High Court Affirms Dutch “Destination Principle” For VAT on Export Services

Case Study: Dutch Flower Group Kenya Limited v Commissioner of Domestic Taxes (Income Tax Appeal E095 of 2022) [2025] KEHC 12581 (KLR) (Commercial and Tax) (16 September 2025) (Judgment)

Background Fact

• Dutch Flower Group Kenya Ltd (DFG Kenya), is a Kenyan company providing logistical and quality assurance services to two related Netherlands-based companies: Flower Retail Europe BV (FRE) and Flower Connect Holdings BV (FCH).
• The Services: DFG Kenya’s role involved sourcing flowers from Kenyan growers, inspecting them for quality, and coordinating their shipment to ensure they met the stringent standards of the European market. The services were performed in Kenya.
• The Tax Dispute: For the period from January 2019 to June 2021, DFG Kenya treated these services as “exported services” (zero-rated for VAT) in its VAT returns. This treatment resulted in excess input tax over output tax, leading to a refund claim of Kshs 13,049,841.
• KRA rejected the refund claim.

The KRA Argued That:

• The services were consumed in Kenya and therefore did not qualify as exported services.
• DFG Kenya was an agent of the Dutch companies, and as an agent, it could not claim input tax on costs incurred on behalf of its principals.

DFG Kenya Appealed This Decision to The Tax Appeals Tribunal

TAT upheld the KRA’s position. The Tribunal felt bound by a previous High Court decision involving the same parties (ITA E101 of 2020), which had ruled against DFG Kenya on the same issues. DFG Kenya then appealed to the High Court.

High Court Decision & Analysis

• The court acknowledged that the Tribunal was correct to feel bound by the previous High Court decision . However, the High Court itself has the power to depart from its own previous decision if there is a compelling reason.
• The court agreed with DFG Kenya that the previous judgement was decided in ignorance of relevant law. The judge in the previous case had; focused heavily on finding an agency relationship. Based the “place of consumption” on the physical location where the services were performed (Kenya); failed to consider a consistent line of High Court authorities that had established the “destination principle” as the correct test for determining the place of consumption for VAT purposes.
• The court thoroughly analyzed the service agreements and found no agency relationship existed. Key reasons included: The cost-plus 5% model was a standard commercial pricing mechanism for an independent contractor, not evidence of the control required for an agency.; DFG Kenya had no authority to legally bind FRE and FCH to third parties (a fundamental feature of agency).; The right of the Dutch companies to inspect books was a standard audit clause, not a mechanism of operational control.
• The court applied the destination principle, which is well-established in Kenyan case law (Total Touch Cargo, Panalpina, Coca Cola, WEC Lines). This principle states that the place of consumption is where the consumer of the service is located and benefits from it, not where the service is physically performed.
• The consumer and beneficiary of DFG Kenya’s services was the Dutch company (FRE/FCH) that commissioned and paid for them. The services enabled FRE/FCH to efficiently import quality flowers into Europe.
• The argument that Kenyan growers “consumed” the services was rejected. The growers were the subject of the service (their flowers were inspected), not the consumer.
• Therefore, the services were used and consumed outside Kenya (in the Netherlands).

Conclusion: The services qualified as “exported services” under Section 2 of the VAT Act and were correctly zero-rated. As such KRA Lost.