Kenya has introduced the Income Tax (Leasing) Rules, 2026, setting out how operating and finance leases of equipment are taxed, including deductions, asset registers and cross-border payments.
Kenya’s National Treasury has published the Income Tax (Leasing) Rules, 2026, through Legal Notice No. 187 on 12 August 2026, a framework that brings income generated by lessors from both operating and finance leases within the scope of income tax and withholding tax.
Legal basis and scope
The rules were promulgated by Cabinet Secretary for the National Treasury John Mbadi Ng’ongo pursuant to Section 130 of the Income Tax Act (Cap. 470). They revoke the previous leasing rules.
They apply to equipment and other assets but exclude land and buildings. Hire purchase agreements, as defined under the Hire Purchase Act, and any contract lasting less than six months are not treated as leases.
Withholding tax
Lease payments are subject to withholding tax at applicable resident or non-resident rates under Section 35 and the Third Schedule of the Act.
Capitalisation and asset register
Leased assets must be capitalised in the books of the lessor, not the lessee. Lessors must also keep a separate register of all leased-out assets. When an asset is sold after the lease expires, the difference between the sale price and the book value is treated as a taxable gain or loss for the lessor.
Deductions
Lessors may claim capital expenditure deductions, namely the investment allowance under the Second Schedule, along with other expenses incurred wholly and exclusively in producing lease income under Section 15.
Lessees may deduct the full amount of lease payments, provided the Commissioner is satisfied that the expense was incurred wholly and exclusively in producing taxable income and that the sole consideration was the right to use the asset.
Lease termination and deemed acquisition
A lessee is deemed to have acquired the asset if, on termination, it is allowed to retain, use or deal with the asset without payment, for nominal consideration relative to fair market value, or at a transfer price below market value. The Commissioner will then recover all deductions previously enjoyed by the lessee, back to the lease commencement date.
The lessee may then claim an investment allowance computed on the total recovered lease payments from the year the lease commenced. Corresponding adjustments are made to the lessor’s tax computation to bring to charge any investment allowances previously claimed.
Cross-border leases
The rules define a cross-border lease as a contract between a person resident in Kenya and a person resident in a different tax jurisdiction.
Gross lease payments received by a Kenyan lessor from foreign lessees are deemed income chargeable to tax in Kenya. Gross lease payments made by a Kenyan lessee to foreign lessors are deemed income derived from Kenya and are subject to Kenyan withholding tax.
