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 least 60% of the undistributed income as deemed dividends, the company may be taxed into a cash crisis before it has even completed the project cycle.
The same applies to agriculture, logistics, construction and trading businesses. Many Kenyan businesses operate in an environment where customers delay payment, banks are cautious, interest rates are high, the shilling moves, imported inputs are expensive, and government itself is often one of the slowest payers. In such an economy, retained earnings are not a luxury. They are oxygen. To tax them as though they have been distributed is to confuse accounting profit with spendable money.
This proposal also punishes prudence. A responsible business owner does not empty the company bank account simply because the year ended with a profit. A responsible owner prepares for bad months, tax obligations, payroll, credit shocks, currency movements, and expansion. But Finance Bill 2026 risks sending the opposite message: do not retain too much, do not build reserves, do not grow too visibly, because KRA may decide that your retained income should have been dividends.
That is why many in the business community will read this proposal politically as well as economically. A government that is comfortable taxing imagined dividends is a government that does not trust private capital. It behaves as if every successful entrepreneur is a suspect, every expanding SME is hiding something, and every company with retained earnings is avoiding tax. That attitude creates fear. It tells citizens that progress itself makes them visible to the taxman.
The political reading is even more worrying in a country where independent money often creates independent voices. A businessperson with capital can fund civic education, support candidates, hire lawyers, challenge bad policy, sponsor media, or speak without begging government for favours. When taxation becomes punitive, it does more than raise revenue. It weakens independent economic power. Many will see this as part of a broader pattern where the State appears uncomfortable with citizens who are financially strong enough to say no.
This is why the business community must stop treating Parliament and the Senate as distant political theatres. Bad tax law does not fall from the sky. It is passed by MPs. It survives because committees approve it, party machines defend it, and legislators who do not understand business clap for provisions that will destroy employers in their own constituencies. If businesses want a better tax environment, they must push for pro-business leaders in Parliament and Senate.
A pro-business leader is not someone who gives speeches about entrepreneurship during campaigns and then votes for laws that punish capital. A pro-business leader understands cash flow, working capital, depreciation, credit cycles, retained earnings, reinvestment, manufacturing timelines and the difference between paper profit and bank balance. Kenya needs lawmakers who can ask KRA hard questions before giving it more power over private enterprise.
The 60% minimum is especially dangerous because of the phrase “at least.” In ordinary language, “at least 60%” means the minimum. It does not stop at 60%. Once the legal trigger is met, the exposure could be argued upward depending on the facts, KRA’s interpretation, or future administrative practice. That uncertainty is poisonous. Investors do not fear tax alone. They fear unpredictable tax, discretionary tax, and tax rules that allow the State to second-guess legitimate business decisions after the fact.
Those defending the amendment may argue that it targets tax avoidance by companies that deliberately refuse to distribute profits so that shareholders avoid dividend tax. That concern is not imaginary. Some companies can abuse retention to defer tax. But the solution is not to create a blunt minimum that can catch genuine reinvestment. The right approach is evidence-based enforcement: examine the company’s cash position, capital commitments, debt, expansion plans, working capital needs and shareholder conduct before deeming income as distributed.
A fair system would ask practical questions. Did the company have free cash after meeting its business needs? Were profits genuinely needed for expansion? Were there board minutes showing reinvestment plans? Was there a capital budget? Were there bank facilities, supplier obligations or contracts requiring cash retention? Was the company hoarding profits for avoidance or preserving capital for survival? These questions matter because tax policy must distinguish between avoidance and growth.
Instead, the proposed hard minimum risks collapsing all those realities into a single aggressive presumption. Once KRA believes distribution could have happened, the business begins from a position of exposure. That is not how a country builds industry. Kenya says it wants manufacturing, jobs, exports and local investment, but then proposes tax rules that make reinvestment more expensive and uncertainty more severe. You cannot shout “Buy Kenya, Build Kenya” while punishing businesses that retain earnings to build capacity.
The exemption angle also raises fairness questions. Special Economic Zone companies, Nairobi International Financial Centre companies and REITs may be insulated in various ways because their dividend structures are already treated differently or exempt under specific regimes. That leaves ordinary SMEs, local manufacturers, family companies and private real estate firms feeling exposed. The result is a two-tier economy: protected capital for those in preferred regimes and harsher treatment for ordinary local enterprise.
For the small business owner, the message is brutal. You work, pay corporation tax, survive expensive power, pay rent, pay staff, comply with eTIMS, chase clients, fight banks, and finally make a profit. Then instead of being allowed to reinvest, KRA can ask why you did not distribute and may treat a minimum portion as dividends. That is how government slowly becomes a silent shareholder without taking risk, without contributing capital and without carrying the pain of building the business.
Kenya must be careful. The country does not have a shortage of taxes. It has a shortage of trust, productivity, discipline in public spending, and policies that reward enterprise. If every profitable company is treated as a target, serious investors will price that risk into their decisions. Some will avoid expansion. Some will stay informal. Some will move capital elsewhere. Some will simply stop trying to grow visibly. That is how bad tax policy kills ambition quietly.
The strongest objection to this proposal is not that companies should never pay dividend tax. Of course, when dividends are actually paid, tax should apply. The objection is that the State should not casually tax money that has not left the business, especially where that money is needed for growth, resilience, jobs and production. Tax actual dividends. Challenge fake retention where there is evidence. But do not design a rule that can punish genuine reinvestment.
This is the moment for business associations, chambers of commerce, manufacturers, SMEs, accountants, lawyers, real estate players and investors to speak clearly. They must demand safeguards, clear criteria, appeal mechanisms, protection for genuine reinvestment, and a narrow application of deemed dividend rules. Silence will be expensive. Once a harsh tax power enters the law, businesses will spend years fighting assessments that should never have been issued in the first place.
Finance Bill 2026 should not be allowed to convert KRA into a boardroom director. The State has the right to collect lawful taxes, but it should not be allowed to dictate how every profitable company manages retained earnings. Kenya needs a tax system that collects revenue without choking enterprise. It needs leaders who understand that businesses are not enemies of the State. They are the people who employ, produce, innovate, pay tax and keep the economy breathing.
The bottom line is simple. The law already exists. KRA already has power under Section 24 to deal with avoidance through non-distribution of dividends. What Finance Bill 2026 appears to add is a harder minimum of at least 60% once the trigger is met. That is the real fight. Kenya must not allow a discretionary anti-avoidance tool to become a blunt weapon against businesses that are simply trying to grow.
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