VAT on Commercial Property Sales: Key Insights from a Landmark Kenyan Court of Appeal Decision

Last updated on April 28th, 2025

In a landmark judgment on March 21, 2025, the Court of Appeal at Nairobi, with Justices K. M’Inoti, F. Tuiyott, and F. Ochieng, provided crucial insights into the application of Value Added Tax (VAT) on the sale of commercial properties in Kenya Revenue Authority v. David Mwangi Ndegwa (Civil Appeal No. 65 of 2019). This decision, which overturned the High Court judgment delivered by Judge Kasango, is a significant development in interpreting tax exemptions under the Value Added Tax Act, 2013 (VAT Act).

This judgment is vital for property developers, investors, and legal professionals. It underscores the need for accurate statutory interpretation and its implications for tax liabilities in real estate deals.

Background of the Case

The dispute arose when David Mwangi Ndegwa, a property developer, bought a commercial property (Kiambu Town Block 11/74) from Standard Chartered Bank Kenya Ltd. for Kshs. 70,000,050 in December 2013. This property was intended for commercial use, and Ndegwa believed he was exempt from paying VAT on the transaction.

The Kenya Revenue Authority (KRA) imposed a 16% VAT of Kshs. 11,200,080 on the transaction, which Ndegwa paid under protest. Ndegwa later filed a suit in the High Court, arguing that paragraph 8, Part II of the First Schedule of the VAT Act, exempted the sale of land, including any buildings thereon, from VAT, regardless of whether the buildings were for residential or commercial use.

On November 29, 2018, the High Court ruled in Ndegwa’s favour. It found that the definition of “land” under Article 260 of the Constitution (which includes the surface, subsurface, and airspace above) encompassed buildings, making the transaction VAT-exempt. The court considered paragraph 8 ambiguous and, applying the principle of strict construction in favour of the taxpayer, ordered KRA to refund the VAT paid.

KRA appealed, arguing that the High Court misinterpreted the VAT Act and that commercial premises were not exempt from VAT.

The Court of Appeal’s Judgment

The Court of Appeal unanimously allowed KRA’s appeal, setting aside the High Court’s judgment.

The court addressed three key issues:

1. Does the Constitutional Definition of “Land” Include Buildings?
   The Court of Appeal rejected the High Court’s broad definition of “land” in Article 260 of the Constitution, which includes the surface, subsurface, and airspace. It emphasised that Article 260 begins with the qualifier, “unless the context requires otherwise,” allowing the legislature to define “land” differently in specific statutes.

In the context of the VAT Act, the court held that “land” and “buildings” are distinct. “Buildings” are defined separately under the Land Act, 2012, as permanent or temporary structures. Thus, buildings, especially commercial ones, are not automatically included in the term “land” for VAT purposes.

2. Is Paragraph 8 of the First Schedule Ambiguous?
   Paragraph 8 exempts from VAT for the “supply by way of sale, renting, leasing, hiring, letting of land or residential premises.”. The High Court found this provision ambiguous because it conflicted with the constitutional definition of “land.”

The Court of Appeal disagreed, stating that the provision is unambiguous. It noted that the specific mention of “residential premises” and the exclusion of “commercial premises” in paragraph 8, coupled with the definition of “residential premises” as buildings occupied or capable of being occupied as residences (excluding hotels or holiday accommodations), indicates that commercial premises are not exempt.

The court of appeal applied the Latin maxim expressio unius est exclusio alterius (the express mention of one thing excludes others), concluding that the legislature intentionally excluded commercial premises from the exemption.

3. Was the VAT Refund Payable?
   After establishing that commercial premises are subject to VAT and that paragraph 8 is clear, the Court of Appeal held that KRA lawfully imposed VAT on Ndegwa’s transaction. Thus, Ndegwa was not entitled to a refund of the Kshs. 11,200,080 paid. The court also noted that section 30 of the VAT Act, which governs refunds for taxes paid in error, was not applicable, as the VAT was correctly imposed.

Four Key Takeaways for Stakeholders

This judgment significantly impacts real estate transactions in Kenya:

1. Clarity on VAT Exemptions: The decision confirms that VAT applies to the sale, leasing, or letting of commercial properties, as they are not expressly exempted under paragraph 8 of the VAT Act. Only land (without buildings) and residential premises are exempt, highlighting the distinction between these categories in tax law.
2. Contextual Statutory Interpretation: Tax laws may adopt specific definitions that differ from general constitutional or legal meanings. Therefore, businesses must carefully analyse the relevant law to determine tax obligations.
3. Strict Construction of Tax Laws: Tax exemptions are narrowly defined.

If a transaction is not explicitly exempted, it is subject to tax, and ambiguities are resolved only when the law’s language is genuinely unclear.

4. Implications for Mixed-Use Properties: The court declined to rule on mixed-use properties (e.g., buildings with residential and commercial components) since that issue was not raised. However, it acknowledged KRA’s submission that industry practices exist for apportioning VAT in such cases. This suggests potential future disputes over VAT treatment for mixed-use developments.

Four Practical Advice for Property Transactions

To navigate VAT complexities in real estate, consider the following:

1. Conduct Due Diligence: Before buying or selling commercial properties, check the VAT implications with tax advisors to avoid unexpected liabilities.
2. Review Contracts: Ensure sale agreements clearly outline VAT obligations, including which party is responsible for payment and remittance.
3. Seek Legal Guidance: Engage experienced tax and property lawyers to interpret applicable exemptions and ensure compliance with the VAT Act.
4. Monitor Legislative Changes: Stay updated about amendments to the VAT Act or related regulations that may affect property transactions.

Why This Matters for Your Business

The Kenya Revenue Authority v. David Mwangi Ndegwa decision is critical for Kenya’s real estate and tax law. It provides clarity for property developers, investors, and businesses engaged in commercial property transactions, ensuring predictable tax outcomes. However, it also highlights the need for careful legal and tax planning to avoid conflicts with KRA. At Kubwa and Company Advocates, our team of tax and property law experts is ready to assist you in navigating VAT compliance and real estate transactions. Contact us today to align your business with the latest legal developments and protect your investments.

Reach us now by Scheduling a Meeting Here or direct chat on WhatsApp Here or by clicking on the live chat in the bottom right corner.

Should you require more information, please do not hesitate to contact [email protected].