Executive summary

On 23 February 2026, the Tax Appeals Tribunal (Tribunal) ruled, in Premier Credit Limited v. Commissioner of Domestic Taxes (Tax Appeal E1149 of 2024), that the principal loan component of a loan write-off is not deductible for income tax purposes. As a result, the Tribunal upheld the Commissioner's decision to disallow Premier Credit Limited's claim for bad debt deductions arising from the principal portion of written-off loans. The Tribunal held that the principal component of a loan constitutes a capital asset reflected on the lender's balance sheet and therefore cannot be deducted as a bad debt expense under Paragraph 4 of the Income Tax Act - Guidelines on Allowability of Bad Debts (Legal Notice No. 37 of 2011).

Detailed discussion

Background

Premier Credit Limited (Appellant), a credit-only microfinance company licensed by the Central Bank of Kenya, was audited by the Kenya Revenue Authority (KRA) for the 2018 financial year. KRA raised an additional income tax assessment of 138,438,726 Kenyan shillings (KES), later reduced to KES 118,293,130 after objection. In subsequent discussions, the parties agreed on some of the issues raised by KRA, leaving KES 30,132,515 in dispute relating to the tax treatment of bad debts written off by the Appellant. The key matter concerned whether the principal portion of written-off loans qualifies as a deductible expense, which was referred to the Tribunal for determination.

Appellant's case

The Appellant asserted that the bad debts were fully deductible under Section 15(2)(a) of the Income Tax Act (ITA) and met the criteria under Legal Notice No. 37 (the Commissioner's Guidelines on bad-debts deduction). They emphasized that extensive recovery efforts had been undertaken, including arrears monitoring, loan restructuring, engagement of private investigators, debt collectors, auctioneers, realization of collateral and dealing with borrower circumstances such as death, fraud and inability to trace borrowers. The Appellant argued that the write-offs fell into legally recognized categories such as uneconomic recovery, exhausted collateral, untraceable customers and deceased borrowers. The Appellant further asserted that Paragraph 4 of Legal Notice 37 was ultra vires for contradicting Section 15(2)(a) of the ITA and maintained that loan principal should not be treated as a capital asset but as part of its normal business operations.

Respondent's case

The KRA maintained that the principal portion of loans constitutes a capital asset in the form of a loan receivable, while only interest, fees and penalties represent revenue. As such, principal amounts cannot be deducted as bad debts under Paragraph 4 of Legal Notice 37. The KRA emphasized that Section 15 must be read together with Section 16 of the ITA, which prohibits deduction of capital expenditure or loss of capital. Furthermore, the KRA argued that the Appellant failed to produce loan-specific evidence demonstrating compliance with Paragraph 2 of the Bad Debt Guidelines. It also asserted that the Tribunal lacked jurisdiction to determine whether Paragraph 4 is ultra vires, noting that only the High Court may determine the legality of subsidiary legislation.

Tribunal's determination

The Tribunal held that it lacked jurisdiction to address the validity of Paragraph 4 of Legal Notice 37 of 2011. It found that the principal portion of loans constitutes a financial asset under International Financial Reporting Standards (IFRS) 9, Financial Instruments, and reduces the loan asset upon repayment rather than generating taxable income, thereby making it capital in nature. Consequently, Paragraph 4, which prohibits deduction of bad debts of a capital nature, bars deduction of written-off principal loan amounts. The Tribunal also observed that the Appellant failed to distinguish between principal, interest and fees in its bad-debt claims, undermining any potential deduction for the revenue components. It therefore upheld KRA's assessment and confirmed principal tax of KES 30,132,515.

Notable mentions

Notwithstanding the foregoing, it is important to note that this judgment contradicts the Tribunal's November 2025 decision in Fourth Generation Capital Limited v Commissioner of Domestic Taxes, in which the Tribunal held that the principal amount advanced constituted stock-in-trade and was therefore revenue in nature rather than capital expenditure making it an allowable deduction. The judgment is also inconsistent with the Tribunal's decisions in Asante Financial Services (EA) Limited v Commissioner of Domestic Taxes, an October 2025 decision in which the Tribunal allowed the deduction of written-off bad debts, including the principal component, on the basis that the taxpayers had satisfied the conditions set out in paragraph 2 of Legal Notice No. 37 of 2011.

Implications

The judgment creates uncertainty regarding the treatment of principal loan amounts written off by financial institutions, which include banks, microfinance institutions, digital lenders, fintech and other credit-only lenders.

Proper tax characterization of the principal loan amount, whether revenue or capital in nature, remains a highly contested issue. Establishing a clear and consistent position on this matter is crucial, given its significant implication for the financial sector.