Kenyan transfer pricing: arm's length rule, documentation, master file, local file and CbCR (2026)

The arm's length rule is in section 18(3) of the Income Tax Act (Cap. 470) ("ITA"). The Income Tax (Transfer Pricing) Rules 2006 (LN 67 of 2006) set out how to apply it. Since 2022, sections 18C to 18F add multinational group reporting: the year-end notification, the country-by-country (CbC) report, the master file and the local file. The Kenya Revenue Authority (KRA) administers them. Penalties and interest come from the Tax Procedures Act 2015 ("TPA"). This skill reads the ITA as consolidated to 1 July 2026, which includes the Finance Act 2026 (Act No. 19 of 2026, which amended s18D), and the TPA as consolidated to 1 September 2026. The year of income is the calendar year, or the company's accounting year.

Who this applies to

• Resident persons dealing with related non-residents. Section 18(3) applies where a non-resident person does business with a related resident person, or with its own Kenyan permanent establishment (PE). If that business gives the resident person or PE no profit, or less than the ordinary profit it would have made without the relationship, its profit is deemed to be the arm's length amount.
• Related person (ITA s2). Two persons are related if either takes part, directly or indirectly, in the management, control or capital of the other's business. With more than two persons, they are related through (a) any other person who takes part, directly or indirectly, in the management, control or capital of the business of both; or (b) an individual who takes part in the management, control or capital of the business of both, is associated with both by marriage, consanguinity or affinity, and in whose business both take part. The Rules' definition of "related enterprises" (r2) covers the first two tests (one in the other, or a third person in both) but has no family limb.
• Scope of the Rules (r5).
  • Transactions between related enterprises of a multinational where one is in Kenya and taxed there and the other is abroad.
  • Dealings between a Kenyan PE and its head office or related branches. The PE is treated as a separate enterprise.
• Covered transactions (r6): sales and purchases of goods; sale, purchase or lease of tangible assets; transfer, purchase or use of intangibles; services; lending and borrowing; and any other transaction affecting profit or loss.
• Multinational enterprise (MNE) groups:
  • the s18C notification applies to an MNE group or constituent entity resident in Kenya, other than an excluded MNE group (consolidated revenue below the KShs 95 billion s18D(1B) amount, s18F);
  • the CbC report applies to a Kenyan-resident ultimate parent entity or, in the s18D(1A) cases, a Kenyan-resident constituent entity, of a group at or above KShs 95 billion (s18D(1)–(1B));
  • the master file and local file duty in s18D(3) is stated for any ultimate parent entity or constituent entity of an MNE group, with no turnover test in the section.
  • A "constituent entity" includes a permanent establishment of a group business unit only if that unit prepares separate financial statements for it (s18F).

Not covered here, refer to a specialist: interest limitation and thin capitalisation (ITA s16(2)(j)), deemed interest, advance pricing agreements, mutual agreement procedures under tax treaties, the preferential tax regime rule (s18A), and comparables benchmarking itself.

Rates, bands and thresholds

Item	Amount	Source
Corporate rate on a TP adjustment, resident company	30% (6 shillings in each 20), year of income 2021 onward	ITA Third Sch. Head B para 2(a)(ix)
Corporate rate, non-resident company with a PE	30%, year of income 2024 onward	ITA Third Sch. Head B para 2(b)(viii)
CbC report threshold	consolidated group turnover of at least KShs 95 billion in the financial year before the reporting year	ITA s18D(1B)
CbC report deadline	not later than 12 months after the last day of the group's reporting financial year	ITA s18D(2)
Master file and local file deadline	filed not later than 6 months after the last day of the group's reporting financial year	ITA s18D(3)–(4)
Year-end notification (who is the ultimate or surrogate parent)	by the last day of the group's reporting financial year; not required for an excluded MNE group (consolidated revenue below KShs 95 billion)	ITA s18C(1), s18F "excluded multinational enterprise group"
Late payment penalty on tax from an adjustment	5% of the tax due	TPA s83A
Late payment interest	1% a month or part of a month, simple	TPA s38
Tax shortfall penalty (deliberate false statement or omission)	75% of the shortfall (+10 or +25 points on repeat; -10 for voluntary disclosure)	TPA s84

The taxable base

The arm's length rule (s18(3)). Compare the resident person's or PE's actual profit from the related-party business with the ordinary profit that independent persons dealing at arm's length would expect. If the actual profit is lower, the Commissioner deems the arm's length profit. The adjustment only ever increases the Kenyan profit.

PE profits (s18(5)). When a non-resident does business through a Kenyan PE, the PE's profit is worked out:

• without deducting interest, royalties, or management or professional fees paid, or said to be paid, by the PE to the non-resident. "Non-resident" here includes the head office and its other offices;
• ignoring foreign exchange gains or losses on internal balances between the PE and the non-resident.

Methods (r7–r8). The taxpayer chooses the method (r4) from these:

• comparable uncontrolled price (CUP);
• resale price;
• cost plus;
• profit split;
• transactional net margin method (TNMM);
• another method the Commissioner prescribes where none of these works.

