Shortfall Distribution of Dividend

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Shortfall Distribution of Dividends

According to section 24 of ITA a company is required to distribute a certain fixed proportion of its profit as dividend to shareholders.

This dividend is taxable on the shareholders.

If a company does not distribute the dividend then the govt. looses on the tax which would have been paid on such dividend.

To avoid this al companies are required to distribute adequately their profit their profit within 12 months of the end of accounting year.

This shows that there is double taxation of profit in Kenya, first at the corporate flat rate and then on the hands of the taxpayer.

The ITA empowers the commissioner to determine the amount of distribution that could be made without prejudice to the requirements of the company’s financial needs.

A shortfall is the difference between the amount of dividend determined by the commissioner and the actual distribution by the company.

The commissioner expects the company to distribute the following amounts as dividend to the shareholders:
A.40% of the net adjusted trading profit after tax
B.100% of non trading income such as interest, dividend etc.

Companies excluded from shortfall regulation:

Companies that are subsidiaries of others.
Companies that are subsidiaries of foreign companies and have no resident shareholders
Companies with 51% or more shares held by non residents

Shortfall is deemed to have been distributed and hence been a part of the income of the shareholders and are liable to pay tax. However, it’s the company which is required to pay tax on the shortfall dividend.

Circumstances under which companies will be entitled to more than 60% permissible retention:

a)Where the company’s authorized capital is fully issued and therefore it cannot obtain further funds from shareholders and can only rely on its internal reserves to finance its…...

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