Kenya has changed what counts as a royalty for tax purposes, and that change touches a lot of everyday business costs.
If your business pays for cloud software, digital tools, or card processing services from a foreign company, you are likely to feel it. The Finance Act 2026 widens the legal definition of a “royalty.”
A royalty is used to mean payment for the right to use someone’s intellectual property, like a patent or trademark. Now it also covers payment for using any software, whether it was built specifically for you or bought off the shelf.
That includes license fees, development work, staff training, maintenance, and support. It also covers payments made through card networks like Visa and Mastercard. Even if the invoice calls it a “service fee” or “processing fee,” the law now treats it as a royalty.
Think of it like renting a house. Previously, KRA only cared if you were paying someone directly for the right to live there; that was the “royalty.”
Now, if you pay for the house itself, the locks, the maintenance visits, or even the estate agent’s monthly service charge, all of it counts as rent for tax purposes.
Let’s say a Nairobi retail business pays Microsoft for a Windows license, pays a trainer to teach staff how to use a new accounting system, and processes customer payments through Visa. Under the old rules, only the license fee would likely have been treated as a royalty.
Under the new rules, all three payments qualify: the software license, the training fee, and the small percentage Visa takes on every card tap. It does not matter what the invoice calls the charge.
If it relates to using someone else’s software or payment network, KRA now sees it as a royalty and taxes it accordingly.
There is a catch that works in your favor, though. The original Finance Bill wanted to tax software payments even when bought through a distributor or reseller rather than the vendor directly. That clause was dropped in the final Act.
So if that same Nairobi business had bought its Windows license through a local reseller instead of straight from Microsoft, that payment would fall outside the royalty net.
This is the government’s response to a Supreme Court ruling in December 2025, where the court sided with Absa Bank Kenya, shielding the banking sector from a tax bill running into billions of shillings.
Judges ruled that fees paid to card networks like Visa or Mastercard were not royalties. They also ruled that interchange fees banks earn on card transactions could not be taxed either. Parliament has now rewritten the law so both count as royalties going forward.
Kenya charges a withholding tax of 20% on royalties paid to non-residents. Most global tech companies, like Google, Microsoft, or Salesforce, will not accept a smaller payment to cover that tax. They expect their full invoice amount.
That means the Kenyan business ends up paying the tax on the vendor’s behalf, on top of the original bill, just so the vendor still walks away with the full amount they invoiced.
A $1,000 (~KES 129,300) Google Workspace bill can turn into a $1,250 (~KES 161,600) payment once you account for this. That is a 25% jump in real cost.
Startups and SMEs are the most exposed. Many run their entire operations on foreign software for accounting, marketing, and payments and cannot easily switch to something else. A sudden jump in cost for tools they depend on could squeeze the budgets even more.
Banks, fintechs, and IT consultants feel it too, especially those handling card payments or selling software from foreign vendors.
In short, businesses should go through every software and card processing contract they hold with foreign providers. Knowing which payments now count as royalties, and setting money aside, if possible, to cover the extra tax, will matter for the rest of 2026.
