The Kenya Revenue Authority (KRA) has announced new interest rates that will guide the calculation of Fringe Benefit Tax and deemed interest for the final three months of 2026.
In a notice issued on October 22, KRA set the prescribed market interest rate for Fringe Benefit Tax at 9 per cent for October, November and December. This is an increase from the 8 per cent rate that applied during the previous quarter.
The authority also set the deemed interest rate at 9 per cent for the same period. Employers, businesses and other taxpayers with qualifying financial arrangements have been advised to take note of the changes and follow the relevant tax requirements.
KRA further directed taxpayers to deduct withholding tax at 15 per cent on deemed interest and remit the amount to the Commissioner within five working days.
How the New Rates Affect Employee Loans
The Fringe Benefit Tax rate applies when an employer gives an employee, director or their relatives a qualifying loan at an interest rate below the prescribed market rate.
Under these rules, the taxable benefit is calculated using the difference between the prescribed market rate and the interest charged on the loan.
For example, if an employer offers an employee a qualifying loan at an interest rate of 3 per cent while the prescribed market rate is 9 per cent, the difference is six percentage points.
That difference is used to determine the value of the benefit for tax purposes. The employer is responsible for calculating and paying the applicable Fringe Benefit Tax.
However, the 9 per cent benchmark does not mean that every employee loan is automatically taxed at that rate. The actual calculation depends on the loan terms and the applicable tax provisions.
What Deemed Interest Means
Deemed interest rules apply to certain financing arrangements where no interest is charged or the interest charged is below the prescribed rate.
These provisions can affect qualifying transactions, including some arrangements involving related parties. The prescribed rate helps determine the interest amount recognised for tax purposes, even where the parties have not charged interest at that level.
According to KRA, withholding tax of 15 per cent on deemed interest must be deducted and paid within five working days. Taxpayers affected by these rules should ensure they meet the deadline to avoid compliance problems.
What Employers and Businesses Should Do
Employers and businesses should review qualifying loans and financing arrangements covering October, November and December 2026. They should establish whether Fringe Benefit Tax or deemed interest rules apply and calculate any amounts due using the correct provisions.
The announcement does not introduce new general income tax bands or change the standard Pay As You Earn rates. Instead, it sets interest benchmarks for specific tax calculations during the final quarter of the year.
Taxpayers who are unsure how the rates apply to their arrangements should consult KRA guidance or a qualified tax professional before making their returns.
