Digital lender Branch International Limited has won a High Court case allowing it to deduct Sh796.7 million in loan write-offs from its tax assessment, dealing a blow to the Kenya Revenue Authority (KRA) in a dispute over the treatment of bad debts in unsecured lending.
In a judgment that clarifies the tax position for Kenya’s fast-growing digital lending sector, the court upheld an earlier decision by the Tax Appeals Tribunal permitting the deductions, while dismissing appeals filed by both the lender and the taxman.
The case arose from tax assessments issued by the Commissioner in March 2024 for the 2018 financial year, in which KRA disallowed several expenses claimed by Branch. These included Sh796.7 million in bad debts, Sh32.4 million in legal and marketing costs, Sh43.4 million in fraud-related losses, and Sh8.9 million in related-party expenses.
At the centre of the dispute was whether loan defaults in unsecured mobile lending qualify as deductible business losses under Kenyan tax law.
Branch argued that the expenses were wholly and exclusively incurred in generating income from its core business of issuing unsecured digital loans, and that the write-offs reflected genuine losses after reasonable recovery efforts. KRA, however, maintained that the lender had not provided sufficient proof and that some of the costs did not meet the legal threshold for deductibility.
The Tax Appeals Tribunal had partly sided with the lender, allowing deductions for bad debts and legal and marketing expenses, but rejecting claims related to fraud losses and related-party transactions. Both parties subsequently appealed the decision.
In its ruling, the High Court upheld the tribunal’s findings in full, saying it had correctly interpreted Section 15(1) of the Income Tax Act and applied the appropriate burden of proof.
On bad debts, the court made a significant determination, finding that loan defaults are an ordinary risk in lending and can be treated as deductible losses where reasonable recovery steps have been undertaken.
Justice Moses Ado said that in a lending business, money itself constitutes the income-generating commodity and assumes the character of trading stock.
Times Tower in Nairobi, the headquarters of the Kenya Revenue Authority. The taxman has demanded that the National Government Constituency Development Fund pay Sh2.2 billion arrears.
Photo credit: File | Nation
“The risk of non-recovery is an ordinary incident of the business,” the judge said, adding that Branch had demonstrated structured recovery efforts, including issuing reminders, engaging debt collectors and listing defaulters with credit reference bureaus before writing off the loans after 90 days.
The court rejected KRA’s argument that the lender was required to exhaust all possible recovery mechanisms, noting that the law only requires reasonable steps to be taken.
“Legal Notice No. 37 of 2011 does not require exhaustion of all conceivable recovery mechanisms,” Justice Ado ruled.
The judge also dismissed the tax authority’s position that loan principal should be treated as capital and therefore non-deductible, finding instead that such funds form part of circulating capital in lending businesses.
However, the court sided with KRA on other disputed claims. It upheld the disallowance of fraud-related losses, citing insufficient evidence to prove that the losses were final and attributable to the 2018 tax year.
“Deductibility requires not only the occurrence of loss, but also sufficient proof and quantification,” the court said.
Similarly, the court upheld the rejection of related-party expenses, finding that Branch had failed to provide adequate documentation to substantiate the transactions. On procedural grounds, the lender’s argument that the tax assessments were invalid due to the issuance of a single objection decision for two assessments was dismissed, with the court ruling that no prejudice had been demonstrated.
“The statute does not elevate procedural form over substance,” Justice Ado said.
