Kenya's Court of Appeal: Export‑logistics Services Zero‑rated; KRA Ordered to Refund Within 90 Days

Last updated: 27 July 2026

On 10 July 2026, Kenya’s Court of Appeal ruled that export‑logistics services performed at Jomo Kenyatta International Airport (JKIA) qualify as zero‑rated supplies under the Value Added Tax Act, dismissing a long‑running appeal by the Kenya Revenue Authority (KRA) and affirming the Airflo Limited judgement in full. The decision, which orders KRA to refund more than KSh 46 million within 90 days, settles a dispute that has shadowed the cut‑flower export chain for years and establishes appellate‑level precedent on the application of the destination principle to services, not only goods.

For exporters, freight forwarders, cargo handlers and M&A advisors active in Kenya, the practical consequences are immediate: historical VAT overpayments may now be recoverable, invoicing systems require updating, and deal valuations for logistics targets must be reassessed.

Case Background and Procedural History

Parties and facts

Airflo Limited operates at JKIA, providing a suite of export‑logistics services to Kenya’s horticultural sector, one of the country’s largest foreign‑exchange earners. Its services include cold‑chain storage, palletisation, export packing, weighing, labelling and airside cargo handling, all performed within the airport’s export‑processing zone before cut flowers are loaded onto outbound aircraft bound for European and Middle Eastern markets.

KRA assessed Airflo on the basis that these services were consumed in Kenya, at the airport, on Kenyan soil, and therefore attracted VAT at the standard rate of 16 per cent. KRA’s administrative position, applied consistently across the logistics sector, treated the physical location of service delivery as the determinative factor, irrespective of the ultimate destination of the goods being serviced. Over several assessment periods, the resulting tax demand exceeded KSh 46 million.

Lower court decisions

Airflo challenged KRA’s assessments before the Tax Appeals Tribunal, which ruled in the taxpayer’s favour and held that the services formed an integral, inseparable part of the export chain and should be zero‑rated. KRA appealed to the High Court, which upheld the Tribunal’s decision and reinforced the application of the destination principle to export‑adjacent services. Undeterred, KRA escalated the matter to the Court of Appeal, the second‑highest court in Kenya’s judicial hierarchy, seeking to re‑establish its long‑held administrative interpretation.

The litigation history is significant: it demonstrates that three separate judicial forums have now examined KRA’s position and rejected it. For businesses assessing the reliability of the precedent, this three‑tier endorsement substantially reduces the risk of the ruling being overturned, although a further appeal to the Supreme Court remains theoretically possible.

What Kenya’s Court of Appeal Rules: Export‑Logistics Services Are Zero‑Rated

How the Court applied the destination principle to services

The Court of Appeal’s central finding is that the destination principle, a cornerstone of international VAT systems, applies to services that are directly and necessarily linked to export transactions, not merely to the exported goods themselves. The bench reasoned that where a service exists solely to facilitate the physical movement of goods from Kenya to a foreign destination, and where the economic benefit of that service is ultimately enjoyed by a non‑resident recipient abroad, the service partakes of the zero‑rated character of the underlying export.

This reasoning aligns with the policy rationale behind zero‑rating: to ensure that exports leave the taxing jurisdiction free of embedded VAT, preserving the competitiveness of Kenyan goods in international markets. The Court observed that taxing export‑logistics services at the standard rate while zero‑rating the goods themselves would produce an internally inconsistent VAT treatment that frustrates the legislative purpose of the destination principle under Kenya’s VAT framework.

Distinguishing services from goods, why onsite handling is zero‑rated

KRA’s core argument was that services physically performed in Kenya are, by definition, locally consumed and therefore subject to standard‑rate VAT. The Court rejected this contention, drawing a distinction between the place of performance and the place of consumption or benefit. While the cold‑chain storage and palletisation happen at JKIA, the Court held that their economic purpose and benefit are entirely directed at the overseas buyer who receives the flowers in export‑ready condition.

The appellate bench further noted that Airflo’s services would have no commercial rationale absent the export transaction. There is no domestic market for pre‑flight palletisation of cut flowers destined for Amsterdam or Dubai. The services are, in the Court’s analysis, functionally inseparable from the export itself. This functional‑inseparability test is the key doctrinal contribution of the judgment and provides a framework that other export‑adjacent service providers, including freight forwarders, fumigation specialists and customs brokers, can rely upon when classifying their own supplies.

Finally, the Court upheld both lower courts’ orders requiring KRA to refund Airflo in excess of KSh 46 million, and added a critical enforcement mechanism: KRA must complete the refund within 90 days from the date of the judgment. This time‑bound order transforms the ruling from a statement of legal principle into an enforceable commercial remedy.

