Judgement Alert Issue No. 2 of 2026

By Moses Mutethia, Associate - Tax

Case Ref: Premier Credit Limited vs. Commissioner of Domestic Taxes (Appeal E1149 of 2024)

In a significant ruling for Kenya’s lending sector, the Tax Appeals Tribunal (TAT) has clarified the tax treatment of bad debts for credit-only microfinance institutions. The decision centers on whether the principal portion of unrecovered loans qualifies as a deductible expense under the Income Tax Act.

Key Takeaways for Finance Leaders:

• Principal as Capital: The Tribunal ruled that for financial institutions, loan principal is a capital asset, not revenue. Consequently, its loss is not deductible under Section 15(2)(a).
• Deductibility Limits: Only the interest, fees, and penalties—which are recognized as taxable income—are eligible for tax deduction when written off as bad debts.
• Regulatory Alignment: The ruling emphasizes the necessity for lenders to strictly distinguish between capital and revenue components in their accounting and tax planning to avoid additional Corporate Income Tax (CIT) assessments.

This decision impacts how microfinance and digital lenders manage credit risk and tax liability in Kenya. It reinforces the Kenya Revenue Authority’s (KRA) position on capital versus trading stock, signaling a more rigid environment for expense claims related to loan defaults.

Click on the link below to read more on the judgement.