INTRODUCTION.
On 5 December 2025, the Supreme Court of Kenya (SCOK) delivered a grounding breaking judgment in Petition No. 12 (E014) of 2022: Barclays Bank of Kenya Limited (now Absa Bank Kenya PLC) v Commissioner for Domestic Taxes (Large Taxpayers Office), where it held that:
- The Fees paid by an acquiring bank to card companies, are not royalties within the meaning of Section 2 of the Income Tax Act, hence not liable to withholding tax, under Section 35 of the Income Tax
- The Interchange Fees paid by an acquiring bank to an issuing bank are not professional or management fees within the meaning of Section 2 of the Income Tax Act, hence not liable to withholding tax under Section 35 of the Income Tax
LITIGATION HISTORY.
The Kenya Revenue Authority conducted an audit on Barclays Bank of Kenya Limited (now Absa Bank Kenya PLC), covering withholding tax on payments made between January 2007 and September 2011. Subsequent to the audit, Kenya Revenue Authority demanded withholding tax on:
- payments by Absa Bank Kenya PLC to card companies, on the basis that they are
- interchange fees paid to issuing banks, on the basis that they are professional or Management fees.
On appeal, the High Court of Kenya, quashed the KRA’s demand on grounds that in assessing tax, it is the duty of the Tax Man to identify with precision the specific transactions or payments that give rise to tax liability. The law obligates KRA to articulate its claim clearly and to demonstrate how the impugned transaction falls within the ambit of the statute. In the present case, the court found that the respondent’s approach fell short of this standard of clarity, noting that reliance on a broad and omnibus definition of “professional and managerial fee” was impermissible.
Kenya Revenue Authority aggrieved by the decision of the High court, moved to the Court of Appeal, where the Appellate court, overturned the decision of the High Court and held that the respondent had sufficiently identified the basis for its claim of withholding tax on account of royalty, and there was no statutory ambiguity necessitating legislative clarification. It concluded that the transaction fees paid by the Absa Bank Kenya PLC amounted to consideration for the right to use the card companies’ trademarks and logos, and therefore constituted royalties within the meaning of Section 2(c) of the Income Tax Act. Aggrieved by the Court of Appeal decision Absa Bank Kenya PLC, moved to the Supreme to challenge the decision by the Appellate Court.
ISSUES FOR DETERMINATION
The SCOK certified the matter as one of public importance and crafted two issues for determination:
- whether payments made by acquiring banks to card companies constitute “royalties” liable to withholding tax.
- whether interchange fees paid by an acquiring bank to an issuer bank constitutes “management or professional fees” liable to withholding tax.
LEGAL ANALYSIS
Strict interpretation of Constitutional Principles and Tax Legislation.
The SCOK anchored its reasoning in Article 210(1) of the Constitution of Kenya 2010, which prohibits the imposition, waiver, or variation of any tax except as provided by legislation, insisting upon strict conformity to the enabling statute.
The SCOK also reaffirmed classic authorities such as Cape Brandy Syndicate v I.R. Commissioners [1921] and Russell v Scott [1948] 2 All ER 5, which emphasized that a taxpayer is not to be taxed unless the statute unambiguously imposes the tax.
Royalties: payments to card companies.
The KRA argued that payments to card companies qualified as royalties because they granted access to the card network and the use of trademarks and logos. The Appellant and the interested parties contended that network fees are transaction facilitation charges and that their framework agreements did not provide for royalty payments.
The SCOK held that the fees paid to card companies are not royalty payments because the definition of “royalty” under section 2(d) of the Income Tax Act, Chapter 470 of the Laws of Kenya is a payment made as consideration for the use or the right to use a trademark or other intellectual property.
The SCOK examined the trademark Licence agreements and determined that these agreements expressly excluded royalty payments. In the absence of payments made for the use of trademarks, KRA’s treatment of the fees as royalties fell outside the statutory definition of “royalties” under section 2 of the Income Tax Act and could not substantiate the imposition of withholding tax.
Interchange fees.
The KRA asserted that authorization, clearing and settlement processes constituted composite managerial, technical and professional services provided by issuing banks to acquiring banks and were subject to withholding tax.
The SCOK rejected this characterization, finding no clear statutory causal relationship between interchange fees and the definition of managerial, technical and professional as envisioned in the Income Tax Act. Further, it held that interchange fees are earned on a transaction-by-transaction basis as part of the payment ecosystem’s risk and cost allocation, rather than as consideration for a service rendered by the issuing bank to the acquiring bank.
CONCLUSION.
The Supreme Court in reaching its final determination emphatically concluded that:
- The Fees paid by an acquiring bank to card companies, are not royalties within the meaning of Section 2 of the Income Tax Act, hence not liable to withholding tax, under Section 35 of the Income Tax
- The Interchange Fees paid by an acquiring bank to an issuing bank are not professional or management fees within the meaning of Section 2 of the Income Tax Act, hence not liable to withholding tax under Section 35 of the Income Tax Act.
