By Phanice Ongera - Associate, Tax

The Finance Bill 2026 proposes to amend Section 2 of the Income Tax Act by expanding the definition of “management or professional fee” to expressly include interchange fees and merchant service fees arising from card-based payment transactions.

Interchange fees generally refer to payments made between financial institutions in the course of processing card transactions. By broadening this definition, the proposal effectively widens the scope of payments subject to withholding tax, thereby enhancing the potential for increased tax collection.

This proposed amendment follows the Supreme Court decision in Commissioner of Domestic Taxes v Absa Bank Kenya PLC (5 December 2025), where the Court held that interchange fees do not constitute management or professional fees for withholding tax purposes.

In light of this development, the proposed amendments in the Finance Bill 2026 may be construed as a legislative response intended to clarify the tax treatment of such fees and counter the position established by the Court. The move may further indicate an effort by the Commissioner to reduce the risk of adverse outcomes in similar disputes, noting that this is not the first instance in which the tax authority has been unsuccessful on this matter.

The impact for the proposed amendment is expected to:

  • Increase tax revenue collection for the tax authority;
  • Impose additional compliance requirements and create cash flow constraints for financial institutions and payment service providers;
  • Potentially lead to higher transaction costs, as affected entities may pass on the tax burden to merchants and end users;
  • Enhance certainty in the classification of such fees, thereby reducing disputes, although new issues may arise in cross-border transactions and treaty interpretation.