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Treasury CS Henry Rotich. FILE PHOTO | NMG 

The expanded definition of dividends to cover all benefits (or expenses) by companies to shareholders will erode the returns for investors and reduce the appetite for bonds.

KPMG Kenya associate director of tax and regulatory services Robert Waruiru on Thursday said corporates are likely to cut investment in tax-exempt bonds since the Finance Act 2018 now provides that any form of payment to shareholders be subjected to taxation.

He explained that bonds such as Kenya Electricity Generating Company’s #ticker:KEGN Sh14.06 billion infrastructure bond set to mature next year will see firms that bought it taxed on payment.

“When a company earns that interest, the interest is not subject to tax, when it comes to computing tax liability.

“But when it wants to distribute that interest to shareholders as dividends, it will first of all have to pay 30 per cent income tax on that interest,” said Mr Waruiru.


“That is equal to a compensating tax, which is a tax on the distribution of untaxed income to shareholders.”

“Does it actually then make sense to invest in these infrastructure bonds, because you are getting interest income, which is tax exempt but when you want to distribute it to shareholders, you pay tax?” Mr Waruiru asked.

The audit firm says this will dampen companies’ appetite for infrastructure bonds since it will be beneficial for one to invest in such bonds as an individual and get the tax exempt return.

Companies are also set to incur additional costs to pay withholding taxes on expenses such as giving shareholders umbrellas, which is popular during many annual general meetings.

KPMG further says for as long as one is a shareholder or spouse of shareholder and a company is meeting any of their expense, that will now be deemed as dividend and taxed.

“If you own a company and it pays for your wife to go shopping, previously it used to be just expensed and the taxman did not collect anything.

“But now, that expense will be deemed as an expense to a shareholder and the company will be required to pay tax.”

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