The taxpayer must apply the method most appropriate for its enterprise, having regard to the nature of the transaction or class of transaction, or the class of related persons or the functions they perform (r8(2)). The Commissioner may issue guidelines on applying the methods (r8(3)).

Documentation on request (r9–r10). A taxpayer who claims arm's length pricing must:

• have a transfer pricing policy;
• determine the arm's length price under the Rules;
• produce documentation when the Commissioner asks.

The Commissioner may ask for: the method chosen and why; how it was applied, with the calculations and adjustment factors; the global organisation structure; details of the transaction; the assumptions, strategies and policies used; and other background. Records must be in English, or translated, and prepared when the transfer price is set (r9(3)).

Master file and local file (s18D(3), (6), (7)). An ultimate parent entity or constituent entity of an MNE group must file both with the Commissioner, in the manner the Commissioner specifies, within 6 months of the group's year end. Unlike the s18D(1B) KShs 95 billion test for the CbC report, s18D(3) states no turnover threshold for these files. Check any exclusion before concluding a small group is out.

• Master file contents:
  • group overview and growth engines;
  • supply chain of the key products and services;
  • research and development policy;
  • each entity's contribution to value creation;
  • intangibles and the intercompany agreements on them, and transfers of intangibles during the period;
  • group financing;
  • consolidated financial statements;
  • tax rulings.
• Local file contents:
  • the Kenyan entity's activities within the group;
  • its management structure and business strategy;
  • its material controlled transactions and competitive environment;
  • the international transactions and the amounts paid and received.

CbC report (s18D(1)–(2), (5), (8), (10)).

• Who files:
  • a Kenyan-resident ultimate parent entity files;
  • a Kenyan constituent entity files instead when the parent has no CbC filing duty at home; or the parent's jurisdiction has an international tax agreement with Kenya but no competent authority agreement with Kenya at the time of filing; or the Commissioner has notified the Kenyan entity of a systemic failure of the parent's jurisdiction (s18D(1A)).
• Only for large groups: both apply only where group turnover in the previous year was at least KShs 95 billion.
• One filer for the group: where several Kenyan entities belong to the group, one may be designated to file.
• Surrogate parent relief: a resident entity need not file where a non-resident surrogate parent files in a jurisdiction that exchanges reports with Kenya (s18D(10) sets the conditions).

Deadlines and filing

Obligation	When	Source
Notify the Commissioner whether the Kenyan entity is the ultimate or surrogate parent, or who is (groups at or above KShs 95 billion)	by the last day of the group's reporting financial year	ITA s18C, s18F
Master file and local file	within 6 months after the group's year end	ITA s18D(4)
CbC report (groups at or above KShs 95 billion)	within 12 months after the group's year end	ITA s18D(2)
TP documentation under the Rules	prepared when the price is set; produced on request	TP Rules r9(3), r10
Tax on any adjustment	assessed with interest from the original due date	TPA ss38, 83A

Penalties and interest

• Failing to comply with s18C or s18D (notification, CbC report, master file, local file) is an offence, with penalties under the TPA (ITA s18E). The specific TPA provision applied was not confirmed for this version. The general penalty for failing to submit a document other than a return is KShs 1 000 a day, capped at KShs 50 000 (TPA s83(2)). Whether KRA applies that to these filings is not confirmed.
• Fraud, failure to furnish returns and underpayment. The Act's provisions on these apply to transfer pricing (TP Rules r11).
• Tax from an adjustment, paid late:
  • a 5% late payment penalty (TPA s83A);
  • interest at 1% a month, simple (TPA s38);
  • a 75% tax shortfall penalty if the pricing statement was deliberately false or misleading (TPA s84).

Cross-border points

• Company residence: a company is resident if incorporated in Kenya, if its management and control was exercised in Kenya in the year, or if declared resident by Gazette notice (ITA s2 "resident").
• Payments a PE makes to its head office or other offices for interest, royalties, and management or professional fees are not deductible in the PE's profit (s18(5)). That is a stricter rule than an arm's length test.
• A treaty may give relief through the mutual agreement procedure after an adjustment. Treaty texts were not read for this version.

Worked examples

Example 1: under-remunerated Kenyan distributor

Savanna Distributors Ltd, a Kenyan company, buys all its products from its Dutch parent and resells them in Kenya. In its 2026 year of income, sales are KShs 500 000 000 and its operating margin is 1%. A benchmark of independent distributors under the TNMM gives an arm's length operating margin of 4%. Savanna has no losses.

