Introduction
On 5 December 2025, the Supreme Court of Kenya (SCOK) delivered a landmark 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:
- payments made by banks that process card payments on behalf of merchants (acquiring banks) to card companies (for example Visa, Mastercard, Amex) are not royalty payments and therefore not subject to withholding tax; and
- interchange fees paid by acquiring banks to the banks that issue cards to customers (issuing banks) are not “management or professional fees” and are therefore not subject to withholding tax.
Background of the issues
The Kenya Revenue Authority (KRA) conducted an audit on Barclays Bank of Kenya Limited (now Absa Bank Kenya PLC or the Appellant), covering withholding tax on payments made between January 2007 and September 2011. Following the audit, KRA demanded withholding tax on: (i) payments by the Appellant to card companies, on the basis that they are royalties; and (ii) interchange fees paid to issuing banks, on the basis that they are management or professional fees.
On appeal, the High Court of Kenya (High Court) quashed the KRA’s demand on the grounds that it lacked specificity and clarity. However, the Court of Appeal overturned the decision of the High Court and held that the payments to card companies constituted royalties and payments to issuing banks constituted management and professional fees.
The SCOK certified the matter as one of public importance and crystallised the issues of determination into two:
- whether payments made by acquiring banks to card companies constitute “royalties” liable to withholding tax; and
- whether interchange fees paid by an acquiring bank to an issuer bank constitutes “management or professional fees” liable to withholding tax.
Legal analysis
Constitutional principle and strict interpretation of tax law
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 emphasised 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 (Income Tax Act) 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 authorisation, 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 characterisation, finding no clear statutory nexus 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.
Practical implications for taxpayers
The below are some of the implications affecting tax payers:
- Interchange fees earned by banks in card transactions are not subject to withholding tax.
- Fees earned by card companies for facilitating card transactions do not constitute royalty payments as defined under the Income Tax Act and are therefore not subject to withholding tax.
- Institutions should map their fee flows and contractual frameworks to the SCOK’s analysis, ensuring compliance positions and returns reflect this authoritative clarification.
