In a taxing Act one has to look merely at what is clearly said. There is no equity about a tax. Nothing is to be read in, nothing is to be implied.
Finance Act, 2026; Income Tax Act (Cap. 470), section 20 and the First, Third and Eighth Schedules; Value Added Tax Act, 2013; Stamp Duty Act (Cap. 480), section 96A; Capital Markets REIT Regulations, 2013.
Where Part I Left Off
Series II asks the commercial question: if the structure is available, why did more property owners not use it? The answer, for several years, was arithmetic.
A REIT is meant to operate as a conduit. Its value lies in allowing real estate income to be taxed principally in the hands of the investor rather than trapped in two layers of taxation. But if the sponsor must pay a substantial cash tax bill merely to contribute the building, the conduit becomes attractive only after the sponsor has already lost too much value at the door.
From 1st January 2023 until the Finance Act, 2026 took effect, that was the problem. The stamp duty relief had lapsed, capital gains tax had risen to 15%, and transferring property into the REIT could attract both capital gains tax on the gain and stamp duty on the value. The law offered a vehicle and then placed a tollgate across its entrance.
The Conduit Principle: How a REIT Is Meant to Be Taxed
Section 20 of the Income Tax Act exempts from income tax a real estate investment trust registered by the Commissioner. Since the Finance Act, 2019, that exemption has extended to a REIT investee company. That extension was important because many REITs hold property through wholly owned companies or trusts. Without it, rental income could be taxed at the investee level before reaching the exempt trust, hollowing out the relief where it matters most.
The exemption is not an absolution. It does not remove withholding tax on interest income and dividends, and distributions to unit holders who are not exempt persons under the First Schedule remain subject to withholding tax at the prescribed rates, with deduction and remittance obligations falling on the trustee or manager. The 80% distribution rule and the conduit principle are two faces of the same design: the vehicle pays little because it retains little.
The pricing consequence is clear. Investors should model after-tax yield, not headline exemption. Sponsors should model the withholding position of each intended investor class, particularly where resident and non-resident investors sit in the same register.
Registration by the Commissioner: The Step That Gets Missed
The section 20 exemption attaches to a REIT registered by the Commissioner. Authorisation by the Capital Markets Authority is necessary, but it is not the same thing and it is not a substitute. The distinction has become more important because both of the Finance Act, 2026 entry reliefs are drafted by reference to a REIT registered by the Commissioner under section 20.
The practical rule is simple: registration first, transfer second. A sponsor that completes the property transfer before Commissioner registration risks carrying all the regulatory burden of a REIT and none of the entry tax benefit. On the Cape Brandy principle, no exemption can be implied into the statute because the transaction almost qualified.
Sponsors should therefore build the Commissioner-registration step into the critical path, preserve evidence of registration on the completion file, and avoid treating a pending application or CMA authorisation as commercially equivalent to section 20 registration.
What the Finance Act, 2026 Changed
a. Capital gains on the way in: exempt
The Finance Act, 2026 amends Part I of the First Schedule to the Income Tax Act to exempt from income tax any capital gains arising from the transfer of property to a REIT registered by the Commissioner under section 20. Capital gains tax is a final tax charged at 15%. For a sponsor contributing an appreciated asset, this was previously the most visible cash cost of entry.
b. Stamp duty: restored, and widened
The Act also amends section 96A of the Stamp Duty Act to exempt from stamp duty the conveyance or transfer of a beneficial interest in property from a person or persons to a Commissioner-registered REIT. Conveyance duty on immovable property is 4% in urban areas and 2% elsewhere. The amendment restores a relief that had lapsed on 31 December 2022 and widens it by expressly referring to beneficial interests, an important point where property is contributed through an investee company or investee trust rather than transferred by title outright.
c. The window that has now closed
From 1 January 2023, the position was commercially unforgiving. Stamp duty relief had lapsed and capital gains tax had risen from 5% to 15%. The Finance Act, 2026 removes both charges from the entrance, absent contrary commencement complexity, with effect from 1 July 2026. The reform is narrow, technical and consequential.
