Infrastructure, green bond investors to pay levy on interest


Central Bank of Kenya. FILE PHOTO | NMG

Interest earned from infrastructure and green bonds will now be subjected to 10 percent withholding tax like others in proposed changes.

This will be a departure from the current income tax law that exempts interest income accruing from all listed bonds, notes or other similar securities used to raise funds for infrastructure and other social services.

The Tax Laws (Amendment) Bill 2020 wants paragraph 51 of the First Schedule of Income Tax Act deleted, effectively introducing 10 percent withholding tax on income earned from these bonds as is the case with other normal bonds.

Also included is the income under green bonds standards and guidelines that has maturity of at least three years.

The introduction of the tax is set to remove the single most distinctive and attractive feature of these bonds, which will also mean that the State may be forced to pay higher interest on the papers to compensate for the tax levy.

“The removal of the tax exemption on infrastructure bonds will make government debt less attractive to investors, making it harder for the government to meet its debt funding requirements,” KPMG Kenya said in an analysis of the bill.

Exempting green bonds income from tax had been seen as a way of promoting investments in projects that help to preserve the environment in line with the UN Sustainable Development Goals.

The proposed changes come at a time the Central Bank of Kenya (CBK) is seeking Sh60 billion through a nine-year infrastructure bond to fund projects in the 2019/2020 budget.

The bond, with a coupon rate of 10.85 percent closes today (Tuesday) with performance results expected in the week. The CBK had informed investors that the bond will be tax-free.


The CBK had in October last year issued a Sh60 billion infrastructure bond with a tenor of 16 years. Investors made bids worth Sh86.95 billion but the CBK accepted Sh68.47 billion.

Infrastructure bonds are particularly attractive to foreign investors due to the tax exemption, and are thus key to attracting foreign portfolio flows into the country’s fixed income and capital markets.

They are also popular with investors in the secondary market at the Nairobi Securities Exchange (NSE), meaning that the removal of the tax advantage might see their trades fall to the detriment of market intermediaries who earn commissions from these transactions.