The Supreme Court on December 5, 2025, ruled that fees banks pay to card companies are not royalties and are therefore not subject to taxation, a win for Kenya’s banking fraternity.
In the ruling delivered by a five-judge bench, the Apex Court also ruled that the interchange fees paid between banks are not management fees or professional fees, and are therefore exempt from taxation.
This Supreme Court ruling overturned an earlier judgment by the Court of Appeal that found that interchange fees and professional and management fees are subject to withholding tax.
Registered under SC Petition No. 12 (E014) of 2022, the case involved a tax dispute over whether various fees charged by banks on credit-related services (VAT) and card transactions should be subject to taxation or fall under the definition of bank interest.
“Accordingly, the Court allowed the appeal, set aside the judgments of the High Court and the Court of Appeal, and declared that the payments were not royalties and not subject to withholding tax,” read part of the Supreme Court declaration.
Background of ABSA Bank vs KRA Case
The Supreme Court stressed that the Commissioner of Income Tax, the respondent in the appeal, assessed and demanded withholding tax from Barclays Bank Kenya Limited (now Absa Bank), the appellant, on payments made to Mastercard Asia Pacific Pte Ltd.
Barclays contended that the payments were not royalties as defined under the Income Tax Act.
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The High Court dismissed the case, holding that the payments were royalties, while the Court of Appeal upheld the High Court’s decision.
Aggrieved by the ruling, the bank filed an appeal before the Supreme Court, arguing that the payments were not royalties but fees for services rendered under a commercial agreement for debit and credit cards, and therefore not subject to withholding tax.
“Barclays Bank, now Absa, appealed to the Supreme Court, and the Court found no basis for the demand.”
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Even after the third appeal, the Commissioner of Income Tax still maintained that the payments were royalties.
“The Supreme Court considered whether the payments made by the appellant to Mastercard Asia Pacific Pte Ltd constituted royalties under the Income Tax Act and whether they were subject to withholding tax,” read the court’s media summary.
The Court held that the payments were not royalties but fees for services rendered under a commercial agreement, adding that the payments were not subject to withholding tax.
In the ruling, the judges stressed that the definition of royalties under the Income Tax Act does not include payments for services.
The ruling also held that each party is required to bear its own costs.
“Judgment of the Court of Appeal is therefore overturned, and each party will bear its costs.”
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