The Court of Appeal has ruled that logistics services for exports qualify for zero-rated Value Added Tax (VAT), dealing a blow to the Kenya Revenue Authority (KRA), which sought to impose a levy on the utilities.
The court said that taxation of export services should be done where the end product is consumed and not where the logistics are physically performed.
The July 10, 2026 decision by the court arose from a dispute between Airflo Ltd, formerly Panalpina Airflo Limited, and the Commissioner of Domestic Taxes over VAT refunds amounting to Sh46 million.
Zero-rated Value Added Tax (VAT) applies a zero percent tax rate to goods and services. Under the arrangement, customers are not charged any VAT, but businesses can reclaim the VAT paid on the raw materials and production costs.
At the centre of the dispute were two key questions: whether logistical services such as cold room storage, vacuum cooling, X-ray screening, palletisation and customs documentation are consumed in Kenya or abroad, and whether services physically performed in Kenya can qualify as exported services under the VAT Act.
Airflo Ltd, a Kenyan company, provides handling services to its Dutch parent company, Airflo BV, which transports cut flowers and other horticultural produce from Kenya via the Jomo Kenyatta International Airport (JKIA) to destinations around the world, mainly on behalf of customers in the Netherlands who have already purchased the flowers from Kenyan growers.
Under the service agreement, the Dutch customers own the flowers before Airflo Ltd's services are engaged. The company receives instructions from the overseas market on how the flowers should be packed, screened and consigned before shipment.
The Court of Appeal found that the services were intended to benefit foreign customers rather than Kenyan farmers or the local export process.
"The ultimate economic benefit and consumption of the respondent's logistical services accrued to the Dutch entities that required their flowers delivered in pristine condition in Europe. The physical location of the performance of the services at JKIA does not alter this commercial reality," the court said.
The appellate court agreed with the High Court that the decisive test for zero-rating under the VAT Act is the place where the service is used or consumed.
"We therefore find no error in the High Court's conclusion that the determining factor for zero-rating was the place of use or consumption, which in this case was the Netherlands," the court ruled.
The court further held that the services could not be classified as exempt horticultural services merely because they involved flowers.
It described cold room storage, vacuum cooling, X-ray screening, palletisation and customs documentation as logistical support services ancillary to international freight transport rather than horticultural production.
"The mere fact that the subject matter of the logistics is horticultural produce does not transform the nature of the service itself. To hold otherwise would expand the exemption beyond its ordinary meaning, effectively converting a sector-based commercial relationship into a statutory exemption without textual foundation," the judges said.
The KRA had argued that because Airflo Ltd is based in Kenya and the services were supplied within Kenya, they should be subject to the standard 16 per cent VAT rate under Section 8 of the VAT Act.
It also maintained that the services were consumed locally because they enabled the flowers to meet export and phytosanitary requirements before leaving the country.
The court disagreed, saying that to hold, as the KRA urges, that a supply made in Kenya under Section 8(1) cannot simultaneously be a service exported out of Kenya under Section 2 would render the zero-rating provision in the Second Schedule meaningless in respect of services performed by Kenyan residents.
“Parliament could not have intended such an absurdity," the court held.
It added that the two provisions work together, with Section 8 establishing Kenya's taxing jurisdiction while the Second Schedule provides for zero-rating where the services are ultimately used or consumed outside Kenya.
"The two provisions operate harmoniously. Section 8(1) brings the transaction within Kenya's taxing jurisdiction; Section 2 and the Second Schedule provide for zero-rating where the service, though supplied from Kenya, is for use or consumption abroad. There is no superfluity," the judges said.
The court also dismissed KRA's attempt to classify the services as exempt horticultural services.
"The Appellant's position amounts to an impermissible attempt to re-characterize the services as exempt merely to avoid processing a refund lawfully due, without any proper statutory basis," it said.
Airflo Ltd had charged VAT at the zero rate on services rendered to Airflo BV and subsequently sought refunds of excess input VAT amounting to Sh36 million for January to September 2019 and Sh10 million for June to October 2020.
KRA rejected the claims in January and February 2021, prompting the company to appeal to the Tax Appeals Tribunal.
The tribunal ruled in Airflo's favour in April 2022, finding that the services were exported and therefore zero-rated. The High Court upheld that decision in May 2023.
The Court of Appeal further directed KRA to process the VAT refund claims within 90 days of the judgment.
