What the 2025 Court Ruling Means for Investors and Developers
In March 2025, Kenya’s Court of Appeal ruled that the sale of commercial property is subject to a 16% Value Added Tax (VAT), overturning a prior High Court decision. This landmark judgment has major implications for real estate investors, developers, and buyers—shaping how transactions are taxed and clarifying legal interpretations of commercial property.
Background to the VAT Dispute
The case originated when businessman David Mwangi Ndegwa bought land in Kiambu from Standard Chartered Bank. The property included a commercial building, and StanChart insisted he pay KSh11.2 million in VAT. Ndegwa objected, arguing that the law only talks about residential premises and not “commercial premises,” and therefore VAT shouldn’t apply.
The High Court agreed with him in 2018, but the Kenya Revenue Authority (KRA) appealed the ruling, fearing a loss of billions in potential VAT collections and tax refunds.
The Legal Journey: High Court vs. Court of Appeal
- High Court (2018): Held that the Value Added Tax Act 2013 was ambiguous and didn’t clearly define “commercial premises,” so the sale was not subject to VAT.
- Court of Appeal (2025): Overturned the decision, stating the law is not ambiguous, and VAT must apply to commercial buildings sold as part of land.
The final verdict? If the property has a commercial building, the entire transaction is VAT-able.
What Is VAT and Why It Matters in Real Estate?
Value Added Tax (VAT) is a consumption tax charged at 16% in Kenya. It’s usually included in the final price of a good or service.
In real estate:
- Residential properties are VAT exempt.
- Commercial properties—like office buildings, warehouses, malls—are subject to VAT.
VAT has serious financial implications on property deals. For example, a Sh100 million office block now attracts Sh16 million in VAT.
What the Court of Appeal Ruling Means
This ruling closes a major tax loophole.
Key takeaways:
- All commercial property sales are now subject to 16% VAT.
- Buyers and sellers can no longer separate the land from the building to avoid VAT.
- Retrospective claims for VAT refunds are now blocked.
It gives clarity to both taxpayers and the KRA on how the law should be applied going forward.
Distinguishing Between Residential and Commercial Property
Understanding this difference is now crucial for compliance:
| Type | VAT Status | Example |
|---|---|---|
| Residential Property | VAT Exempt | Apartments, homes |
| Commercial Property | VAT at 16% | Offices, shops, warehouses |
| Vacant Land | VAT Exempt | Undeveloped plots |
If a plot includes a commercial structure, the whole deal is taxable.
Impact on Buyers, Sellers, and Developers
For Buyers
- Budgeting must now factor in VAT costs.
- Due diligence is more important than ever.
- Consider potential input VAT recovery if you’re VAT-registered.
For Sellers
- You must charge, collect, and remit VAT to the KRA.
- Transactions must be fully documented.
For Developers
- Increased transparency in tax structuring.
- Project pricing must accommodate VAT obligations.
How KRA Will Enforce the VAT
The KRA is likely to:
- Increase audits of high-value commercial property sales.
- Monitor title transfers at the Lands Registry and link them with VAT declarations.
- Require VAT compliance certificates during property registration.
Failure to comply can lead to:
- Penalties and interest
- Legal action
- Potential business licensing issues
Tax Refund Implications
Before the ruling, many hoped they could:
- Claim refunds on previously paid VAT,
- Avoid VAT in future sales of commercial buildings.
Now, the Court ruling:
- Nullifies the High Court’s VAT exemption stance,
- Prevents KRA from having to refund billions,
- Establishes a uniform interpretation across the country.
Effect on Real Estate Investment Trends
According to the Kenya National Bureau of Statistics:
- Office spaces remain the most dominant commercial property.
- High demand is still seen in retail and healthcare property.
- Industrial and warehousing properties are gaining popularity in Nairobi, Machakos, and Mombasa.
Possible investor reactions:
- Short-term slow-down in commercial property sales
- Increase in structured lease agreements to avoid upfront VAT
- More sophisticated tax planning
Regions Affected Most: Nairobi, Kiambu, Mombasa & More
Areas with the highest concentration of commercial properties are:
- Nairobi: Upper Hill, Westlands, CBD
- Kiambu: Thika Road, Ruiru
- Mombasa: Moi Avenue, Nyali
- Machakos: Athi River, Mlolongo
These areas are likely to see:
- Price adjustments,
- More due diligence by buyers, and
- Higher VAT remittance activity.
Legal and Tax Advisory Best Practices
To stay compliant:
- Engage a real estate tax consultant early.
- Always identify VAT obligations before signing the sale agreement.
- Check whether the seller is VAT registered.
- Use a tax clause in your sale agreement to protect against liability.
Capital Gains Tax vs VAT: Know the Difference
| Tax Type | Rate | Applies To |
|---|---|---|
| VAT | 16% | Sale of commercial buildings |
| Capital Gains Tax | 15% | Profit from any property sale |
Yes—both taxes can apply to the same commercial property transaction, meaning:
- You pay 15% CGT on the gain,
- Plus 16% VAT on the sale price of the commercial structure.
Read: High Court Nullifies EADB Privileges
Frequently Asked Questions (FAQs)
Is the sale of land with a commercial building VAT-exempt?
No. If a commercial structure exists, the full transaction is subject to 16% VAT.
Can I claim input VAT if I buy a commercial property?
A: Yes, if you’re VAT-registered and the property will be used for taxable business purposes.
Does this apply retroactively to past transactions?
No. But it blocks any VAT refund claims based on the earlier High Court ruling.
Are residential properties still VAT-exempt?
Yes. VAT only applies to commercial properties.
What if the seller is not VAT-registered?
VAT still applies. KRA may still demand VAT, so consult a tax expert.
Conclusion
The 2025 Court of Appeal ruling has redefined the tax landscape for commercial property in Kenya. With VAT now clearly enforceable on these transactions, all stakeholders—investors, developers, realtors, and buyers—must adjust their strategies. It’s no longer just about location and price. Tax compliance is now part of the core real estate equation.
If you’re involved in any commercial property transaction, now is the time to:
- Understand the law,
- Budget accordingly,
- Seek professional advice.
