~ There is no equity about tax... If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear ~

The Briefing

Structuring a high-value commercial property acquisition requires meticulous attention to the tax leakages that can erode capital. For family trusts, institutional investors, and private wealth managers, a misstep in tax assumptions can instantly compromise the yield profile of an asset. The Court of Appeal’s judgment in Kenya Revenue Authority v Ndegwa brings sharp clarity to a long-debated issue: Whether the sale of a commercial building is legally classified as "land" and thus exempt from Value Added Tax (VAT).

The Catalyst

The dispute arose when an investor acquired a commercial property in Kiambu from Standard Chartered Bank Kenya Ltd for KES 70,000,050. The Kenya Revenue Authority (KRA) assessed a 16% VAT on the transaction, amounting to over KES 11.2 million, which the buyer paid under protest before challenging the assessment in the High Court. The High Court initially sided with the buyer. Relying on Article 260 of the Constitution, the court reasoned that the definition of "land", which encompasses the surface of the earth and the airspace above it, naturally absorbs any buildings erected upon it. Consequently, since the VAT Act exempts the supply of "land," the High Court ruled the commercial property sale was exempt and ordered KRA to refund the tax. The Court of Appeal, however, reversed this position. The appellate bench emphasized that constitutional definitions apply "unless the context requires otherwise". In the specific context of the VAT Act (First Schedule, Part II, paragraph 8), Parliament deliberately distinguished between "land" and "residential premises". Applying the legal principle of expressio unius est exclusio alterius; meaning the express mention of one thing excludes others, the court concluded that by explicitly exempting residential premises, the legislature intentionally left commercial premises exposed to VAT. Ultimately, the tax levy was upheld, and the refund order was quashed.

The Bottom Line for Investors

For clients managing commercial portfolios or structuring acquisitions through matrimonial and trust vehicles, this decision demands an immediate adjustment in deal modeling.

  • Pricing in the 16% Premium: Commercial real estate acquisitions are not VAT-neutral. Buyers must underwrite the 16% tax into their initial capital outlays and deal appraisals to avoid unexpected funding gaps at closing.
  • The Residential Safe Harbor: Capital directed toward residential real estate remains protected. The statutory exemption explicitly covers the supply of residential premises (whether by sale, renting, or leasing).
  • Strict Statutory Interpretation: Tax liability cannot be mitigated by relying on broad constitutional or common law maxims. Tax exemptions are construed strictly; if a transaction type is not expressly listed as exempt within the VAT Act, it is vatable by default.

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                                         ~ Published on 20 March 2026 ~