Kenya: Tax case updates – March 2026

This monthly case updates brings you a curated summary of recent tax decisions issued by the Tax Appeals Tribunal (Tribunal) and the appellate courts. In addition, we have also summarised the latest Kenya Revenue Authority (KRA) updates issued during the month.

The decisions addressed several critical tax issues in Kenya, including the following key themes:

• Where a taxpayer misclassifies roles in a related-party arrangement in the relevant transfer pricing documentation, the same will result in the entire transfer pricing methodology being rejected (Delmonte Kenya Limited vs Commissioner of Legal Services and Board Co-ordination);
• The principal amount of a loan is only deductible for tax purposes when it has not been capitalised, constitutes a revenue item, and the conditions prescribed in the Income Tax Act – Guidelines on Allowability of Bad Debts (Legal Notice No. 37 of 2011) have been satisfied (Premier Credit Limited vs Commissioner of Domestic Taxes and Fourth Generation Capital Limited vs Commissioner for Domestic Taxes);
• KRA cannot rely on the denial of a Tax Compliance Certificate (TCC) and placement on the VAT ‘special table’ as coercive enforcement measures where tax assessments are actively under appeal (Miles Construction Limited vs Commissioner for Legal and Board Services); and
• KRA must issue assessments that disclose the basis, grounds and computations of the assessments (Manchester Outfitters Limited vs Commissioner of Legal Services & Board Coordination).

Summary of the decisions

TAT E504/2025: Del Monte Kenya Ltd vs Commissioner of Legal Services and Board Co-ordination

• • This was a transfer pricing dispute in which the KRA audited Del Monte Kenya’s related-party transactions from 2019 to 2021 and raised an assessment of KES 4.96 billion. Del Monte Kenya had characterised itself as a grower and processor selling to its related party DMI GmbH (a Swiss distributor) on a cost-plus basis at a 4.83% mark-up using the Transactional Net Margin Method.
  • The KRA rejected this approach and argued that Del Monte Kenya performed the bulk of the economically significant functions, bore the majority of the risks, and employed the key assets in the value chain making it the more complex party and DMI GmbH the appropriate tested party. KRA also purported to disallow intercompany recharges to Del Monte Kenya for agricultural inputs, software costs, and administration charges for lack of supporting documentation.
  • Lastly, KRA rejected interest deductions on loans from DMF B.V. to Del Monte Kenya on the grounds that the arrangement lacked commercial substance, given that DMF B.V. was a shell entity and its parent, DMI GmbH, already owed Delmonte trade receivables exceeding the loan value.
  • The Tribunal upheld the KRA’s position on all issues, finding that Del Monte Kenya failed to discharge its statutory burden of proof having relied on mere averments and correspondence rather than registry records, source documents, and verifiable financial data and accordingly dismissed the appeal in its entirety.

TAT No. E1149 of 2024: Premier Credit Ltd vs Commissioner of Domestic Taxes

• • Premier Credit Ltd, a credit-only microfinance institution licensed by the Central Bank of Kenya, appealed against a corporate income tax assessment of KES 30 million issued by KRA for the 2018 year of income. The disputed amount arose from the KRA’s disallowance of bad debt deductions relating to loans written-off.
  • Premier Credit argued that the entire loan amount (including the principal) satisfied the conditions under Legal Notice 37 of 2011 (the Guidelines on Allowability of Bad Debts) and was allowable for deduction under Section 15(2)(a) of the Income Tax Act. KRA’s position was that the principal loan amount written off as a bad debt is capital in nature and therefore not an allowable deduction under the Income Tax Act. KRA further supported this position by reference to the Premier Credit’s financial statements (prepared in accordance with IFRS 9), which treated loans and advances as financial assets in the balance sheet.
  • The Tribunal upheld the KRA’s position, finding that for a financial institution, the principal element of a loan is a financial asset, while only the interest, fees, and penalties are recognised as revenue or income. Accordingly, paragraph 4 of the Guidelines which provides that a bad debt of a capital nature shall not be an allowable expense applied to the principal element of the written-off loans.

TAT E1253/2024: Fourth Generation Capital Ltd vs Commissioner for Domestic Taxes

Fourth Generation Capital is a digital credit provider whose principal business is the issuance of short-term loans to individuals running small businesses. Following a multi-year audit, the KRA disallowed the principal component of written-off loans on the basis of paragraph 4 of Legal Notice 37 of 2011, taking the position that the principal loan amount is capital in nature. The KRA confirmed a principal tax liability of KES 167 million and the matter was referred to the Tribunal for determination.

