Branch International wins Sh796m tax deduction case against KRA

The High Court has delivered a significant blow to the Kenya Revenue Authority by allowing digital lender Branch International Limited to deduct Sh796.7 million in loan write-offs from its tax assessment.

Justice Moses Ado upheld a previous decision by the Tax Appeals Tribunal, which found that unrecovered principal from unsecured mobile loans qualifies as a deductible loss for tax purposes.

The long-running dispute centered on the 2018 financial year. During an audit, the taxman had disallowed several expenses claimed by the lender, arguing that a defaulted loan principal is capital in nature and should not be deducted from taxable income.

Branch International countered that in the digital lending space, where loans are issued without collateral, defaults represent an inherent and ordinary risk of doing business.

The court agreed with this position, noting that the company had demonstrated reasonable efforts to recover the funds. Evidence presented showed the lender had used reminders, engaged debt collection agencies, and listed defaulters with credit reference bureaus.

This ruling clarifies the tax treatment of bad debts in Kenya’s rapidly expanding digital credit sector. By recognizing these losses as revenue-related rather than capital losses, the court has provided a level of predictability for fintech firms operating in the region.

However, the victory for the lender was not absolute. The High Court upheld the rejection of other expense claims related to fraud and related-party transactions.

Justice Ado noted that Branch International failed to provide sufficient documentation to support those specific deductions. The court found that the evidence for fraud-related losses was insufficient to prove they had fully crystallized as bad debts during the period in question.

The decision arrives at a time when the Kenya Revenue Authority is intensifying efforts to collect revenue from the digital economy. While the taxman has successfully challenged other lenders on similar grounds recently, this specific judgment distinguishes the operational realities of unsecured mobile lending.

For the wider financial and construction-adjacent sectors, the case underscores the importance of rigorous documentation and the necessity of proving recovery efforts before writing off assets.

The KRA is expected to recompute the tax liability for the 2018 period based on the court's direction to allow the Sh796.7 million deduction while maintaining the exclusion of the unsupported fraud and related-party expenses.