How a Small Edit in Law Could Cost Kenya Billions

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A seemingly harmless tweak in Kenya’s Finance Bill 2025 is now causing unease among tax professionals and economic analysts, who warn that a minor edit could open a multibillion-shilling hole in the country’s tax base.

The proposed amendment seeks to remove a clause that previously classified all loans, both secured and unsecured, as “debentures” for tax purposes.

On the surface, it reads like a routine legal update. But experts warn that this small change could quietly punch a multibillion-shilling hole in Kenya’s revenue stream by limiting how the Kenya Revenue Authority (KRA) taxes interest earned from corporate loans.

What’s Changing and Why It Matters

A debenture is a debt instrument used by companies to borrow money, often without specific collateral. Under Kenya’s existing tax law, the term “debenture” has been interpreted broadly to encompass a wide range of loans, whether backed by security or not.

This expansive definition ensured that interest income from various corporate loans was subject to consistent taxation, contributing to government coffers. The Finance Bill 2025 proposes to repeal this definition, narrowing the scope of what qualifies as a debenture.

For example, unsecured loans, which were once taxed as debentures, might now be categorized differently, possibly escaping withholding tax or benefiting from lower tax rates.

This change, though subtle in language, could enable corporate borrowers and lenders to legally reclassify loan arrangements in a way that reduces or eliminates their tax obligations.

The Importance of Definitions in Tax Law

When it comes to tax laws, the way things are defined isn’t just about wording. These definitions decide what gets taxed and what doesn’t, which can have a big impact on how much money the government collects.

By removing a broad definition that has served as the legal foundation for taxing loan interest, the Finance Bill introduces uncertainty into the system. Without clear guidelines, companies may find room for creative accounting, potentially shifting billions of shillings outside the reach of tax authorities.

Read: Finance Bill 2025: Why Global Firms May Soon Be Rushing to Register in Kenya

Unsecured corporate loans, often facilitated by multinational banks or private equity firms, are particularly at risk of being reclassified under more favorable terms.

If interest income from such loans escapes withholding tax due to a narrower legal definition, it could mean massive revenue losses for Kenya at a time when every shilling counts.

A Risky Move Amid Fiscal Pressure

Kenya’s economy is under mounting fiscal stress. The national budget deficit continues to widen, public debt is on the rise, and the government is struggling to meet revenue collection targets.

In 2024, the Kenya Revenue Authority acknowledged it had missed several key tax collection goals, attributing the shortfall to economic slowdown and growing tax avoidance.

Introducing a legal change that could reduce taxable income, especially from high-value corporate lending, raises red flags. Large-scale interest earnings, if no longer classified under taxable debentures, could go untaxed altogether.

This loophole could be exploited by multinational corporations and high-net-worth individuals who already have access to sophisticated tax planning tools.

Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.