By the end of the topic the student should be able to:
- Define dividends, and interest
- State what constitutes dividend, and interest
- Calculate dividend, and interest income
- Explain the tax rules governing dividend, and interest
Investment income is one of the specified sources of incomes. Investment income is received in form of dividends or interest
9.1 Dividend income
“Dividend” means any distribution (whether in cash or property, and whether made before or during a winding up) by a company to its shareholders with respect to their equity interest in the company, other than distributions made in complete liquidation of the company of capital which
was originally paid directly into the company in connection with the issuance of equity interests;
- In a voluntary winding up of a company, such amounts distributed as profits including any profits realized on the disposal of fixed assets of a company, whether before or during the winding up and whether paid in cash or otherwise.
- The issue of debentures or redeemable preference shares or ordinary shares for free. The dividend amount shall be taken to be the greater of nominal or redeemable value and the market value.
- The issue of debentures or redeemable preference shares or ordinary shares at a discount provided the discount factor exceeds 5% of the nominal/par value. In this case the discount amount shall be taken as the dividend and taxed accordingly.
9.1.2 Exempt Dividends
- Dividends received by a company that owns or controls 12.5% or more of the voting powers of the paying company.
- Dividends received from outside Kenya or from non-resident companies.
- Dividends received by a resident insurance company from its investment income of the life insurance fund.
- Dividends amount being the discount factor on the issue of debentures or redeemable preference shares or ordinary shares provided the discount factor is less than 5% of the par value.
9.1.3 Qualifying Dividends
Qualifying dividends are dividends paid by limited companies and SACCOS. Thaey are subject to withholding tax at 5% which is final. This is a tax incentive meant to encourage growth in capital markets by taxing dividends at a low rate.
9.1.4 Non-Qualifying Dividends
These are dividends paid by designated co-operative societies other than SACCOS. The withholding tax rate is 15% which is not final
9.2 Interest income
- Amount payable in any manner in respect of a loan, deposit, debt, claim or other right or obligation,
- Premium or discount by way of interest
- Commitment or service fee paid in respect of any loan or credit;
- Discount received upon final redemption of a bond
9.2.1 Exempt interest
- Interest on tax reserve certificates which may be issued by authority of the Government.
- Interest on a savings account held with the Kenya Post Office Savings Bank.
- Interest earned on contributions paid into the Deposit Protection Fund established under the Banking Act.
- Interest paid on loans granted by the Local Government Loans Authority established by section 3 of the Local Government Loans Act.
- Interest income accruing from all listed bonds, notes or other similar securities used to raise funds for infrastructure and other social services, provided that such bonds, notes or securities shall have a maturity of at least three years.
- Interest income generated from cash flows passed to the investor in the form of asset-backed securities.
- Interest earned on deposits not exceeding Kshs. 3 million which deposits are made in qualifying institution in registered home ownership savings plan (plan)
All other interest income is subject to withholding tax (refer to WHT rate).
9.2.2 Qualifying interest
This is the aggregate interest, discount or original issue discount receivable by a resident individual in any year of income from –
(i) a bank or financial institution licensed under the Banking Act, or
(ii) a Building Society registered under the Building Societies Act which in the case of housing bonds has been approved by the Minister for the purposes of this Act, or
(iii) the Central Bank of Kenya:
Qualifying interest is subject to final withholding tax
9.2.3 Non qualifying interest
This is interest received by a body corporate or non- resident individual or a resident individual from sources other than those specified above. Withholding tax on non qualifying interest is not final