The Court of Appeal Upholds VAT on Commercial Properties in Kenya

In a long-awaited decision, the Court of Appeal in Kenya Revenue Authority v David Mwangi Ndegwa (Civil Appeal 65 of 2019) KECA 510 (KLR), has finally provided the much-needed clarity on the taxation of real estate properties in Kenya.

In its decision delivered on March 21, 2025, the Court of Appeal has overturned an earlier High Court decision and has now confirmed that the sale of commercial properties is subject to Value Added Tax (VAT), a judgment with significant implications for real estate investors and developers.

Background of the Case

On 11th December 2013, David Mwangi Ndegwa purchased ALL THAT property known as Kiambu Town Block 11/74 together with the building erected and being thereon from Standard Chartered Bank Kenya Limited for Kshs 70,000,050. Upon purchase, the Kenya Revenue Authority (KRA) demanded Kshs 11,200,080 in VAT, being 16% of the purchase price.

Mr. Ndegwa paid the tax under protest and later filed a suit at the High Court on 30th October, 2015, arguing that sale of land is VAT-exempt as provided under paragraph 8 of Part II of the First Schedule to the Value Added Tax Act, 2013. After years of litigation, on November 29, 2018, the High Court ruled in his favor holding that under Article 260 of the Constitution of Kenya, 2010, the definition of land includes all that is on the surface of the earth, the subsurface rock and the airspace above the surface.

Based on this interpretation, the Court found that the sale was VAT-exempt and ordered KRA to refund the amount paid.

Court of Appeal’s Decision and Key Legal Insights

Dissatisfied with the High Court’s decision, KRA swiftly moved the Court of Appeal determined to overturn the decision. The appellate court, comprising of Justices K. M’Inoti, F. Tuiyott, and F. Ochieng, delivered a decisive ruling that not only overturned the High Court’s verdict but also cemented the position that VAT is indeed applicable in the sale of commercial property transactions.

This landmark judgment has redefined the taxation landscape for real estate investors and developers, settling years of uncertainty.

A key takeaway from the Court’s decision is that we need to adopt a contextual interpretation of the term “Land” as appearing under Article 260 of the Constitution vis-à-vis specific legislative texts, particularly in taxation.

While the Constitution of Kenya provides a broad definition of land—encompassing the surface, subsurface, airspace, and all permanently affixed structures—the Court underscored that this definition applies “unless the context requires otherwise.”

Article 260: Interpretation

In this Constitution, unless the context requires otherwise— “land” includes-

(a) the surface of the earth and the subsurface rock;

(b) any body of water on or under the surface;

(c) marine waters in the territorial sea and exclusive economic zone;

(d) natural resources completely contained on or under the surface; and

(e) the air space above the surface.

That when it comes to taxation, the VAT Act introduces a distinction between land and residential premises, making it clear that the constitutional definition does not automatically extend to all properties for VAT purposes.

This distinction is well captured under Paragraph 8 of Part II of the First Schedule to the VAT Act as below:-

The supply of the following services shall be exempt supplies—

(8)  Supply by way of sale, renting, leasing, hiring, letting of land or residential premises;

  “residential premises” means land or a building occupied or capable of being occupied as a residence, but not including hotel or holiday accommodation;

From the above paragraph, it is evident that under the VAT Act, there is a distinction between “Land”, “Residential Premises”, “Building” and “Commercial Premises.”

The Court reinforced this distinction by drawing from the Land Act, 2012, which defines land separately from buildings, confirming that land and structures on it can be treated as separate entities depending on the context. Additionally, the Court examined the Mining Act, 2022 which explicitly provides that all minerals found on the surface of the earth, sub-surface rock, in water courses or marine waters are not owned by the landowner but by the government, in trust for the people.

A purposive interpretation of these texts led the Court to conclude that the legislative intent was to exempt from VAT “the supply by way of sale, renting, leasing, hiring, or letting of land or a building used as a residence.” In reviewing previous VAT legislation in Kenya, the Court found that Parliament has consistently distinguished land, residential premises, and commercial property for taxation purposes and specifically, has always upheld the taxation of commercial buildings, indicating a deliberate and consistent legislative approach to property taxation.

In reaffirming a longstanding principle, the Court emphasized that tax exemptions must be expressly stated in law—they cannot be presumed or implied. Since the sale, renting, leasing, hiring, or letting of commercial buildings is not explicitly exempt under the VAT Act, such transactions remain taxable.

As the saying goes, “If the glove doesn’t fit, you must acquit.” Similarly, if the constitutional definition of land does not align with the specific provisions of a legislative text, it cannot be forced into that framework.

What This Decision Means for Property Buyers and Investors

The decision by the Court of Appeal has far-reaching consequences for Kenya’s real estate sector and taxation policies.

  • VAT must be paid on Commercial Property transactions: Anyone purchasing, leasing, or renting commercial property must factor in VAT at the prevailing rate. This applies to both local and foreign investors engaging in Kenya’s commercial real estate market.
  • Residential Property remains VAT-Exempt: The exemption for land and residential premises remains intact. Individuals purchasing homes for occupation will not be required to pay VAT on their transactions. For clarification purposes, buildings constructed and operated for letting residential Apartments are exempted from VAT.
  • Importance of Strict Interpretation of Tax Exemptions: The decision reinforces the principle that tax exemptions must be explicitly and unambiguously provided for in law. Courts will adhere to the precise wording of the statute and will not readily broaden the scope of exemptions.
  • Mixed-Use Developments: The Court noted that there is existing industry practice on VAT apportionment and therefore, land owners should seek guidance from tax authorities on VAT treatment in respect to mixed use properties.

Conclusion

The Court of Appeal’s decision in Kenya Revenue Authority v David Mwangi Ndegwa has provided much-needed certainty on the VAT treatment of real estate transactions. The judgment confirms that while land and residential premises remain VAT-exempt, the sale of commercial buildings erected on land is not exempt. Additionally, it reinforces the principle that tax laws must be interpreted strictly, and exemptions must be explicitly provided for by law.

For property investors, developers, and buyers, this decision highlights the need to factor in VAT when engaging in commercial real estate transactions. Seeking legal and tax advice before purchasing or leasing commercial property can help avoid unexpected tax liabilities.

Need Legal Guidance?

Understanding tax obligations on real estate transactions is crucial. If you require legal advice on VAT and property taxation, our team of experts is here to assist. Contact us today for professional guidance on navigating Kenya’s evolving tax landscape.