NAIROBI, Kenya – Japanese companies, consultants and employees working on selected development projects in Kenya will continue enjoying tax exemptions after the Supreme Court dismissed an appeal seeking to invalidate the reliefs.
In a landmark judgment, a five-judge bench held that the legal process used to implement the tax exemptions complied with the law that was in force when Kenya and Japan entered into the financing agreements between 2007 and 2020.
The judges ruled that income earned in Kenya by Japanese personnel under technical assistance and development services agreements can legally be exempted from taxation.
“Emoluments payable from foreign sources in respect of duties performed in Kenya under a technical assistance or other development services agreement are a tax that can be exempted; the appellant, on this issue, did not prove his case on the balance of probabilities,” the court ruled.
The court noted that the bilateral agreements were negotiated and signed under the former Constitution, which did not require parliamentary approval through legislation before such legal notices could take effect.
The judges further observed that, at the time, the President had the constitutional authority to enter into international agreements, while Parliament’s responsibility was to enact laws implementing treaties where necessary.
The appeal arose from a constitutional petition challenging the legality of Legal Notice No. 15 of 2021, which implemented tax exemptions for Japanese firms and personnel involved in Kenya-Japan funded projects.
The petitioner argued that the tax waivers violated Article 210 of the Constitution, which requires taxes to be imposed, varied or waived only through legislation passed by Parliament.
He also contended that the National Assembly exceeded its constitutional mandate by approving the exemptions through a legal notice instead of an Act of Parliament.
However, the Supreme Court rejected the arguments, finding that the petitioner had failed to demonstrate that the exemptions were unconstitutional or unlawfully introduced.
The judges also dismissed claims that the tax incentives unfairly discriminated in favour of Japanese investors, ruling that there was insufficient evidence to support the allegation.
Japan’s tax exemption policy forms part of its standard financing arrangements for overseas development assistance and has been incorporated into all financing agreements signed with Kenya.
The exemptions cover income earned by Japanese companies, consultants and employees working on several major infrastructure projects, including the Dongo Kundu Special Economic Zone, the Olkaria I Unit 4 Geothermal Power Project, the Mwea Irrigation Development Project, and electricity distribution upgrade programmes in Nakuru and Mombasa.
The matter had previously sparked debate in Parliament, with some lawmakers questioning why Japanese firms were exempt from taxes while Kenyan companies remained subject to taxation and did not enjoy reciprocal benefits when operating in Japan.
In defending the exemptions, the Cabinet Secretary argued that the long-term economic gains from the Japanese-funded projects—including job creation, increased economic activity and higher government revenues—would outweigh the tax revenue forgone through the incentives.