The Kenya Revenue Authority (KRA) has been blocked from demanding taxes on service charge collections by building and estate managers following a four-year dispute with Nextgen Mall Management Company.

The Tax Appeals Tribunal ruled that Nextgen Mall Management Company only handled funds as a conduit for unit owners to obtain basic upkeep services like grass cutting, security, bin cleaning, and management fees.

It ruled that the monies it held from service charges and property owners' contributions were not earnings that should attract income tax and value-added tax (VAT), setting a precedent in an era that has seen the rise of management companies taking charge of upkeep in gated communities, office blocks and apartments.

The taxman, through the Commissioner of Domestic Taxes, had slapped Nextgen with a Sh119.8 million income tax and value-added tax (VAT) claim, dating back to 2016.

The tax obligations included income tax arrears of Sh38.5 million covering the years between 2016 and 2020, as well as VAT obligations of Sh81.3 million for the years between 2017 and 2020, bringing the total to Sh119.8 million.

The firm – established to manage the common areas of Nextgen Mall on Mombasa Road in Nairobi on behalf of purchasers of units from Nextgen Office Suites Limited, which is the developer – objected to the KRA demands at the Tax Appeals Tribunal.

This gave birth to a legal battle that has been ongoing in the corridors of justice since September 7, 2022.

A KRA audit of the firm triggered the Sh119.8 million tax demand.

KRA argued that the service charge contributions collected from unit owners constituted taxable business income.

It reckoned that the firm is a private company whose primary economic activity is real estate activities, specifically the management of Nextgen Mall, and that it was selected for audit after declaring income in its Income Tax returns while remaining unregistered for VAT.

The taxman said that the firm's transactions attract tax because it offers services and charges a fee, arguing that it is not a passive holding company.

KRA said firms receiving service charges can only escape taxation through an exemption granted in law.

The firm maintained that it merely collects service charges on behalf of property owners and uses the funds to pay third-party service providers responsible for maintaining the common areas of the mall, including garbage collection, payment of utility bills and repair works within the common areas.

The case narrowed down to two issues: whether service charge and member contributions constituted income chargeable to Income Tax; and whether the service charge and member contributions collected attract VAT.

On the first issue, the Tribunal ruled that service charge collections were fiduciary pass-through funds held by the management company for the benefit of unit owners through settlement of service costs in the common areas.

The Tribunal added that the management company is a vehicle for owners to pool and spend their own monies, arguing that the firm offers no service on its own account, adds no margin and retains nothing as a fee.

The Tribunal noted that the company neither earned nor retained cash, arguing that the contributions cannot be treated as taxable income.

On VAT, the Tribunal found that the company did not supply management services.

On the contrary it noted that the services were being supplied by independent property managers who had already charged and accounted for VAT and therefore subjecting the service charge contributions to VAT again would amount to taxing the same services twice.

The Tribunal rejected KRA’s move that forced registration of the firm under Section 34(6) of the VAT Act on the strength of the firm having made taxable supplies exceeding the registration threshold of Sh5 million, arguing that the contributions do not attract taxation.

Consequently, the Tribunal on July 27, 2026, found that the service charge and member contributions are not a taxable supply, and that KRA erred in subjecting the fees to VAT.

The Tribunal allowed KRA to tax the company's own incidental commercial income, such as kiosk and market stall rentals.

“The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to issue the following Orders that the Appeal be and is hereby allowed; the Respondent’s objection decision dated December 2, 2025, be and is hereby set aside. Each party to bear its own costs. It is so ordered,” reads a ruling by Justice Gloria Awuor Ogaga.

“The decision reinforces the principle that fiduciary funds held on behalf of third parties are not taxable income merely because they are received and administered by a management company, providing the much-needed certainty to the real estate and property management sector,” said Diro Advocates LLP.

The verdict brought to a close a winding legal battle that started at the Tribunal, then to the High Court in 2024, before returning to the Tribunal.

“It is the Tribunal’s considered view that the Appellant is a conduit through which the owners pool and disburse their own monies; it renders no service on its own account, adds no margin, and retains nothing as a fee.”

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