Kenya has established itself as one of Africa’s most sophisticated digital financial ecosystems, earning Nairobi the moniker “Silicon Savannah”. Over the past decade, high mobile penetration, a vibrant fintech sector, and forward-looking regulation have created fertile ground for innovation in payments. Kenya’s integration with continental initiatives, notably the Pan-African Payment and Settlement System (PAPSS), has further elevated its position, enabling real-time, low-cost cross-border transactions in local currencies and linking national payment systems across Africa.

Global players have recognised Kenya’s potential. Visa has launched its inaugural African Innovation Studio in Nairobi. At the same time, Mastercard projects the country’s digital payments market to reach US$14.54 billion by 2028, expanding at a compound annual growth rate of 14.1%. KCB Bank is actively shaping this ecosystem through initiatives such as smartphone-based merchant payments that negate the need for traditional Point of Sale (POS) terminals, enabling broader financial inclusion and facilitating seamless integration with both domestic and regional payment systems. In this context, clarity around taxation of digital payments is critical, as ambiguity can materially affect cash flow, operational planning, and the bank’s capacity to innovate.

The Supreme Court’s ruling in Absa Bank Kenya PLC v Commissioner for Domestic Taxes resolves a decade-long dispute over the taxation of card-related fees. The dispute began in 2011 when the Kenya Revenue Authority (KRA) audited Barclays Bank (now Absa) and sought to impose withholding tax on two categories of payments. The first was fees paid to international card networks, including Visa, Mastercard, and American Express, which KRA classified as royalties. The second was interchange fees paid by acquiring banks to issuing banks, which KRA classified as management or professional fees.

In 2015, the High Court quashed these assessments, holding that KRA had failed to demonstrate how the payments fell within statutory definitions. The Court emphasised that tax statutes must be interpreted strictly, without extending definitions to capture routine operational payments. However, in 2020, the Court of Appeal reversed the High Court’s ruling, reinstating the withholding tax obligations and creating uncertainty across the banking sector. Recognising the matter’s general public importance, Absa sought Supreme Court certification.

On 5 December 2025, the Supreme Court, in a unanimous judgment led by Justice Martha Koome, Justice Smokin Wanjala, Lady Justice Njoki Ndungu, Justice Isaac Lenaola, and Justice William Ouko, restored the High Court decision. The Court held that fees for access to card networks are operational business expenses, not royalties, and that interchange fees are cost-sharing arrangements between independent banks, not payments for managerial, technical, or professional services. The ruling removes withholding tax liability for these payments while confirming their treatment as operational expenses subject to corporate tax, establishing a legal precedent with far-reaching implications for all banks and digital payment service providers in Kenya. This recalibration could lower costs for merchants, encourage broader adoption of digital payment channels, increase transaction volumes, and better align pricing with actual operational costs.

Relief from withholding tax frees capital that can be redeployed toward innovation, merchant engagement, and scaling of digital payment solutions. The decision validates the collaborative nature of payment ecosystems, enabling banks to optimise interchange structures and drive efficiency across the network. Optimising interchange fees and lowering transaction costs can accelerate the adoption of cashless payments, reduce reliance on cash, and enhance financial inclusion.

The Supreme Court’s ruling represents a watershed moment for Kenya’s banking sector. In removing long-standing ambiguity around the taxation of digital transaction fees, the decision establishes a legal precedent that clarifies the treatment of operational payments and aligns domestic practice with international norms.