The Finance Bill 2026 is moving to close a tax gap exposed by a Supreme Court ruling that limited the government’s ability to levy withholding tax on card payment flows, after the court sided with banks in a dispute with the Kenya Revenue Authority (KRA) over how interchange and payment network fees should be classified under tax law.
- •The legislative proposal targets fees embedded in card transactions, including interchange payments between issuing and acquiring banks and charges paid to global card schemes such as Visa and Mastercard, which sit at the core of Kenya’s increasingly digital payments system.
- •Absa Bank Kenya (formerly Barclays Bank of Kenya in the case) won against KRA in a case that began after a tax audit covering transactions between 2007 and 2011 were centered on whether payments made within the card payments ecosystem could be subjected to withholding tax under the Income Tax Act.
- •Globally, tax authorities are rewriting statutory definitions to keep pace with digital payment infrastructure that increasingly operates across networks, platforms and cross-border systems not contemplated in earlier tax frameworks.
In the court case, the tax authority argued that fees paid by Kenyan banks to international card networks constituted royalties because they involved access to a proprietary payment infrastructure, branding, and systems. It also argued that interchange fees paid between issuing and acquiring banks amounted to management, technical, or professional fees, making them subject to withholding tax.
Banks challenged that interpretation, arguing that the payments were part of a broader multilateral payment system rather than consideration for intellectual property or identifiable services between contracting parties. They maintained that card network fees represented access to global transaction infrastructure, while interchange fees were structural payments embedded in the mechanics of card settlement rather than payments for services rendered.
The High Court initially quashed the tax demand, but the Court of Appeal overturned that decision and sided with the KRA, holding that both categories of payments fell within taxable definitions. The dispute ultimately reached the Supreme Court, which narrowed the scope of the case and ruled in favour of the banks.
What Exactly is Taxable?
The Supreme Court held that payments made to card networks did not constitute royalties under the Income Tax Act because they were not considered for the use of intellectual property in the legal sense. It further held that interchange fees could not be treated as management or professional fees, finding that they were not payments for identifiable services provided by issuing banks to acquiring banks, but rather part of a pre-structured allocation of costs and risk within the payment system.
The court anchored its reasoning on strict statutory interpretation, holding that taxation must be clearly authorized by law and cannot be extended through broad administrative classification where legislation is silent or ambiguous. The result was to remove withholding tax exposure from key flows in the card payments ecosystem under the existing legal framework.
The Finance Bill now seeks to directly address that outcome by rewriting the statutory definitions that formed the basis of the court’s decision. It expands the definition of “management or professional fees” to explicitly include interchange fees and merchant service fees arising from card transactions, removing the argument that these are structural settlement flows outside the scope of taxable services.
At the same time, it broadens the definition of “royalty” to extend beyond traditional intellectual property usage to include payments for access to or participation in payment infrastructure systems including card schemes, switching systems, clearing systems and settlement platforms. The revised definition also captures proprietary digital platforms and software distribution arrangements where payments are made on a recurring or usage basis, regardless of how they are labelled in contracts.
Taken together, the changes effectively reverse the practical tax outcome of the Supreme Court ruling without challenging it directly, instead providing explicit statutory authority to bring card networks and interchange flows within Kenya’s withholding tax regime going forward.
For banks and payment processors, the amendments would reintroduce tax exposure into parts of the card payments system that had previously been excluded under judicial interpretation. For the KRA, they restore a revenue base that had been constrained by the court’s strict reading of the Income Tax Act.
