The Kenya Revenue Authority (KRA) has announced the new Fringe Benefits Tax and Deemed Interest Tax rates to serve for the next three months between October and December.
In a notice issued on Tuesday, October 21, KRA set the Fringe Benefit Tax rates at eight per cent, urging employers to comply.
Fringe Benefit Tax is a tax charged on employers when they provide loans to employees, directors, or their relatives at an interest rate lower than the market rate.
It is essentially the tax on the benefit that an employee enjoys by getting a cheaper loan from their employer. The burden of payment falls on the employer, and it is payable whether or not the employee is exempt from tax.
“For the purposes of Section 12B of the Income Tax Act, the Market Interest Rate is 8%. This rate shall be applicable for the three months of October, November and December 2025,” KRA noted.
It also applies to non-cash benefits offered to an employee by an employer, including vehicles, cars, or other forms of perks that are not part of the employee's gross earnings.
The Fringe Benefit Tax is calculated by first determining the prescribed market rate of interest, which is set quarterly by the Commissioner for Domestic Taxes. This is then balanced by the actual interest rate charged by the employer.
The difference between these two rates is called the deemed interest benefit. The Fringe Benefit Tax is then charged on this deemed benefit at the corporate tax rate, which is currently 30 per cent.
A practical example is when an employer gives a Ksh1,000,000 loan to an employee at five per cent interest. So if the prescribed rate is 15 per cent, the deemed benefit would be calculated as follows:
(15 per cent − 5 per cent) × 1,000,000 = Ksh100,000.
Fringe Benefit Tax = 30 per cent × 100,000 = Ksh30,000.
The employer would pay Ksh30,000 to KRA as Fringe Benefit Tax.
Deemed Interest Rate
KRA further informed that the deemed interest rate – used when assessing whether a benefit has arisen from a loan – is also 8 per cent, aligning with the market interest rate for the same period.
It serves the purpose of preventing tax avoidance by ensuring that employers do not disguise income as a cheap loan and that multinationals do not shift profits by manipulating loan interest between subsidiaries.
''For purposes of section 16(2)(a) of the Income Tax Act, the prescribed rate of interest is 8 per cent. This rate is applicable for the months of October, November and December, on the deemed interest rate,'' read part of the statement by KRA.
In terms of how it is set, the Commissioner of Domestic Taxes publishes the prescribed rate of interest quarterly in the Kenya Gazette. It is typically pegged to the 91-day Treasury Bill rate, plus a margin.
