The Court of Appeal’s ruling on the Kenya Revenue Authority’s (KRA) digital exports tax dispute marks a notable shift in how the country treats cross‑border software services for value‑added tax (VAT) purposes.
Appeal overturns high court decision, cancels Sh40.6 million assessment
In a judgment delivered this week, a three‑judge bench affirmed that software support services supplied by Sybrin Kenya Ltd to foreign affiliates qualify as exported services and are therefore exempt from local VAT. The decision reverses a 2024 High Court judgment that had upheld a Sh40.6 million VAT assessment on the company for the period covering January 2016 through December 2019.
The appellate court reinstated a 2021 Tax Appeals Tribunal ruling, which had concluded that the services fell within the definition of exported services under Section 2 of the VAT Act. “The tribunal found that the appellant’s services were correctly characterised as exported services as defined under Section 2 of the VAT Act,” the court noted in its opinion.
KRA had argued that although the invoices were addressed to Sybrin’s South African and Guernsey affiliates, the ultimate users of the software were Kenyan banks, making the supplies subject to VAT. The authority’s position rested on the premise that the Kenyan financial institutions benefited from the finished product.
Legal reasoning focuses on location of the consumer
The appellate judges emphasized that the contracts between Sybrin Kenya and its foreign partners clearly identified the overseas entities as the contracting parties and primary consumers of the services. One agreement stated, “Sybrin Kenya is contracted by Sybrin Systems to carry out specific activities as directed,” and further clarified that any systems delivered would be invoiced solely to Sybrin Systems.
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According to the court, the foreign affiliates “commission the appellant’s fractional services to fulfil their own proprietary obligations to third‑party financial institutions in Kenya.” The judges highlighted that the location of the consumer, not the place where the work is performed, determines the taxing rights for business‑to‑business supplies.
Quoting the Organisation for Economic Co‑operation and Development’s International VAT guidelines, the bench observed: “For business‑to‑business supplies, the jurisdiction in which the consumer is located has the taxing rights over internationally traded services and intangibles.” This principle aligns with Kenyan law, given that the affiliates are domiciled outside Kenya.
Applying that framework, the judges concluded that the services were exported and thus fell outside the scope of domestic VAT.
The ruling could affect other Kenyan tech firms that provide similar support services to overseas clients. Companies may now look more closely at contract language to ensure that the foreign party is identified as the sole customer, potentially reducing future tax exposure.
For businesses operating in the digital services sector, the decision highlights the importance of clear contractual arrangements that delineate where the ultimate consumer resides. The outcome also signals that Kenyan courts may adopt a more international perspective when interpreting tax statutes related to digital exports.
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While the judgment clarifies the tax position for Sybrin Kenya, it does not settle broader questions about the taxation of digital services rendered in Kenya for foreign users. The KRA may still pursue other avenues to capture revenue from such activities, especially if the contractual structure differs.
Legal observers note that the case reflects an ongoing tension between tax authorities seeking to broaden their bases and businesses aiming to align with global best practices. The court’s reliance on OECD guidelines suggests a willingness to harmonize Kenyan tax policy with international standards.
Industry groups have not yet issued a collective response, but individual firms are likely to monitor the ruling closely for its implications on their own tax planning.
Overall, the appellate decision represents a setback for KRA’s attempt to levy VAT on certain digital exports, at least in the specific context of software support services channeled through foreign affiliates.
