Kenya Expands Withholding Tax to Card Payment Fees Under Finance Act 2026

The Finance Act 2026 has expanded the definition of “management or professional fees” under the Income Tax Act to include interchange fees and merchant service fees arising from card-based payment transactions, bringing the payments within Kenya’s withholding tax framework from July 1, 2026.

The amendment overturns the legal position established by the Supreme Court in the Commissioner of Domestic Taxes v Absa Bank Kenya PLC case, where the court ruled that interchange fees did not qualify as management or professional fees for withholding tax purposes.

The change is expected to affect banks, payment processors, fintech firms, merchants and other businesses involved in Kenya’s growing digital payments ecosystem.

Finance Act 2026 Expands Withholding Tax to Card Payment Fees

The Finance Act retained a proposal contained in the Finance Bill, 2026, amending Section 2 of the Income Tax Act to expressly include interchange fees and merchant service fees within the definition of management or professional fees.

As a result, payments falling under the expanded definition will now be subject to withholding tax where applicable.

Interchange fees are charges paid between financial institutions when customers make card payments, while merchant service fees are charges paid by merchants to banks or payment service providers for processing card transactions.

The amendment widens the categories of payments subject to withholding tax and extends its reach across Kenya’s banking, fintech and electronic payments sectors.

Law Reverses Supreme Court Decision on Interchange Fees

The legislative change comes after the Supreme Court held that interchange fees could not be classified as management or professional fees under the Income Tax Act.

In the Commissioner of Domestic Taxes v Absa Bank Kenya PLC case, the court found that interchange fees arose from automated payment processing arrangements rather than the provision of management or professional services.

By expressly adding interchange fees and merchant service fees to the statutory definition, Parliament has effectively overridden that interpretation and established a new legal basis for taxing the payments.

Businesses May Face Higher Card Payment Costs

Tax advisers say the expanded definition could increase the overall cost of card transactions, particularly where Kenyan businesses are contractually required to bear withholding tax on payments made to non-resident service providers through gross-up clauses.

In such cases, the additional tax cost may ultimately be passed on to consumers through higher transaction charges.

The amendment also raises questions around the treatment of merchant service fees because the Income Tax Act does not define what constitutes a merchant service fee.

Without a statutory definition, withholding tax could potentially apply to the entire merchant discount or service fee charged during card transactions rather than only specific components.

Tax Compliance May Become More Complex for Payment Providers

Industry participants may also face practical challenges in administering withholding tax because merchant service fees are typically settled through automated clearing systems on a net basis across thousands of transactions.

These fees often comprise several components, including acquiring fees, card processing fees and interchange fees, making tax accounting more complex.

However, previous Kenyan court decisions have held that where withholding tax obligations exist under the law, taxpayers must configure their systems to comply with the requirements regardless of operational complexity.

Businesses operating card payment platforms may therefore need to review their payment flows, contractual arrangements and tax compliance systems to accommodate the new rules.

Industry Raises Concerns Over Departure from International Practice

The amendment also departs from the traditional interpretation of management or professional services adopted in many jurisdictions, where a service generally involves a degree of human intervention before it is classified as managerial or professional in nature.

Some tax specialists argue that extending the definition to automated payment processing fees could increase the cost of electronic transactions and reduce incentives for businesses and consumers to use cashless payment methods.