Finance Bill 2026: The Deemed Dividend Trap That Could Turn KRA Into A Silent Shareholder In Kenyan Businesses

The Finance Bill 2026 debate on deemed dividends must be handled carefully because the idea is not entirely new. KRA already has power under Section 24 of the Income Tax Act to treat undistributed company income as if it had been distributed as dividends, where the Commissioner believes that the company failed to distribute income that could have been paid out without damaging the needs of the business. The real danger in the 2026 proposal is that it appears to harden an existing discretionary power into a heavier statutory weapon by introducing a hard minimum of 60%.

That distinction matters. The current law already gives KRA a route to intervene where a company is accused of retaining profits mainly to avoid dividend tax. But the existing wording speaks of “that part of the income” which the Commissioner believes could reasonably have been distributed. It does not set a fixed floor. In other words, the Commissioner may intervene, but the portion is still supposed to be determined by the facts of the business, the cash position, the company’s obligations, and whether distribution would prejudice operations.

Finance Bill 2026 changes the weight of that power. By replacing the open phrase with a minimum threshold of at least 60% of the relevant undistributed income, the Bill sends a clear message to business owners: once KRA forms the view that your company could have distributed profits, the exposure is no longer flexible in the same way. Sixty percent becomes the floor, not the ceiling. That is why the proposal is so dangerous for companies that are building slowly, reinvesting heavily, or carrying profits on paper without matching cash in the bank.

This is not a small technical amendment. It touches the heart of how businesses survive. In the real economy, profit does not always mean cash. A company can be profitable on paper but still have money tied up in inventory, receivables, land, construction, machinery, credit terms, pending invoices, or expansion plans. A serious tax system must understand that businesses do not grow by distributing every shilling they earn. They grow by retaining capital, reinvesting it, and taking long-term risks.

The danger is that the government is increasingly treating business profits as idle money waiting to be harvested. That thinking is economically reckless. A business that retains earnings may be preparing to open another branch, buy a delivery van, import machinery, expand production, pay suppliers, hire new staff, or survive a difficult season. When government steps in and treats retained earnings as dividends, it is no longer merely taxing income. It is interfering with capital allocation inside private enterprise.

The current legal trigger is important. KRA cannot simply say that every retained shilling is automatically a dividend. The Commissioner must think that the income could have been distributed within the required period without prejudice to the company’s business needs. But that opinion itself gives the taxman enormous power, and the proposed 60% minimum makes the consequences heavier. It shifts the discussion from whether a certain portion can reasonably be deemed distributed to a starting point where at least 60% is exposed once KRA disagrees with the company’s retention decision.

Take a simple SME example. A small manufacturing company makes KSh 10 million in after-tax income. The directors decide not to declare dividends because they want to buy a packaging machine worth KSh 6 million, increase stock by KSh 2 million, and keep KSh 2 million for wages and electricity. Under a business-minded policy environment, that is a good decision. The company is expanding capacity. Under the proposed approach, if KRA concludes that the company could have distributed profits, at least 60% of the relevant income could be treated as a deemed dividend, creating withholding tax exposure even though no shareholder received cash.

That means the business may be forced to pay tax on money it never paid out. If the deemed dividend is KSh 6 million, the withholding tax could be charged on that deemed amount depending on the applicable shareholder category and rate. For a resident individual shareholder, dividend withholding tax is generally 5%. For non-residents, the rate is generally 15%, subject to treaty relief where applicable. The immediate problem is liquidity: the company may have already committed the money to machinery, stock, suppliers or loan repayments, yet KRA is demanding tax as though cash had gone to shareholders.

Now look at a real estate company. It develops apartments and records profit because units have been sold on paper, but the actual cash is coming in slowly through instalments. Some buyers are late. Some mortgage disbursements are pending. The company still has contractors to pay, approvals to clear, and finishing works to complete. On paper, there is profit. In reality, cash is trapped in the project. If KRA treats at