Kenya has taken a decisive step towards operationalising its significant economic presence (SEP) tax regime with the publication of the Draft Income Tax (Significant Economic Presence Tax) Regulations, 2025 on 22 September 2025. These regulations are designed to bring clarity and structure to Kenya’s new approach to taxing the digital economy, following the repeal of the digital service tax (DST) at the end of 2024 (for prior coverage, see the item in the Bytes column of the February 2025 issue of Indirect Tax News). Once finalised—likely by early 2026—the regulations will provide a comprehensive framework for taxing digital transactions of nonresidents in Kenya.
The move from a DST to a SEP regime reflects Kenya’s continued efforts to modernise its tax system in line with global digital economy trends. The SEP regime introduced in December 2024 replaced the 1.5% DST with an income-based approach that applies to nonresidents deriving (or accruing) income in Kenya from the provision of services through a business conducted on a digital marketplace. The scope of the SEP regime was expanded in the Finance Act 2025 (which applies as from 1 July 2025) to include income earned through the internet or an electronic network. Under the SEP rules, 10% of a nonresident’s Kenyan gross turnover is deemed to be taxable profit taxed at the 30% corporate rate, resulting in an effective 3% levy on gross revenue. Notably, there is no monetary threshold for a nonresident to be caught by the SEP rules.
While the DST simply taxed top-line turnover, the SEP framework aligns more closely with international income tax principles, especially those underpinning the OECD’s Pillar One initiative on taxing profits where users are located.
The draft SEP regulations apply to nonresident persons without a permanent establishment in Kenya that earn income through services provided via the internet or an electronic network, including digital marketplaces. A nonresident providing services in Kenya through a digital marketplace is deemed to have a SEP in Kenya if the user of the service is located in Kenya. Importantly, the SEP tax is a final tax, meaning that no further tax obligations will arise from the same income. This clearly signals that Kenya intends to tax foreign digital service providers that derive value from the Kenyan market, regardless of whether they have a physical presence in the country.
The draft regulations adopt an expansive definition of taxable digital services to include:
To determine where value is created, the regulations detail how user location will be established. A user will be considered to be in Kenya if any of the following conditions are fulfilled:
The draft rules would exempt:
Nonresident digital service providers must register with the Kenya Revenue Authority using a simplified tax registration framework, submit monthly returns and remit the SEP tax by the 20th day of the following month. A nonresident that elects not to register must appoint a tax representative to act on its behalf.
The draft regulations include transitional provisions to ensure continuity: entities already registered under the Digital Service Tax Regulations, 2020 will automatically be deemed to be registered under the SEP framework. The DST regulations are formally revoked.
Penalties and interest for noncompliance will apply under the Tax Procedures Act, ensuring consistent enforcement across tax regimes.
Kenya’s digital tax reforms mirror broader regional developments. Uganda is moving from a DST to a 15% withholding tax on related party digital transactions, while Tanzania and Rwanda maintain or have proposed their own DST variants. Kenya’s SEP approach, however, goes further by embedding profit attribution principles and connecting tax obligations to user location.
The publication of the draft SEP Regulations marks a crucial milestone in Kenya’s transition to a sophisticated, enforceable and future-ready digital tax regime. By expanding scope, defining user nexus and clarifying compliance obligations, the regulations translate policy into practice. As we await the publication of the final regulations, businesses—especially nonresident digital service providers—should begin assessing their exposure, compliance systems and pricing models.
Steve Okoth
BDO in East Africa
DST to SEP: A Paradigm Shift
The move from a DST to a SEP regime reflects Kenya’s continued efforts to modernise its tax system in line with global digital economy trends. The SEP regime introduced in December 2024 replaced the 1.5% DST with an income-based approach that applies to nonresidents deriving (or accruing) income in Kenya from the provision of services through a business conducted on a digital marketplace. The scope of the SEP regime was expanded in the Finance Act 2025 (which applies as from 1 July 2025) to include income earned through the internet or an electronic network. Under the SEP rules, 10% of a nonresident’s Kenyan gross turnover is deemed to be taxable profit taxed at the 30% corporate rate, resulting in an effective 3% levy on gross revenue. Notably, there is no monetary threshold for a nonresident to be caught by the SEP rules.While the DST simply taxed top-line turnover, the SEP framework aligns more closely with international income tax principles, especially those underpinning the OECD’s Pillar One initiative on taxing profits where users are located.
Application: Who the SEP Rules Target
The draft SEP regulations apply to nonresident persons without a permanent establishment in Kenya that earn income through services provided via the internet or an electronic network, including digital marketplaces. A nonresident providing services in Kenya through a digital marketplace is deemed to have a SEP in Kenya if the user of the service is located in Kenya. Importantly, the SEP tax is a final tax, meaning that no further tax obligations will arise from the same income. This clearly signals that Kenya intends to tax foreign digital service providers that derive value from the Kenyan market, regardless of whether they have a physical presence in the country.
Scope: What Services Are Covered
The draft regulations adopt an expansive definition of taxable digital services to include:
- Downloadable digital content such as apps, ebooks and films;
- Subscription-based media and streaming services;
- Software and cloud computing solutions;
- Search engines, automated helpdesks and AI services;
- Ticketing, online education and training platforms;
- Ride-hailing, travel, rental and accommodation marketplaces; and
- Data monetisation and online payment facilitation services.
User Location: The Nexus of Taxability
To determine where value is created, the regulations detail how user location will be established. A user will be considered to be in Kenya if any of the following conditions are fulfilled:
- The service is accessed through a device located in Kenya;
- Payment is made through a Kenyan financial institution;
- The user’s IP address or mobile country code corresponds to Kenya; or
- The user has a business, residential or billing address in Kenya.
Exemptions: Who Is Not Covered
The draft rules would exempt:
- Nonresidents with a permanent establishment in Kenya (i.e., nonresidents that are already taxable under the normal corporate tax rules);
- Income already subject to withholding tax under sections 9(2) or 10 of the Income Tax Act (e.g., management fees, royalties or interest); and
- Digital services provided to airlines where the government of Kenya holds at least a 45% shareholding.
Compliance and Administration
Nonresident digital service providers must register with the Kenya Revenue Authority using a simplified tax registration framework, submit monthly returns and remit the SEP tax by the 20th day of the following month. A nonresident that elects not to register must appoint a tax representative to act on its behalf.
Transitional and Enforcement Provisions
The draft regulations include transitional provisions to ensure continuity: entities already registered under the Digital Service Tax Regulations, 2020 will automatically be deemed to be registered under the SEP framework. The DST regulations are formally revoked.Penalties and interest for noncompliance will apply under the Tax Procedures Act, ensuring consistent enforcement across tax regimes.
BDO Insight
Kenya’s digital tax reforms mirror broader regional developments. Uganda is moving from a DST to a 15% withholding tax on related party digital transactions, while Tanzania and Rwanda maintain or have proposed their own DST variants. Kenya’s SEP approach, however, goes further by embedding profit attribution principles and connecting tax obligations to user location.The publication of the draft SEP Regulations marks a crucial milestone in Kenya’s transition to a sophisticated, enforceable and future-ready digital tax regime. By expanding scope, defining user nexus and clarifying compliance obligations, the regulations translate policy into practice. As we await the publication of the final regulations, businesses—especially nonresident digital service providers—should begin assessing their exposure, compliance systems and pricing models.
Steve Okoth
BDO in East Africa