Legal Framework: VAT and the Destination Principle in Kenya

Statutory sources

Kenya’s Value Added Tax Act provides for the zero‑rating of exported goods and certain categories of exported services. The Second Schedule to the Act lists supplies that attract a zero rate, including goods exported from Kenya and services supplied for use or consumption outside Kenya. The destination principle, while not always defined explicitly in the statute’s text, is embedded in the architecture of these provisions: the taxing right belongs to the country of importation, not the country of export.

Successive Finance Acts have periodically amended the scope of zero‑rated supplies, but the core export provisions have remained substantively stable. The Court of Appeal’s ruling interprets these provisions purposively, holding that Parliament intended export‑adjacent services to fall within the zero‑rating regime where they are functionally linked to an export transaction. This purposive approach is consistent with the broader trend in Kenyan tax jurisprudence, which increasingly favours substance‑over‑form analysis.

KRA’s administrative practice before the ruling

Prior to the Airflo judgement, KRA’s position was that VAT on handling services at JKIA attracted the standard rate. KRA had publicised enforcement wins in the logistics sector, including a reported KSh 105.6 million recovery against another logistics operator, reinforcing the view that physical location of service delivery was the sole determinant of VAT treatment. This administrative stance was widely understood in the industry: logistics operators routinely charged and remitted VAT at 16 per cent, and exporters absorbed the cost or attempted (often unsuccessfully) to reclaim it.

The Court of Appeal’s decision effectively overrules this administrative practice at the appellate level. While KRA has not yet issued updated public guidance, industry observers expect the authority to revise its internal manuals and assessment procedures to reflect the judgment. Until that happens, taxpayers relying on the ruling should retain comprehensive documentation linking each service to a specific export transaction.

Practical Implications: Who Benefits and How

Exporters, flowers, fresh produce and beyond

Kenya’s horticultural sector, which generates over USD 1 billion in annual export revenue, stands to benefit most directly. Flower exporters who have been absorbing 16 per cent VAT on JKIA handling services can now pursue VAT reclaims for exporters in Kenya covering historical overpayments, subject to statutory limitation periods. Going forward, exporters should expect to receive zero‑rated invoices from compliant logistics providers, improving cashflow and reducing the working‑capital drag associated with reclaim processing.

Action for exporters this week:

• Audit all invoices received from JKIA logistics and handling providers over the past five years.
• Identify invoices where VAT was charged at the standard rate on services now qualifying as zero‑rated.
• Calculate the aggregate overpayment and prepare a refund claim referencing the Court of Appeal judgment.
• Update VAT accounting codes to reflect zero‑rated treatment for qualifying JKIA export services.

Freight forwarders and logistics providers

The freight forwarder VAT treatment in Kenya shifts significantly as a result of this ruling. Operators providing cold‑chain storage, palletisation, cargo handling and related export‑logistics services at JKIA must reassess their service classifications. Where services are directly linked to export shipments, invoices should now be issued at zero rate rather than 16 per cent. Failure to reclassify creates a risk of over‑collection, and exposes providers to client claims for restitution of VAT charged in error.

What advisers must do now:

• Review standard service contracts and update VAT clauses to reflect zero‑rated treatment where applicable.
• Implement documentation requirements to evidence the export link for each service (air waybills, customs export entries, client export declarations).
• Train billing teams on the distinction between domestic logistics services (standard‑rated) and export‑chain services (zero‑rated).
• Notify existing clients of the reclassification and discuss credit notes for historical overcharges.

Banks, insurers and M&A advisors

For institutions financing or insuring export‑logistics operations, the ruling alters the risk profile of these businesses. Historically overpaid VAT now represents a recoverable asset, potentially a material one for mid‑sized logistics operators. M&A advisors conducting due diligence on acquisition targets in the logistics sector should reassess both the tax‑liability and tax‑asset positions of target companies, adjusting enterprise valuations accordingly.

The 90‑Day KRA Refund Order: What It Means and How to Use It

Mechanics of claiming the refund

The Court of Appeal’s order requiring KRA to complete the refund within 90 days is enforceable from 10 July 2026, giving KRA until approximately 8 October 2026 to process payment. For Airflo, this means submitting a formal demand to KRA’s Domestic Taxes Department, attaching a certified copy of the judgment and the computed refund schedule.

For other taxpayers seeking to rely on this precedent for their own refund claims, the process involves several steps:

1. Compile the evidence file: invoices, VAT returns, air waybills, customs export declarations and contracts evidencing the export‑logistics nature of the services.
2. Prepare a formal refund application: submit through the iTax platform or in writing to the relevant KRA station, referencing the Court of Appeal judgment by case number and date.
3. Include a legal opinion: attach a brief memorandum explaining how the taxpayer’s circumstances mirror the Airflo facts and why the zero‑rating applies.
4. Set a response deadline: request KRA to process the claim within the 90‑day framework established by the Court, noting the taxpayer’s intention to pursue enforcement if KRA fails to comply.

