The Finance Bill 2026 is seeking to overhaul Kenya’s tax treatment of digital card payments following a Supreme Court ruling that curtailed the Kenya Revenue Authority’s ability to impose withholding tax on key payment flows within the banking system.
The proposed amendments are aimed at fees generated through card transactions, including interchange fees shared between issuing and acquiring banks, as well as payments made to international card operators such as Visa and Mastercard. These charges form a critical layer of Kenya’s rapidly expanding digital payments infrastructure.
The dispute traces back to a tax audit involving Absa Bank Kenya, formerly Barclays Bank Kenya, covering transactions conducted between 2007 and 2011. At the centre of the case was whether fees circulating within the card payment ecosystem qualified for withholding tax under the Income Tax Act.
KRA argued that payments made by Kenyan banks to global card schemes amounted to royalties because they granted access to proprietary payment systems, branding and infrastructure. The authority further maintained that interchange fees between banks qualified as management, technical or professional service fees, making them taxable.
Banks pushed back against that interpretation, insisting that the charges were merely embedded components of a broader multilateral settlement framework rather than direct payments for intellectual property or professional services. They argued that card scheme fees essentially covered access to transaction infrastructure, while interchange fees reflected the internal mechanics of risk and cost allocation within the payment system.
The legal battle moved through multiple courts. While the High Court initially dismissed the tax demand, the Court of Appeal later sided with KRA and held that the payments fell within taxable categories. However, the Supreme Court ultimately ruled in favour of the banks, significantly narrowing KRA’s position.
Supreme Court’s Interpretation
The apex court found that payments made to card networks did not meet the legal definition of royalties under the Income Tax Act because they were not directly tied to the use of intellectual property.
It also ruled that interchange fees could not be classified as management or professional fees since they did not arise from identifiable services rendered between issuing and acquiring banks. Instead, the court viewed them as pre-arranged allocations within the settlement framework of the payment ecosystem.
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The judgment leaned heavily on strict statutory interpretation, with the court emphasising that taxes can only be imposed where legislation expressly provides for them. Administrative interpretation alone, the judges held, could not extend tax obligations into legally ambiguous territory.
Finance Bill Rewrites Definitions
The Finance Bill 2026 now seeks to effectively neutralise the practical impact of that ruling by rewriting the definitions that shaped the court’s decision.
Under the proposed amendments, the definition of “management or professional fees” will be expanded to expressly include interchange fees and merchant service fees linked to card transactions. This would eliminate the argument that such flows are merely settlement mechanics outside the taxable net.
At the same time, the Bill broadens the meaning of “royalty” beyond conventional intellectual property arrangements to include payments for access to payment infrastructure systems such as card schemes, switching platforms, clearing networks and settlement systems.
The revised wording would also cover recurring or usage-based payments tied to proprietary digital platforms and software arrangements, regardless of how the agreements are described contractually.
In effect, the proposed changes restore the government’s ability to tax parts of the digital payments ecosystem that had previously escaped withholding tax exposure under the Supreme Court’s interpretation.
For banks, fintech firms and payment processors, the amendments could significantly alter the tax treatment of card-based transactions going forward. For KRA, the changes reopen a revenue stream that had been shut off by the court’s narrow reading of the Income Tax Act.
