Background
Through a letter dated 15th September 2025, KKCO East Africa LLP sought clarification from the Kenya Revenue Authority (KRA) on the interpretation of Section 15(4) of the Income Tax Act (ITA) following its amendment by the Finance Act, 2025. The amendment introduced a five-year limitation on the carrying forward of tax losses, effective 1st July 2025.
Before this amendment, taxpayers were allowed to carry forward losses indefinitely, and the change created uncertainty regarding how losses accumulated prior to July 2025 would be treated.
KKCO East Africa LLP Request and Position
Our request to the Commissioner sought a confirmation of two key issues:
1.That losses incurred before 1st July 2025 should continue to be carried forward indefinitely, as they were generated under the old legal regime.
2.That only losses incurred after 1st July 2025 should fall under the new five-year limitation introduced by the Finance Act, 2025.
From our perspective, the absence of a transitional clause meant that losses accumulated before the effective date should not be disadvantaged, and therefore, a fair interpretation would preserve the indefinite carry-forward status for pre-July 2025 losses.
KRA’s response on treatment of accumulated losses (14th November 2025)
That:
1.No Transitional Provision for Pre-2025 Losses, the amended law did not include a transitional clause for losses accumulated before 1st July 2025. As a result, all losses whether incurred before or after 1st July 2025 are subject to the 5-year limitation, provided they fall within a 5-year income period.
2. Losses Prior to 2020 are no longer deductible based on the 5-year rule counted backwards from the effective date.
Only losses that fall within five years of income as at 1st July 2025 remain allowable.
3. Losses must be utilized within five Years and emphasized that interpreting the law to allow indefinite carry-forward of losses incurred before 1st July 2025 would amount to a misapplication of the law
Implications to Taxpayers
This guidance has substantial implications:
a) Regulatory risk – There is uncertainty due to lack of clear criteria for extension as the law doesn’t clearly define how the Cabinet Secretary through KRA will approve extensions beyond 5 years, this leave uncertainty for companies which would seek for extension whether their extension requests will be granted
b) Cash-Flow Risk – When the losses expire, companies may pay more tax earlier than they expected, which will greatly affect cash flows.
c) Retrospective Loss Write-Off – as this Impact on deferred tax assets which requires businesses to reassess and potentially write down deferred tax assets relating to older losses.
d)Investor Confidence & Capital-Intensive Projects – that the five-year cap undermines investor confidence, especially for capital-intensive investments with long payback periods. It could discourage new investments or make financing more expensive since the tax shield from losses is less certain.
The way forward
In light of the above position taken by KRA, taxpayers need to consider the following immediately
1) Review Historical Losses by conducting a detailed review of all historical tax losses to identify those now falling outside the allowable five-year window.
2) Apply for Extensions Early- If a business expects it cannot use all losses within 5 years due to heavy capital investment, it should early enough make an application for extension under Section 15(5) of the Income Tax Act.
3) Advocate / Monitor Policy Developments as this is a major policy change, companies especially large or capital-intensive ones should engage with industry associations, KRA, and Treasury to seek clarity on extension criteria.