The Supreme Court has handed ABSA Bank Kenya PLC a major win after setting aside a Court of Appeal judgment that had required the lender to pay withholding tax on fees linked to card payment services.
The top court delivered its decision on December 5, 2025, bringing an end to a long-running tax dispute centred on how payments made during card transactions should be treated under the Income Tax Act.
The case, filed as SC Petition No. 12 (E014) of 2022, pitted the bank against the Commissioner for Domestic Taxes from the Large Taxpayers Office. Kenya Bankers Association and Mastercard Asia Pacific (Pte) Limited took part as interested parties.
At the heart of the matter was whether fees paid by acquiring banks to card companies amount to royalties, and whether interchange fees paid to issuing banks fall under management or professional fees.
The Commissioner had argued that both categories fit within Sections 2 and 35 of the Income Tax Act, making them subject to withholding tax.
A media summary from the Supreme Court explained that the Commissioner had issued two sets of assessments. The first related to payments ABSA Bank made to Visa International Services Association, Mastercard Inc., and American Express Ltd, which the tax authority labelled as royalties.
The second involved payments made to other banks that issue credit cards, which the Commissioner classified as management and professional fees.
ABSA Bank contested these assessments before the High Court. The trial court ruled in the bank’s favour, noting that the Commissioner had not clearly shown how the assessed transactions met the requirements of the tax law.
The judge found that the tax authority had not pinpointed the exact transactions that fell within the definitions in Sections 2 and 35.
The Court of Appeal later overturned this decision. It concluded that payments to card companies were royalties and that interchange fees to issuing banks amounted to professional and management fees, making them taxable.
ABSA Bank then moved to the Supreme Court, challenging the appellate court ruling.
The Supreme Court outlined two main questions: whether fees paid to card companies are royalties and whether interchange fees qualify as management or professional services for tax purposes.
After reviewing the arguments, the Supreme Court ruled in favour of ABSA Bank. It held that payments to card companies do not meet the definition of royalties under Section 2 of the Income Tax Act and cannot attract withholding tax under Section 35.
The Court also found that interchange fees do not fall under management or professional fees, meaning they are not taxable under the same provision.
The Court therefore set aside the Court of Appeal’s decision and directed that each party bear its own costs.
The judgment offers important clarity for the banking industry, confirming that fees arising from card transactions and interbank services cannot be taxed as royalties or management fees.
The decision is expected to shape how similar transactions are taxed in the future, giving financial institutions clearer rules as they manage card operations and meet tax obligations.
By allowing the appeal, the Supreme Court affirmed that withholding tax should only apply where the law clearly defines a payment category, reinforcing the need for precise statutory interpretation in the financial sector.
