INVESTMENT INCOME

• This is income derived from an investment vehicle.

• It includes:

➢Dividends income
➢Interest payments
Taxation of Dividends

• Dividend paid by resident companies to the individual shareholders is

taxable income.
• Dividends are taxed on withholding tax basis.
• A resident company controlling more than 12.5% shareholding is exempt
from tax for dividend received from such a co.

• In comparison to employment income which is brought to tax in the year it

is earned, dividend income is taxable in the year it was paid out.
 Dividends:
For tax purposes, the following amounts are taken to be dividend
income
• Cash dividends

• The distribution of profits in case of voluntary winding up ( whether cash or non-

cash)

• The issue of debentures or redeemable preference shares without any payment.

Dividend in this case shall be higher of the nominal value or Redeemable value.

• The issue of debentures without any payment

• Issuance of Debentures or redeemable Preference shares for part payment i.e. at

a discount.
Classification of Dividends

Qualifying dividends

Non-qualifying dividends

Exempt
 Qualifying dividends

• These are dividends subject to withholding tax only-meaning the

withholding tax charged on them is final.

• Resident WHT is 5% on gross amount & 10% for non residents.

• These are dividends paid by:
➢Private companies
➢Public Companies
➢SACCOs
Non-Qualifying Dividends
➢For non qualifying dividends the withholding tax of 15% is not final.

➢The non qualifying dividends will be aggregated with other incomes

and taxed further.

➢Non qualifying dividends are dividends paid by cooperative societies

other than Sacco’s. e.g Kakamega farmers cooperative
society.((Taxed under section 19A) - S2)
Exempt dividends

• Exempt dividends – Paid to exempt persons listed on 1st Schedule or

those received by a resident co. controlling >12.5% - S7(2)
 Interest
➢Interest incurred wholly & exclusively in generation of income is tax
allowable
➢But where a company is controlled by non resident person together
with four or fewer resident persons the interest deductibility is
restricted only to the extent that the total indebtedness of the
company does not exceed three times the paid up share capital and
revenue reserves(thin capitalization-debt to equity ratio of 3:1)
➢Thin capitalization ratio from extractive industry is 2:1
(e.g.petroleum, mining, geothermal companies e.t.c)
Interest Classification

• Qualifying interest

• Non qualifying interest

Qualifying Interest

➢Is interest receivable by an individual in any year of income from

financial institutions e.g. Banks, insurance companies, treasury Bills
and bonds.
➢Interest is subject to Withholding tax as final tax at a rate of 15%
Non-Qualifying Interest
• This the interest that is taxed further.
• Eg. All income accruing to a person other than individual
• Interest in excess of shs 300,000 of housing development bonds
• Interest accruing to individuals other than from financial institutions
• If the amount is stated as net ,it should be converted to gross .
• Gross= Net Interest * 100%
• 85%
 Exempt Interest
• Interest from Abroad
• Interest fro saving account with post bank
• Interest received from pension
• Interest received from gvt infrastructure bonds
• Home ownership plan interest up to 3m
• Interest by non resident from govt treasury bonds
• Interest from a tax reserve certificate
Deemed Interest
• A company excluding banks & financial institutions ,that has an
interest free loan from a related non-resident entity is required to
compute deemed interest and add it back to tax computation.(wef
june 2010).

• The deemed interst attract 15% WHT

• From 2011 the deemed interest is based on the commissioners

prescribed rates.