Kenya to scrap tax breaks on startup employee stock options in 2025 Finance Bill

Kenya is proposing to scrap tax breaks on employee stock ownership plans (ESOPs) for early-stage startups, a move that risks gutting one of the few incentives left to attract talent in a sector struggling to raise capital and make payroll.

Under the Finance Bill 2025 proposal, the government wants to remove a provision allowing employees at eligible startups to defer taxes on stock received in place of salary. If passed, the change would force workers to pay income tax within 30 days of receiving shares, regardless of whether those shares can be sold.

For early-stage startups, where liquidity is rare and valuations are often speculative, the change amounts to taxing promise, not profit.

“Where an employee is offered company shares in lieu of cash emoluments by an eligible startup, the taxation of the benefit from the shares allocated to that person by virtue of employment shall be deferred and taxed within thirty days,” reads part of the proposal.

Taxing stock options on conversion, rather than at sale or liquidity event, may also deter skilled workers from joining risky early-stage ventures, opting for more stable jobs in traditional sectors. That could slow the flow of talent into the tech ecosystem at a time when Kenya is looking to deepen its digital economy and become a regional innovation hub.

In theory, employees taxed on their stock awards could benefit later through dividends or capital gains, though most startup shares are unlisted and highly illiquid.

The current tax rule, passed under the Finance Act 2023, allowed workers to defer tax until five years after receiving shares or when they left the company or sold their stake. The new proposal would unwind that deferral, potentially saddling employees with tax bills they cannot afford.

The proposal raises additional complications for founders. Currently, dividends from such shares are subject to a 5% withholding tax, and if the shares are not traded on the Nairobi Securities Exchange (NSE), employees may also face capital gains tax when selling. An additional tax burden on this compensation tool could force many startups to phase out ESOPs.

In 2024, the Treasury proposed a similar tax in the Finance Bill 2024, which was dropped following nationwide protests over rising taxes. Its reappearance suggests a push by Kenya to widen the tax net amid falling revenue and growing pressure to manage public debt.

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