Transfer pricing is emerging as a defining issue for investors in Kenya and across Africa. As capital flows into tech driven sectors, tax authorities are becoming increasingly alert to cross border structures particularly those that involve intangible assets such as intellectual property (IP) and that shift value to low tax jurisdictions. For investors, this means transfer pricing can no longer be treated as a compliance matter. It must be addressed early in the deal process as a strategic lever to protect returns, support clean exits, and navigate a more demanding tax audit environment.

Introduction

Kenya’s economy has quickly matured into a vibrant destination for private equity and venture capital, drawing USD 3.3 Billion in investment between 2019 and 2024[1], 84% of all the funds raised in East Africa. Kenya’s combination of strong technology infrastructure, mobile-first consumers, and a deepening entrepreneurial culture, particularly in fintech, healthtech, and agritech, has positioned it as a natural gateway for regional digital growth.

As capital flows into the sector, investors continue to rely on relatively simple holding company models, often incorporating in jurisdictions such as Mauritius or Delaware, among others, to hold intangible assets and centralise financial flows. While this architecture has enabled global scalability and investor protection, it is now drawing scrutiny from tax authorities.

Transfer Pricing Emerging as a Strategic Concern

Tax authorities across East Africa, and particularly in Kenya, are paying closer attention to how value is created and where profits are reported. Transfer pricing, once seen as a compliance matter, has emerged as a critical concern for fund managers, founders, and deal teams. It is a live issue at entry, during growth, and especially at exit where valuation, audit exposure, and legacy tax positions often come under the greatest scrutiny.

Many high-growth Kenyan startups receive foreign funding structured through offshore special purpose vehicles (SPVs), commonly domiciled in low-tax jurisdictions such as

Mauritius. A common feature of such arrangements is the transfer of intellectual property (IP) developed locally to the offshore SPV, with the Kenyan entity subsequently paying royalties for its use. Additionally, companies often price royalties using simple formulas such as a fixed percentage of turnover. While reasonable, these allocations may appear arbitrary if not backed by documentation that explains the basis of the charges and demonstrates the benefit received by the Kenyan entity.

For the Kenya Revenue Authority (KRA), this raises fair questions. How should royalties be priced? And more broadly, are the profits from local value creation taxed fairly?

Moreover, cross-border transactions involving management services, shared infrastructure, and intercompany financing may arise.

These are not theoretical concerns. Tax authorities have begun to interrogate these arrangements more frequently, particularly in sectors where intangible assets drive value. There is a clear policy direction toward greater alignment between profit realization and substance of the transactions in question.

Deal Structuring and Exit Valuation Exposure

For investors, the implications are significant. Tax friction can erode value at multiple points in the deal lifecycle. For instance, inaccurately priced intangible asset transfers may attract retroactive assessments or litigation. Additionally, inappropriately priced royalties, if not adequately substantiated may be denied altogether.

This is particularly relevant at exit. Numerous successful startups and growth-stage companies are often acquired by larger foreign funds or taken public in offshore jurisdictions. As due diligence becomes more rigorous, legacy tax positions taken at entry can surface as liabilities and affect valuation. For this reason, fund managers should take transfer pricing considerations into account in deal structuring conversations, not only for compliance, but as a risk management tool.

Practical Considerations for Investors

Forward looking investors should integrate transfer pricing considerations into their deal structuring process. Rather than treating it as a compliance checkbox, transfer pricing should be considered from the outset, starting at the term sheet and structuring stage and continuing through to the due diligence stage, where tax positions are closely examined and tested. This early focus helps ensure that the chosen structure can withstand scrutiny and avoid the risk of liabilities crystallizing in future. Key areas of attention include clearly documenting IP arrangements, outlining who developed the asset, how it was financed, and where it will be commercially exploited.

Further, in Kenya, the recently introduced Advance Pricing Agreements (APAs) offer a route to reduce future disputes. An APA is a contract, usually for multiple years, between a taxpayer and the tax authority specifying the pricing method and pricing that the taxpayer will apply to its related-company transactions. While Kenya’s regime currently supports only unilateral agreements, there is the possibility of future expansion into bilateral and multilateral APAs. This could be especially helpful where portfolio companies operate in multiple jurisdictions across the region. APAs can bring certainty to key pricing elements such as royalties, management fees, and intercompany financing.

At the regulatory level, Kenya has shown intent to strengthen capacity, but expertise in valuing intangibles and assessing digital business models remains limited. This creates both risk and opportunity. Investors who proactively engage with the KRA and provide clear, well-reasoned TP documentation are likely to fare better than those who rely on opaque structures or generic documentation.

Regional Perspective

Many investors apply regional strategies. As similar tax challenges emerge in jurisdictions such as Uganda, Rwanda, and Tanzania, the need for regional coordination of transfer pricing mandates will grow. Transfer pricing is becoming a strategic regulatory focus across East Africa, and this will affect fund managers with cross-border portfolios.

Investors who develop consistent, principle-based approaches to transfer pricing are better equipped to manage regional complexity, avoid duplication, and respond to increased regulatory expectations. From a reputational perspective, tax alignment also sends a strong signal to stakeholders that investment returns are not dependent on tax arbitrage but on sound commercial fundamentals.

Conclusion

Kenya, and East Africa more broadly, is at an inflection point as its transfer pricing landscape continues to evolve rapidly. For investors, transfer pricing should be a critical component of the value creation strategy.

As the region’s regulatory framework matures, those who integrate tax alignment into their investment approach will be better positioned to manage downside risk, maintain investor confidence, and achieve cleaner exits. In today’s transparent investment climate, tax alignment is not simply good governance—it’s good business.