Model timeline and cashflow planning

Businesses should build the 90‑day window into their financial forecasts. For Airflo, the refund of KSh 46 million‑plus represents a material cash injection. Other exporters and logistics providers with comparable claims may be looking at six‑ or seven‑figure refunds in Kenyan shillings, depending on the volume and duration of affected transactions.

If KRA fails to honour the refund order within the stipulated period, the judgment creditor may apply to the High Court for execution of the order, including attachment of KRA bank accounts or garnishee proceedings against the National Treasury. While enforcement against a government agency is procedurally complex, the specificity of the 90‑day timeline strengthens the taxpayer’s hand in any subsequent enforcement application.

Effect on KRA Assessment Practice and Likely Next Steps

The Court of Appeal judgment places KRA in a difficult position. Its long‑standing administrative interpretation, that JKIA export‑logistics services are locally consumed and therefore standard‑rated, has now been rejected at three judicial levels. Industry observers expect KRA to undertake an internal review of its VAT assessment manuals for the logistics sector. However, taxpayers should not assume that KRA will proactively amend its guidance or voluntarily process refund claims without formal demand.

The possibility of a further appeal to the Supreme Court remains. Under the Supreme Court Act, KRA would need to demonstrate that the matter raises a question of general public importance or involves the interpretation of the Constitution. Given that the case turns primarily on statutory construction of the VAT Act rather than constitutional principles, early indications suggest that leave to appeal may be difficult to obtain, but not impossible. Taxpayers pursuing refund claims should factor this residual litigation risk into their planning, potentially by securing tax indemnities or holdback provisions in any concurrent M&A transactions.

Cross‑Jurisdictional and M&A Considerations

The Airflo ruling sits within a broader trend across the East African Community toward stricter enforcement of the destination principle. Regional tax advisors have noted that Uganda and Tanzania have grappled with similar classification disputes for export‑adjacent services, and the Kenyan appellate decision is likely to be cited persuasively in those jurisdictions.

For cross‑border M&A transactions, the judgment has immediate due‑diligence implications. Acquirers of Kenyan logistics businesses should now include specific representations and warranties addressing the target’s VAT classification of export‑logistics services, together with indemnities covering both historic under‑claims (missed refunds) and potential KRA reassessments. The judgment may also affect completion‑accounts mechanisms, where the recoverability of a material VAT refund changes the net‑asset position of the target at closing. Parties involved in Kenya merger control processes should integrate these tax implications into their transaction timelines.

Comparison Table: Who Pays, Who Reclaims, and What to Do Now

Worked example

Consider a single shipment of roses handled at JKIA with a logistics and handling charge of KSh 100,000. Under KRA’s pre‑ruling position, the logistics provider would charge VAT of KSh 16,000 (16 per cent), bringing the total invoice to KSh 116,000. The exporter would bear this cost and could attempt, often without success, to reclaim the input VAT. Post‑ruling, the same service is invoiced at KSh 100,000 with zero‑rated VAT. The exporter’s immediate cashflow benefit is KSh 16,000 per shipment. For a mid‑sized exporter processing 500 shipments per month, the annualised saving exceeds KSh 96 million, a material impact on margins in a sector where net profits are often razor‑thin.

Next Steps for Businesses and Advisors

The Court of Appeal’s ruling on export‑logistics services marks a turning point for Kenya’s export sector and for the broader application of the destination principle to services under Kenya VAT law. Businesses that have been overcharged VAT on JKIA export‑handling services now have clear appellate authority to pursue refunds, and the 90‑day enforcement window creates actionable urgency. Whether you are a flower exporter, a freight forwarder, or an M&A advisor structuring a logistics acquisition, the time to act is now.

For tailored guidance on VAT reclaims, refund applications and transaction structuring in light of this judgment, consult a qualified Kenya M&A or tax lawyer. The Global Law Experts lawyer directory connects businesses with specialists across Kenya’s legal landscape, including practitioners experienced in Kenya tax and finance legislation and Kenya revenue compliance.

Sources

1. Kenya Law, Tax Appeals Tribunal judgment (related precedent)
2. KRA, Press releases and news centre
3. Business Daily Africa, Court of Appeal ruling coverage
4. PwC, Regional tax alert on export services VAT
5. The Kenya Times, JKIA and KRA case coverage
6. Global Law Experts, Breaking news coverage of the judgment