• Adjustment under s18(3): (4% - 1%) x 500 000 000 = KShs 15 000 000 of extra taxable profit.
• Extra corporation tax at 30%: KShs 4 500 000.
• If assessed and paid 12 months after the due date:
  • late payment penalty 5% = 225 000;
  • interest 1% x 12 months x 4 500 000 = 540 000.
• Total cost: 4 500 000 + 225 000 + 540 000 = KShs 5 265 000, before any shortfall penalty. A deliberate understatement would add 75% of the shortfall: KShs 3 375 000.

name: Kenya distributor TNMM adjustment, sales KShs 500m, margin 1% vs 4% (2026)
inputs:
  sales: 500000000
  actual_margin: 0.01
  arm_length_margin: 0.04
  rate: 0.30
  months_late: 12
steps:
  - adjustment: (arm_length_margin - actual_margin) * sales
  - extra_tax: adjustment * rate
  - late_penalty: extra_tax * 0.05
  - interest: extra_tax * 0.01 * months_late
  - total_cost: extra_tax + late_penalty + interest
  - shortfall_penalty_if_deliberate: extra_tax * 0.75
expected:
  adjustment: 15000000.00
  extra_tax: 4500000.00
  late_penalty: 225000.00
  interest: 540000.00
  total_cost: 5265000.00
  shortfall_penalty_if_deliberate: 3375000.00

Example 2: Kenyan branch paying its head office (s18(5)) and the CbC threshold

Nordic Engineering AS, a Norwegian company and the group's ultimate parent, has a Kenyan branch (PE) that prepares separate financial statements. The group's financial year is the calendar year. For 2026, the branch's accounts show a profit of KShs 25 000 000. That profit is after charging a head-office management fee of KShs 10 000 000 and interest of KShs 5 000 000 on a loan booked from head office. The group's consolidated turnover for 2025 was KShs 120 billion.

• Add back under s18(5): the management fee and the head-office interest are not deductible. Taxable profit = 25 000 000 + 10 000 000 + 5 000 000 = KShs 40 000 000.
• Tax at the PE rate of 30%: KShs 12 000 000. On the accounts profit it would have been KShs 7 500 000.
• CbC: the group's KShs 120 billion turnover is at least the KShs 95 billion threshold. Section 18D(1A) asks a constituent entity "resident in Kenya" to file only if one of its conditions applies, for example if the Norwegian parent has no CbC duty. Otherwise the parent's home filing covers it.
• Year-end notification: if the branch is within s18C, it is due by 31 December 2026. Sections 18C and 18D(1A) speak of entities "resident in Kenya", and a branch of a Norwegian company is not resident under s2; whether a Kenyan PE is caught is not confirmed, so check with KRA.
• Master and local file: s18D(3) has no residence wording, and a PE with separate financial statements is a constituent entity (s18F). Due by 30 June 2027 (s18D(4)).

name: Kenyan PE add-back of head-office fee and interest, s18(5) (2026)
inputs:
  accounts_profit: 25000000
  ho_management_fee: 10000000
  ho_interest: 5000000
  rate: 0.30
  group_turnover: 120000000000
  cbc_threshold: 95000000000
steps:
  - taxable_profit: accounts_profit + ho_management_fee + ho_interest
  - tax: taxable_profit * rate
  - tax_on_accounts_profit: accounts_profit * rate
  - extra_tax: tax - tax_on_accounts_profit
  - cbc_margin: group_turnover - cbc_threshold
expected:
  taxable_profit: 40000000.00
  tax: 12000000.00
  tax_on_accounts_profit: 7500000.00
  extra_tax: 4500000.00
  cbc_margin: 25000000000.00

Ask the client first

1. The group chart: who owns or controls the Kenyan entity, and who it deals with. Include individuals linked by family.
2. Every related-party transaction in the year, by type (goods, assets, intangibles, services, loans, other) and amount.
3. Whether the Kenyan business is a company or a branch (PE), and any head-office charges booked in the branch accounts.
4. The group's consolidated turnover for the prior year, where the ultimate parent is resident, and whether that country exchanges CbC reports with Kenya.
5. The existing TP policy, the method chosen, and any benchmarking study, with its date.
6. The group's financial year end, to fix the s18C notification, master file, local file and CbC dates.

Sources

Source	URL	Read on
Income Tax Act, Cap. 470, Kenya Law consolidated version of 1 July 2026 (s2 "related person", "resident"; s16(2)(j) and s18A, scope only; s18(3), (5); ss18C, 18D, 18E, 18F; Third Schedule Head B para 2(a)(ix), (b)(viii))	https://new.kenyalaw.org/akn/ke/act/1973/16/eng@2026-07-01	2026-10-29
Income Tax (read for Transfer Pricing) Rules 2006, LN 67 of 2006, Kenya Law version of 31 December 2022 (r1–r12)	https://new.kenyalaw.org/akn/ke/act/ln/2006/67/eng@2022-12-31	2026-10-29
Tax Procedures Act 2015, Kenya Law version of 1 September 2026 (ss38, 83, 83A, 84)	https://new.kenyalaw.org/akn/ke/act/2015/29/eng@2026-09-01	2026-10-29

Not yet confirmed:

• Which TPA penalty KRA applies to s18C/18D failures under s18E.
• Whether s18D(3) master and local file filing has a turnover threshold or other exclusion set by the Commissioner's specification (no threshold appears in the section itself).
• Any KRA transfer pricing guidelines issued under r8(3).
• Interest limitation under s16(2)(j).
• Treaty mutual agreement relief.
• Whether a Kenyan permanent establishment of a non-resident company counts as a constituent entity "resident in Kenya" for the s18C notification and the s18D(1A) CbC filing.