Kenya has taken a major step in taxing the digital economy by introducing the Significant Economic Presence (SEP) tax.

This move, implemented through the Income Tax (Significant Economic Presence Tax) Regulations, 2025, replaces the old 1.5 per cent Digital Services Tax (DST) and aims to capture revenue from foreign digital companies operating in Kenya without a physical presence.

What is the SEP Tax in Kenya?

The SEP tax in Kenya applies to non-resident businesses providing digital services to Kenyan users.

Introduced in December 2024, SEP charges 30 per cent of a deemed profit equal to 10 per cent of gross turnover.

In effect, this means companies pay three per cent of gross revenue earned from digital services in Kenya. The law ensures that global tech giants like Amazon, Microsoft, Netflix, Facebook, and Alibaba contribute to the Kenyan economy despite lacking a permanent establishment.

For example, a company earning Ksh10 million from Kenyan users would calculate its taxable income as 10 per cent of the revenue (Ksh1 million) and then pay 30 per cent of that amount (Ksh300,000) as SEP tax. This clear structure makes the SEP tax in Kenya straightforward but crucial for compliance.

Exemptions for government-owned airlines

Kenya Airways (KQ) benefits from specific exemptions.

Global software providers supplying KQ are not required to pay SEP tax, protecting the airline from potentially hefty digital service bills.

The Income Tax (Significant Economic Presence Tax) Regulations, 2025, state that the tax does not apply to non-resident providers servicing airlines where the government holds at least 45 per cent shareholding.

KQ’s booking systems and aircraft avionics are costly, with the airline spending Ksh8.773 billion on passenger reservations and frequent flyer programmes in 2024.

Additionally, aircraft landing, handling, and navigation systems cost Ksh21.965 billion. Without the exemption, these service providers could have passed billions in SEP tax costs onto KQ. Leading suppliers include Amadeus, Collins Aerospace, Honeywell, Thales, Safran Electronics & Defense, L3Harris, and Boeing AvionX.

SEP tax vs. VAT on digital services

In addition to SEP, Kenya applies a 16 per cent Value Added Tax (VAT) on digital services.

VAT is indirect and collected from consumers, whereas SEP is a direct tax paid from revenue. Businesses providing digital services to Kenyan users must comply with both taxes. Non-compliance can result in penalties, interest, market restrictions, or even legal action.

Kenya’s SEP tax aligns with international trends, particularly the OECD’s Pillar 2 global minimum tax reforms.

The country repealed objections to the OECD’s Ksh32.29 trillion global tax plan and replaced DST with SEP to facilitate compliance and strengthen trade relations, including potential US free trade deals. As of August 2025, 178 digital service providers were registered with KRA, remitting over Ksh240 million annually.

Other countries, like India, Indonesia, Saudi Arabia, and Italy, have implemented SEP-like taxes to ensure foreign digital companies contribute fairly to the local economy, even without physical offices.

Who should pay SEP tax?

Foreign companies providing digital services in Kenya without a permanent establishment must pay the SEP tax. Exemptions include:

• Non-residents operating through a permanent establishment in Kenya.
• Telecommunication and certain specified services.
• Government-owned airlines with at least 45 per cent state shareholding.
• Small businesses earning less than Ksh5 million annually.

Calculating and complying with SEP Tax

The tax is calculated on 10 per cent of gross revenue, then charged at 30 per cent. For instance, a digital service generating Ksh1 million would have a taxable income of Ksh100,000 and a SEP liability of Ksh30,000. Payments are due by the 20th of the month following service delivery.