The Rest of the Fiscal Picture
a. Value added tax
Transfers of assets, and other transactions related to the transfer of assets, into a REIT are exempt from VAT. Exempt is not the same as zero-rated. There is no output VAT on the transfer, but neither is there an entitlement to recover input VAT on legal, valuation, structuring and advisory costs. Those costs remain part of the fund economics.
b. The investor’s exit
Gains on disposal of securities listed on an approved securities exchange fall outside the charge to capital gains tax. A listed I-REIT may therefore give a unit holder a cleaner exit than unlisted restricted units, where that treatment is not available as a matter of course.
c. Withholding and non-resident tax
Withholding tax on distributions remains part of the investor model. The draft materials identify a 5% withholding position for distributions and a revised framework for non-resident unit holders. Separately, the Finance Act, 2026 introduces a self-assessed non-resident rental income tax at 30% of gross rental income and brings within capital gains tax non-resident alienations of shares deriving value from Kenya or changing ownership of, or interests in, Kenyan property, without a shareholding threshold. Direct and offshore holding structures are therefore less obviously superior to a registered REIT than they may once have appeared.
d. A competing incentive withdrawn
The preferential 15% corporation tax rate for companies constructing at least 100 residential units in a year of income has been repealed. Those developers now face the ordinary 30% corporation tax rate. For a housing developer comparing a conventional build-and-sell company with a D-REIT, the comparison has shifted.
e. A clean-up window that expires
The Finance Act, 2026 introduces an amnesty on penalties and interest for periods up to 31 December 2025 where the entire principal tax is paid by 31 December 2026. Sponsors with legacy exposure in property-holding companies should regularise before those companies or assets are placed before a trustee, transaction adviser and regulator.
f. Documentation and valuation discipline
The exemptions are only as strong as the file supporting them. Transfer instruments should describe the contribution accurately, valuation reports should be current and methodologically sound, and the completion file should show that the transferee was a Commissioner-registered REIT when the transfer occurred. Poor sequencing, vague instruments or weak valuation support invite retrospective challenge.
What It Means on Thursday afternoon
- Register with the Commissioner, not only the Authority. Both Finance Act, 2026 reliefs are keyed to section 20 registration. Treat registration as a condition precedent to completion.
- Sequence the transfer deliberately. Transfers taking effect on or after 1 July 2026 fall within the new relief architecture, but instruments and transfer dates should be documented carefully.
- Use the amnesty before it expires. Legacy penalties and interest should be cleaned up where principal tax can be settled by 31 December 2026.
- Test tenure against Article 65 before fixing the investor base. Freehold assets and foreign institutional investors should not be brought together without a deliberate title and constitutional strategy.
- Model the management expense ratio, not just headline yield. The 80% distribution is struck after fees, and two funds holding similar assets may produce materially different investor outcomes.
- Build the evidentiary file as if the exemption will be audited. Registration evidence, valuation, transfer instruments, beneficial-interest analysis and tax advice should all speak the same language.
The Bottom Line
For three and a half years Kenyan law offered a tax-efficient real estate vehicle and then taxed the act of getting into it. The Finance Act, 2026 has removed that contradiction by exempting capital gains on transfers into a Commissioner-registered REIT and restoring stamp duty relief for transfers of property or beneficial interests to such REITs.
That is the most consequential development for Kenyan REITs since the Regulations themselves. It does not create liquidity, lower professional fees, settle Article 65, guarantee distribution performance or make weak assets institutional. It does something more precise: it removes the most obvious fiscal objection.
From 1st July 2026, the question for a sponsor with a portfolio is no longer whether the tax makes a REIT impossible. It is whether the assets, governance, investor base and economics make the fund worth building.
This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article should be held without seeking specific legal advice on the subject matter. If you have any query regarding the same, please do not hesitate to contact the Conveyancing & Real Estate Department at Wamae & Allen LLP: Conveyancing@wamaeallen.com.
About the author
Janeirene specializes in real estate and securitization and banking and finance. She is a promising transactional advocate who has experience in real estate and securities law, transactional law and advisory and has handled complex transactions and advisories.
Denis Mutugi specializes in Commercial Litigation and Alternative Dispute Resolution.
Denis graduated with a Bachelor of Laws, LLB (Hons) from The University of Nairobi in 2021 and was admitted to the Roll of Advocates of the High Court of Kenya in the year 2023.
Denis has amassed a considerable wealth of experience in conducting legal research on various complex legal matters touching on Commercial, Insurance, Employment and Insolvency law and bankruptcy.