• • • The Tribunal allowed the appeal in full, holding that the principal loan amount is stock-in-trade and therefore revenue in nature, not capital. The Tribunal reasoned that because Fourth Generation issues loans not as a one-off investment but as a recurrent, core trading activity and because money is the very ’merchandise’ that a moneylender puts into circulation to earn profit. Pursuant to the Tribunal, the principal amount constitutes circulating (revenue) capital rather than fixed (capital) expenditure.

TAT E134/2025: Manchester Outfitters Ltd vs Commissioner of Legal Services & Board Coordination

• • The appeal concerned a tax liability of KES 53 million assessed against a garment manufacturing company for failure to file income tax returns for the year 2023. Manchester Outfitters cited difficulties accessing accounting records due to a protracted ownership dispute and system errors on the iTax platform. The KRA issued a written assessment on 25 November 2024, which Manchester Outfitters objected to on 17 December 2024. The KRA rejected the objection.
  • The Tribunal held that the KRA failed to issue a valid default assessment compliant with Section 29 of the Tax Procedures Act, as the assessment lacked disclosure of its basis and computation. The KRA’s actions were deemed procedurally unfair and inconsistent with statutory and constitutional standards. The Tribunal allowed the appeal, declaring the assessment invalid and procedurally flawed.

TAT 1030/2025: Miles Construction vs Commissioner for Legal and Board Services

• • Miles Construction Ltd filed an application seeking orders to compel the KRA to issue a Tax Compliance Certificate. The denial of the Tax Compliance Certificate was based on the company’s placement on the VAT ‘special table’ due to alleged non-compliance with VAT filing requirements and unresolved tax assessments for the years 2016 to 2019, which were actively under appeal before the Tribunal.
  • The Tribunal found that it had jurisdiction to hear the matter, as the denial of the Tax Compliance Certificate and placement on the ‘special table’ constituted appealable decisions under Section 3(1) of the Tax Procedures Act. The Tribunal determined that the KRA’s actions were unjustified, as no evidence was provided to support the claim of additional tax assessments outside the 2016 to 2019 period. The Tribunal emphasised that tools such as denial of a Tax Compliance Certificate and ‘special table’ placement should not be used as coercive measures to enforce disputed or arbitrary tax demands and directed the KRA to remove the Miles Construction from the VAT ‘special table’ and issue a Tax Compliance Certificate within 21 days.

KRA notices

The KRA has introduced several administrative changes effective January 2026, including (a) automatic validation of income and expenditure disclosures against eTIMS data, (b) a new approval requirement before instalment tax overpayment refunds may be utilised, and (c) an updated individual tax return requiring declaration of income subject to final tax.

Validation of income and expenditure upon filing of tax returns

Effective 1 January 2026, taxpayers filing annual returns will have their income and expenses automatically validated against information available in KRA’s TIMS/eTIMS platforms. The iTax system will only allow amounts matching data from electronic sources such as eTIMS, customs data and withholding taxes. No deduction shall be allowed against any expenditure where invoices are not generated from an electronic tax invoice management system, except where transactions are exempted under the Tax Procedures Act.

Therefore, we recommend that clients:

• • ensure all sales and expenditure are supported by eTIMS invoices;
  • file income tax returns at the earliest opportunity; and
  • reconcile accounting data with eTIMS data and request a breakdown of eTIMS data from the respective KRA Account Manager where discrepancies arise.

Tax overpayments

Amendments have been made to the treatment of overpaid instalment taxes on iTax. Previously, entities that overpaid instalment taxes were automatically issued with an Instalment Adjustment Voucher (IAV) upon filing their annual self-assessment returns, which could be used to offset future instalment tax liabilities.

IAVs will now be subject to review by the KRA and may only be utilised upon approval, making the recovery process longer and affecting cashflow planning for businesses.

Clients are advised to promptly apply for the instalment tax refund, where applicable, after submitting the self-assessment return on iTax and to immediately follow up with the Refunds office at the KRA.

Individual tax return filing

The Resident Individual self-assessment tax return has been modified to include an additional sheet (F2_Other_Income_with_Final_Tax), which prompts declaration of income subject to final tax, such as gratuity, pension, qualifying interest and qualifying dividends.

Resident individual taxpayers are reminded to reconcile all incomes for the year of income 2025, including incomes subject to final tax and to declare these when filing their annual tax return.