Why 30pc tax on dividend is not reasonable

The Income Tax Bill, 2018 which is still on the floor of the National Assembly has sought to increase this threshold to 25 percent. 

A recent headline published in the Business Daily Newspaper titled “new 30pc dividends shocker hits investors” has triggered a lot of panic among investors who have invested through holding structures.

The amendments introduced by the Finance Act, 2018, seeking to streamline the taxation of distribution of dividends were long overdue in the Kenyan income tax regime. However, the amendments were poorly drafted, creating room for ambiguity in their interpretation.

The amendments scrapped the requirement by companies to maintain a dividend tax account. As a result, compensating tax which would be chargeable on distribution of untaxed gains or profits, was also abolished.

To ensure that no distributions are made from untaxed gains, the Finance Act, 2018 introduced corporation tax at the resident rate, currently at 30 percent, on untaxed gains distributed as dividends. This is the regime that has replaced compensating tax.

The distribution of qualifying dividends attracts withholding tax at the rate of five per cent for resident and 10 per cent for non-resident shareholders. However, distribution of dividends to a company controlling more than 12.5 percent of the distributing company is exempt from withholding tax.


The Income Tax Bill, 2018 which is still on the floor of the National Assembly has sought to increase this threshold to 25 percent. The article argued that the subsequent distribution of exempt dividends received from a subsidiary would be subject to further taxation at the rate of 30 percent. A strict interpretation of these provisions would lead to the imposition of additional tax burden on distributions made by holding companies to the shareholders.

This is because the wording of the provisions suggests that distributions drawn from gains or profits on which no tax has been paid would include distribution of exempt dividends received by holding companies from their subsidiaries where they hold more than 12.5 percent. This is a possible interpretation of the law as it is.

However, the above interpretation may be considered as unreasonable for failing to take into account the business realities, prevailing conditions and intentions of the National Assembly in making the amendments.

Firstly, it would render the tax exemption on distribution of dividends to holding companies pointless as it would create a higher tax burden than the tax saving it was intended to provide.

Secondly, dividends are ordinarily distributed from taxed profits. As such, further distribution of the dividend income received does not change the fact that the income has undergone through the full taxation cycle.

Lastly, it is imperative to determine whether exempt income would be deemed to have been taxed for purposes of the subject provisions.

Therefore, the interpretation of the provisions may be construed as imposing corporation tax on further distribution of dividends received by holding companies from their subsidiaries. However, in our opinion, this interpretation is farfetched and would defeat the true intention of the National Assembly.

Patrick Murimi and Samuel Kioko, Senior tax associates, KN Tax LLP