Understanding the Taxation of Dividends in Kenya
Dividends, for tax purposes, refer to any distribution (in cash or in kind) made by a company to its shareholders based on their equity interest, whether during normal operations or winding-up.
The Finance Act 2018 significantly changed the taxation of dividends by repealing and replacing Section 7A of the Income Tax Act, effective from 1st January 2019.
Key Changes Under Section 7A
Under the new Section 7A:
- If a company distributes dividends from profits or gains that have not been taxed, the company becomes liable to pay tax on that amount.
- The tax is charged at the resident corporate tax rate in the year the dividend is distributed.
- This replaces the earlier rule which imposed a compensating tax on distributions made from untaxed or lower-taxed income.
Dividend Withholding Tax Rates
Withholding tax (WHT) applies differently based on residency and ownership structure:
| Recipient Type | WHT Rate | Final Tax |
|---|---|---|
| Resident individual or company | 5% | Final |
| Non-resident individual or entity | 10% | Final |
| Resident company with >12.5% shareholding in payer company | Exempt | – |
Note: Dividend income from both private and publicly listed companies is taxed at the same rates above.
Exemptions for Resident Companies
Dividends are exempt from tax if:
- They are received by a resident company from another company in which it owns more than 12.5% of the shares (directly or indirectly)
- The paying company is a local or foreign subsidiary
However, any expenses incurred in earning this exempt income are non-deductible for tax purposes in Kenya.
Dividends from Foreign Subsidiaries
Dividend income from a foreign subsidiary is also exempt from tax in Kenya, provided:
- The parent company is a Kenyan tax resident
- The shareholding exceeds 12.5%
If the dividends are paid to Kenya from countries with a Double Taxation Agreement (DTA), lower WHT rates may apply under the agreement—subject to compliance with limitation of benefits clauses.
Final Thoughts
The taxation of dividends in Kenya is structured to ensure transparency and fairness while encouraging local and cross-border investment. Investors and companies should:
- Be aware of WHT obligations
- Track the tax status of distributed profits
- Leverage DTA provisions where available
By understanding these regulations, taxpayers can remain compliant while optimizing their dividend-related tax liabilities.
