On 21st March 2025, the Court of Appeal delivered a landmark decision in Kenya Revenue Authority v Ndegwa [2025] KECA 510 (KLR), affirming that Value Added Tax (VAT) applies to the sale of commercial property.

This judgment overturns an earlier High Court decision, which had held that VAT did not apply to the sale of land regardless of whether the buildings erected on it were residential or commercial. The Court of Appeal’s decision now sets a clear precedent with far-reaching implications for all parties involved in the sale or purchase of commercial land and buildings.

For property developers, investors, or buyers, understanding the tax consequences of this ruling is critical. It affects pricing, financial planning, and contract negotiations. The judgment underscores the importance of clarity and compliance in the treatment of VAT in commercial real estate transactions.

Background

In 2013, Mr. Ndegwa purchased a property consisting of land and commercial buildings from Standard Chartered Bank Kenya Ltd. for KES. 70 million. The Kenya Revenue Authority (KRA) subsequently demanded KES. 11.2 million as Value Added Tax (VAT) at the applicable 16% rate. Mr. Ndegwa paid the amount under protest.

He later filed a petition in the High Court sometime in 2015 seeking a declaration that VAT was not payable on the sale or purchase of land, whether developed with residential or commercial buildings, and a refund of the VAT paid.

Mr. Ndegwa relied on Paragraph 8, Part II of the First Schedule to the VAT Act, which exempts from VAT the “supply by way of sale, renting, leasing, hiring, letting of land or residential premises.” He also invoked the definition of “land” under Article 260 of the Constitution, arguing that it includes the physical land and any structures on it. As such, he claimed, the entire transaction was VAT-exempt.

The KRA opposed the claim, arguing that the VAT exemption only applied to land and residential premises, not commercial property. The VAT Act distinguishes between land and buildings, and the sale of commercial property was therefore subject to VAT.

High Court Decision on VAT Exemption

The High Court accepted Mr. Ndegwa’s argument and held that the definition of “land” in Article 260 of the Constitution which includes surface land, subsurface, and airspace meant the entire property was VAT-exempt; Paragraph 8 of the VAT Act was ambiguous, especially in cases involving mixed-use properties; Mr. Ndegwa’s VAT payment was not made in error, as he had objected at the time of payment, so the one-year refund limit under Section 30 of the VAT Act did not apply; and Despite the vendor being the party to remit VAT, Mr. Ndegwa was entitled to the refund, as he had borne the tax burden. As a result, the Court ordered the KRA to refund the VAT to Mr. Ndegwa.

The KRA, dissatisfied with the decision, appealed to the Court of Appeal.

Court of Appeal ruling on VAT for commercial buildings

The Court of Appeal disagreed with the High Court’s interpretation of the VAT Act, narrowing in on the proper reading of Paragraph 8, Part II of the First Schedule to the VAT Act, 2013. This provision exempts from VAT the “sale, renting, leasing, hiring, or letting of land or residential premises.”

The High Court had interpreted “land” broadly based on Article 260 of the Constitution, to include any buildings erected on it, whether residential or commercial. However, the Court of Appeal took a stricter statutory interpretation approach and made the following key findings:

i) Commercial premises are not VAT-exempt
The Court noted that the VAT Act specifically defines “residential premises” as land or buildings occupied or capable of being occupied as a residence. Since commercial premises are not specifically mentioned, they do not benefit from the exemption.

ii) Express mention implies exclusion
Applying the legal maxim expressio unius est exclusio alterius—the express mention of one thing excludes others—the Court concluded that by explicitly exempting residential premises, the Act deliberately excludes commercial properties from the exemption.

iii) Legislative history confirms intent
The Court also examined previous VAT legislation and noted that non-residential buildings were once expressly exempt from VAT, but that exemption was later repealed. This, in the Court’s view, reflected a clear legislative intent to tax commercial property sales under the current VAT regime.

Practical Implications for Property Developers

a) The sale of land with commercial buildings is now confirmed to be subject to VAT. In contrast, transactions involving residential premises (as defined under the First Schedule of the Act) and vacant land remain exempt from VAT. Buyers and sellers must now factor VAT into the pricing and financial structuring of commercial property transactions.

b) For buyers, VAT represents a substantial transactional cost. Unless the buyer is VAT-registered and eligible to claim input VAT, the tax becomes a direct expense. This affects investment appraisals, cash flow projections, and negotiations. Buyers should therefore plan for additional costs.

c) It is essential for parties to conduct legal and tax due diligence to confirm the VAT status of a property. Sale agreements must clearly indicate whether the price is VAT-inclusive or exclusive and allocate responsibility for VAT.

d) Mixed-use developments require careful VAT treatment. Developers of properties with both commercial and residential components must determine the correct VAT treatment for each part. Only the residential portions may be exempt, and proper documentation is necessary to support any exemptions claimed.

Conclusion

The Court of Appeal’s decision clarifies that VAT applies to commercial property sales, ending legal uncertainty. Going forward, parties must approach such transactions with clear awareness of VAT obligations, proper pricing, and contract clarity. It is important to engage legal and tax professionals early in the transaction process to avoid costly oversights and to structure deals appropriately in light of this legal position.