The High Court has ordered the Tax Appeals Tribunal to recalculate the tax relief on a contentious hotel and apartment project by hospitality firm Hemingways Watamu Limited, handing a reprieve to the Kenya Revenue Authority (KRA), which is fighting to block a Sh944 million claim by the investor.
High Court Judge Julius K. Ng’arng’ar directed the tribunal to reassess the investment tax deduction on the project in Kilifi County, undertaken about seven years ago.
“It is a finding of this court that the appellant’s appeal partially succeeds. The tribunal erred in awarding investment deduction at the rate of 150 percent, absent clear statutory authority for the enhanced rate in respect of the respondent’s Watamu hotel,” the judge said in a decision on an appeal by KRA.
“The judgment of the Tax Appeals Tribunal delivered on October 4, 2024, is hereby set aside to the extent that it allowed investment deduction at the rate of 150 percent, and it is substituted with a finding that the respondent is entitled to investment deduction at the statutory rate of 100 percent,” Justice Ng’arng’ar added in the October 7, 2025, decision and directed that the matter be remitted back to the tribunal to decide on the Value Added Tax (VAT) assessment.
The feud dates back to 2018 when Hemingways built a hotel and apartments in Watamu for Sh629,357,254 and later claimed Sh944,035,881 as being 150 percent of the total construction cost, in line with the investment deduction allowance policy for hotel and manufacturing buildings, and machinery used for manufacture.
Under the Income Tax Act policy designed to entice investments, firms investing more than Sh200 million outside Nairobi, Mombasa, and Kisumu enjoy a 150 percent tax deduction on money invested in hotel and manufacturing buildings, and machinery used for manufacture.
Hemingways argued that, based on the provisions of the Income Tax law, it was entitled to claim Sh944,035,881 — a 150 percent investment deduction on its investment.
KRA, however, said that during a review of the company’s returns, it noted that the applicable rate for Hemingways’ project was 100 percent and not 150 percent as claimed by the hotelier. The authority therefore disallowed the overclaimed amount of Sh314,678,627 for the 2018 period.
The KRA review resulted in an adjusted investment deduction claim of Sh417,351,449 for 2018 and Sh30,201,052 for 2019.
The taxman maintained that the 150 percent claim applies only to investors who satisfy both conditions of having a building and installing machinery therein, as provided under the Second Schedule, Paragraph 24(1)(f) of the Income Tax Act.
“The Tribunal finds that contrary to the respondent’s assertion that the provision only applies to buildings used for manufacture, Paragraph 24(3)(d) of Part I of the Second Schedule to the Income Tax Act provides a further definition of the term ‘building’ as any building structure, then enumerates civil works and other structures that qualify as buildings in the case of buildings used for manufacture,” the tribunal said, noting that this provision does not exclude a hotel building from the definition of the term ‘building’.
“It follows that the appellant, having incurred qualifying expenditure of over Sh200,000,000 in the construction of a hotel building in Watamu, Kilifi County, being outside the City of Nairobi or the municipalities of Mombasa or Kisumu, was allowed to deduct investment deduction at the rate of 150 percent of the qualifying capital expenditure, and the associated construction costs were allowable,” it said.
The tribunal, chaired by Robert Mutuma, said KRA erred in disallowing costs incurred by Hemingways in the construction of the Watamu hotel. “The appellant’s costs incurred in the construction disallowed by the respondent are allowable,” it ruled.
“The upshot of the foregoing is that the appeal has merit and therefore succeeds. Consequently, the tribunal makes the following orders: (a) The appeal be and is hereby allowed; (b) The respondent’s objection decision dated 5th October 2023 is hereby set aside,” the tribunal said.
Dissatisfied with the verdict, KRA moved to the High Court on November 20, 2024, with several objections, including a claim that the tribunal erred in law and in fact in holding that the hotelier qualified for investment deduction at the rate of 150 percent.
