as if they were charged interest at a market rate.
This prevents multinationals from eroding Kenya’s tax base through low-cost intragroup financing or by stretching payment terms on intercompany balances.
The Legal Framework
- Section 16(2) (ja) of the Income Tax Act treats non-resident loans to resident entities at a rate below the prescribed market rate to a notional deemed interest to having accrued and subjects it to a withholding tax.
The current quarterly rate is 8% for the last quarter of 2025, with quarterly updates published by KRA.
- Section 16 (5) of the ITA Provides that the Commissioner shall prescribe the form and manner in which the deemed interest shall be computed and the period for which it shall be applicable.
- Section 18 of the ITA governs transfer pricing and empowers KRA to adjust related-party transactions that don’t reflect arm’s-length terms.
When KRA May Apply Deemed Interest
- Interest-free or below-market loans between related entities, whether resident or foreign-controlled;
- Long-overdue intercompany receivables or payables, especially from shared services, management fees, royalties or cost allocation arrangements with extended payment terms;
- Cash pooling or sweeping arrangements without explicit interest terms, which KRA may reclassify as loans; and
- Extended credit terms in shared services, that may effectively become financing if payments are delayed beyond typical market terms.
Deemed Interest and Other Tax Rules
- Arm’s length interest rates: KRA benchmarks rates against comparable loans considering credit risk, term, currency and security.
- Interest deductibility limits: Interest paid to related parties may be limited to 30% of EBITDA, aiming to curb excessive intragroup financing deductions.
- Withholding tax (WHT): A 15% WHT applies to both actual and deemed interest, with double tax treaties potentially reducing this withholding tax rate.
- VAT & regulatory approvals: Interest is generally exempt from VAT. Large foreign loans may require Central Bank of Kenya registration or approval.
Calculation of Deemed Interest
If a Kenyan company receives a USD 20,000, loan from a related non-resident at 0% interest, KRA deems that loan to be earning interest at the prescribed rate (currently at 8% for (October–December 2025).
Deemed Interest=8%×20,000=USD 1,600 p.a.
Withholding Tax at 15% applies on that deemed interest:
16000×15% =USD 240
The withholding tax must be withheld and remitted to KRA within 5 working days, even if no actual interest is paid.
Transfer Pricing Audit Trends and Case Highlights
KRA increasingly targets related-party financial transactions, focusing on prolonged interest-free loans and overdue intercompany balances.
Aggressive recharacterization of cost sharing and management fees as financing is common.
Tax Appeals Tribunal cases reaffirm that transfer pricing adjustments must reflect arm’s-length pricing in financing transactions, increasing scrutiny on documentation and benchmarking.
Recommendations on managing Deemed Interest Risk for Multinationals
- Use formal, signed intercompany loan agreements with clear, market-based interest terms;
- Periodically benchmark interest rates against market comparables and update transfer pricing documentation;
- Convert intercompany balances into formal loans or equity to clarify tax treatment;
- Deduct and remit withholding tax on deemed interest promptly; and
- Align intercompany financing policies with treasury and transfer pricing strategies.
If your business is navigating the complexities of related-party financing, transfer pricing or managing intercompany transactions in Kenya, do not leave your tax risks to chance.
Partner with a team of seasoned tax professionals who bring deep expertise and personalized advisory tailored to your unique needs.
At Intelpoint Consulting, Your Tax Lawyers with a Personal Touch our tax experts stay ahead of evolving KRA rules and deliver practical, audit-ready solutions to protect your bottom line and unlock tax efficiencies.
Contact us today to safeguard your compliance, optimize financing structures and gain peace of mind with confident, expert guidance every step of the way.
Intelpoint Consulting
info@intelpointconsulting.com
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Disclaimer: This alert is for informational purposes only and does not constitute legal or tax advice.
Please contact us to discuss your specific circumstances.