The Finance Act, 2026 has introduced two significant tax changes that directly overturn recent court decisions in Kenya.
The changes affect the withholding tax (WHT) treatment of card transactions and VAT on outsourced labour.
Together, they show Parliament’s power to reshape the tax landscape even after courts have spoken.
In December 2025, the Supreme Court delivered its judgment in Barclays Bank of Kenya (Absa) v Commissioner for Domestic Taxes.
The dispute over taxation of card transactions is among Kenya’s longest-running tax battles.
It began over 15 years ago when the Kenya Revenue Authority (KRA) demanded WHT from Barclays Bank (now Absa Bank) on interchange fees and payments made to international card companies such as Visa, Mastercard, and American Express.
For years, the bank argued that interchange fees were cost-sharing arrangements between issuing and acquiring banks, and that payments to card companies were facilitation charges, not royalties. The KRA countered that both fell within the scope of WHT.
The row went through multiple rounds of litigation with conflicting outcomes. Because it predated the Tax Appeals Tribunal (established in 2015), it was first heard directly by the courts. In May 2015, the High Court nullified the KRA’s assessment, but in November 2020 the Court of Appeal reversed that ruling, siding with the taxman.
Given the significance of the issues, Absa Bank sought and obtained certification for the matter to be heard by the Supreme Court as one of general public importance.
The Supreme Court delivered its verdict on December 5, 2025, holding that interchange fees are neither management nor professional fees and that payments to card companies are not royalties. Consequently, these payments are not subject to WHT.
For banks, the ruling ended a long and costly tax dispute, with many viewing it as the final resolution of the matter. That relief, however, has proved short-lived.
The Finance Act, 2026 has now legislated the exact opposite position. Interchange fees are now expressly classified as management or professional fees, while payments to card companies are deemed royalties. Both will now be subject to WHT.
This reversal of what was widely regarded as the final judicial position is expected to increase tax and compliance costs for banks, payment processors, and merchants. A significant portion of these additional costs is likely to be passed on to consumers.
At the same time, a different story has unfolded in relation to firms involved in outsourcing of labour.
In May 2025, the High Court in Commissioner of Domestic Taxes v Techsavana Company Limited held that VAT applies to the entire invoice amount in staff outsourcing arrangements, including salaries, statutory deductions and service fees.
The court reasoned that outsourcing firms are the legal employers and, therefore, all related costs form part of the taxable supply.
The Finance Act, 2026 has, however, reversed this position by amending the VAT Act to exempt staff costs from VAT. As a result, outsourcing firms will only charge VAT on their service fees and not on salaries or statutory deductions.
This change will reduce the tax burden for outsourcing companies and their clients, making outsourced services more affordable in sectors such as IT, security, and cleaning.
The two amendments tell very different stories. On the one hand, Parliament has expanded the tax base by overriding the Supreme Court’s decision on interchange fees and payments to card companies. On the other hand, it has narrowed the tax base by overturning the High Court’s ruling on VAT on outsourced labour.
The implications for businesses are significant. Banks and payment service providers will face higher tax and compliance costs, which may ultimately be passed on to merchants and consumers.
By contrast, outsourcing firms and their clients benefit from lower VAT costs, potentially encouraging greater use of outsourced services across various sectors.
Ultimately, these developments serve as a reminder that, in tax matters, a court victory may not always be the final chapter. Parliament can still rewrite the playbook.