How businesses can navigate new tax loss restrictions

Kenya’s Finance Act 2025, introduced a significant change to the corporate tax landscape by reinstating a five-year limit on the carry forward of tax losses, effective  July 1, 2025.

This marks a departure from the indefinite carry-forward regime introduced in 2021, and a return to the pre-2015 limit of five years, which was previously extended to ten years by the Finance Act, 2015.

The 2015 law also allowed businesses to apply for an extension beyond 10 years, subject to approval by the Cabinet Secretary upon recommendation from the Commissioner. The reintroduction of the five-year cap in 2025 is part of a broader evolution in Kenya’s tax policy.

It follows the repeal of the minimum tax regime, which was struck down by the courts in 2021 for being unconstitutional.

While the minimum tax was intended to ensure that all businesses contributed a baseline amount to the exchequer, its removal left unresolved concerns about the erosion of the tax base due to perpetual loss declarations. By limiting the carry-forward period, the government is seeking to reintroduce discipline into the system in a manner that is more constitutionally sound.

The new rule is designed to ensure that tax losses are not used indefinitely to avoid tax liability, while still allowing room for genuine business cycles to play out.

One area of uncertainty is how the new limit will apply to tax losses incurred before July 1, 2025, as the Act does not include a specific transitional provision.

Historical losses

This leaves room for varied interpretation. One view is that the restriction could apply retrospectively to losses older than five years from the effective date, effectively phasing out historical losses, while another interpretation is that the change should apply prospectively, affecting only losses incurred after this date.

The lack of explicit guidelines raises the need for clarity to provide certainty for businesses planning around historical losses. The five-year cap presents a dilemma for businesses whose growth strategies depend on long-term investment horizons.

In sectors like manufacturing and infrastructure, intensive capital expenditure often generates substantial capital allowances that lead to early-stage tax losses.

These allowances are designed to encourage long-term investment, yet the limited window for utilising resulting losses undermines their value, creating a disconnect between policy intent and business reality.

This challenge extends beyond investment-heavy industries. Startups, restructuring firms, businesses in research and development-heavy sectors, and those affected by economic shocks also face prolonged periods of loss before stabilising.

The time-bound nature of loss utilisation may force a shift from long-term planning to short-term tax efficiency, challenging the way businesses structure, innovate, and sequence their growth.

To adapt, companies may need to revisit financial models to ensure losses are absorbed within the five-year window. This could involve adjusting pricing, cost structures, or the timing of capital investments.

For corporate groups, the inability to transfer losses between entities adds complexity, particularly where profitability is uneven across subsidiaries.

Mergers, acquisitions, and internal restructuring may also be affected as tax loss utilisation becomes a more time-sensitive factor in strategic decisions.

Resulting losses

While capital allowances continue to incentivise investment, the restricted timeframe for using resulting losses limits their practical benefit, challenging businesses to align long-term growth plans with short-term tax constraints.

In-house tax and finance teams are now required to take up more proactive and compliance-oriented roles when managing the extension applications.

This includes maintaining detailed tracking of loss utilisation by year to trigger timely applications and initiating early engagements with the Kenya Revenue Authority (KRA) where extensions are required.

The process is anticipated to require substantive justification and documentation, adding to the compliance burden.

Businesses will also need to demonstrate that the losses are genuine and supported by a reasonable expectation of future profitability. The rationale behind the change is clear: supporting Kenya’s fiscal consolidation efforts and broadening the tax base. However, it also places a premium on strategic tax planning.

Businesses that delay action until the fifth year may find themselves constrained by time and limited options.

To mitigate this risk, taxpayers should begin reviewing their historical losses, model projected profitability, and prepare to engage with the KRA in advance if an extension is likely necessary.

This shift underscores that tax loss management is not just a compliance issue but a strategic consideration in broader financial and operational planning.

The new five-year limit on tax loss carryforwards is more than a technical amendment; it signals a broader evolution in Kenya’s tax policy in an era of fiscal tightening. For businesses, the message is clear: tax planning can no longer be passive.

It must be dynamic, data-driven, and forward-looking.

- The authors are consultants within PwC Kenya’s Tax Consulting Line of Service.