NAIROBI, Kenya — Uncertainty over how carbon credits are taxed in Kenya is emerging as a growing concern for investors and project developers, with experts warning that the lack of clarity could slow investment in one of the country’s fastest-growing climate finance sectors.
The Kenya Revenue Authority (KRA) has yet to clarify whether carbon credits should be treated as goods or services under the Value Added Tax (VAT) regime, leaving companies exposed to potential disputes, backdated assessments, and compliance risks.
Under Kenyan law, all goods and services that are not expressly exempt or zero-rated attract VAT at 16pc. Carbon credits, however, are not expressly classified in statute, creating a grey area in their tax treatment.
Alex Kanyi, a corporate commercial lawyer and partner at Cliffe Dekker Hofmeyr (CDH), said the regulatory gap persists despite Kenya’s efforts to position itself as a regional leader in carbon markets.
“There is really a gap in terms of how to look at taxing carbon credit revenues,” Kanyi said. “This gap becomes even clearer when you look at how transactions in the carbon market space are structured. You will find multiple entities doing different things in that particular space.”
Carbon credit projects often involve developers, landowners, financiers, verifiers, and offshore buyers, raising complex questions on where value is created and whether VAT should apply at different transaction stages.
Clarice Wambua, an environmental law consultant at CDH, said Kenya ranks among Africa’s largest carbon credit producers, having issued more than 52 million credits by 2024.
The projects span forest conservation, renewable energy, sustainable agriculture, and clean cookstove initiatives.
Many are aligned with Kenya’s climate commitments under the Paris Agreement and the Climate Change Act, 2016.
Wambua warned that the absence of a statutory definition exposes investors to unpredictable tax outcomes.
“Without clarity, disputes with KRA are likely, especially as the sector grows and revenues increase,” she said.
The issue has drawn attention following a ruling by the Tax Appeals Tribunal in the Wildlife Works Sanctuary Limited case.
While the tribunal addressed corporate income tax and transfer pricing, it did not resolve whether carbon credits qualify as goods or services for VAT purposes.
In that case, KRA issued tax assessments amounting to Sh6.9 billion for the 2018–2021 period.
The authority argued that revenues were generated locally and that the Kenyan entity performed core project functions, justifying corporation tax and withholding tax on what it termed deemed dividends.
Although the ruling clarified aspects of income taxation, it left the VAT question unanswered, reinforcing calls for legislative or policy guidance.
Industry experts argue that taxing carbon credits aggressively could undermine Kenya’s ambition to attract climate finance and support community-based conservation and clean energy projects.
Without clarity, developers warn that Kenya risks losing projects to jurisdictions with clearer and more predictable tax regimes.
As carbon markets expand globally, the question of how Kenya taxes carbon credits is no longer theoretical.
It is now a governance test of whether climate ambition can be matched with legal certainty and investor confidence.
