Kenya’s frequent amendments to the rules on carry forward tax losses demonstrate the ongoing evolution of tax law.  At its core is a simple economic and practical principle; if a business makes a loss, it should not be taxed but instead, the loss should be offset against future income as this cushions businesses from economic shock and recognizes the cyclical nature of profit and loss. 

Historically, the Income Tax Act (ITA) under Section 15 allowed businesses to carry forward tax losses for up to five years, a window considered too short for capital intensive industries where return on investment can sometimes take more than a decade. 

To cure this, in 2015 the ITA was amended to extend the carry forward period to ten years and allowed businesses under the Kenya Revenue Authority’s (KRA) recommendation to make applications for extension to the Cabinet Secretary for National Treasury.  Additionally, the Tax Procedures Act (TPA), under Section 23(1)(c) required records to be kept for at least 5 years from the end of a period for a loss to be claimed years after it is incurred failure to which KRA would disallow the loss. 

In a move that confounded taxpayers, the Finance Act, 2021 repealed the limitation of time with effect from 1 January 2022, allowing businesses to carry forward tax losses for an indefinite period provided they were properly documented and legally supported.  

However, the Finance Act, 2025 has reinstated the definite period restriction of five years from when the loss was incurred.  Under the amendment, taxpayers are allowed to apply to the Cabinet Secretary for National Treasury for an additional five-year extension, subject to KRA’s recommendation.  The criteria for approval remains unknown as the Finance Act, 2025, did not enshrine a detailed transitional scheme.  This legislative silence has opened a lacuna in the law, especially in relation to losses incurred under the now-abolished indefinite regime between 2022 and 2024. 

In a highly controversial development, KRA, through a private ruling issued in September 2025, intimated that losses would only be eligible for carry forward from the year 2025 if they were incurred from the year of income 2020 onward.  This ruling gave some retrospective application to the five-year cap, thus invalidating losses older than five years, even if those losses were incurred under the formerly unlimited regime.  Even though private rulings are not binding precedents, they are a strong indication of how the KRA intends to enforce this change. 

In Madison Insurance Kenya Ltd v. Commissioner of Income Tax, the court ruled that losses from before 2009 could not be carried forward, emphasizing that carry-forward rights are determined by the laws that were in place when the loss arose.  The court reinforced that tax breaks need to be clearly stated in the law and cannot be assumed based on later changes. 

Ultimately, the principle of carrying forward tax losses illustrates the complexities of tax law and how closely it is tied to the government's financial and economic goals.