Analysis of the latest taxation data for nine months ended March 2026 shows that taxes paid by corporations and other enterprises on their income, profits and capital gains rose by a minimal 5.24 percent to Sh351.6 billion.

This marked the weakest expansion since the economy emerged from the Covid-19 downturn, extending a four-year decline from the 21.3 percent expansion recorded in the nine months to March 2022.

The figures indicate that while Corporate Kenya remains profitable, earnings growth is steadily losing momentum amid weaker consumer demand, higher operating costs and an increasingly heavy tax burden.

Against that backdrop, Treasury had sought a new avenue for raising revenue by targeting a minimum percentage of retained corporate earnings.

The Treasury proposal would have required companies to distribute or be deemed to have distributed at least 60 percent of retained earnings, triggering dividend taxation on a much larger portion of corporate profits.

This was an amendment to the prevailing law, where the Commissioner for Large and Medium Taxpayers can demand tax after an assessment on undistributed profits, but the law does not provide a minimum threshold.

Under the Income Tax Act, deemed dividends are charged withholding tax at the rate of five percent for Kenyan residents and 15 percent for non-residents.

The proposal in the Finance Bill 2026 immediately ran into resistance from major business organisations, including the Institute of Certified Public Accountants of Kenya, the Association of Chartered Certified Accountants, Eastern Africa, the Kenya Bankers Association, the Kenya Private Sector Alliance, the Kenya Association of Manufacturers, Deloitte, KPMG, and EY.

Business groups argued that retained earnings are critical for financing expansion projects, maintaining liquidity, strengthening balance sheets and cushioning firms during periods of economic uncertainty.

Treasury Cabinet Secretary John Mbadi defended the bid to trigger dividend taxation on a much larger portion of corporate profits when he presented the Budget statement, arguing that some companies were indefinitely holding back profits to avoid dividend taxation.

“When companies make profits, those profits should find their way back to shareholders within a reasonable time,” Mr Mbadi told lawmakers on June 11.

“Currently, some companies have been holding back their profits indefinitely, simply to defer paying dividend tax. This is a loophole that needs to be addressed.”

The Finance and Planning Committee of the National Assembly, however, acknowledged sustained opposition from manufacturers, bankers, accountants and other private-sector lobbies.

The committee, chaired by Molo legislator Kuria Kimani, noted that stakeholders had warned that the proposal risked creating cash flow constraints and could undermine investment plans.

The House team subsequently recommended that the proposal by the Treasury be watered down from a minimum of 60 percent to a maximum of 40 percent as the threshold for deemed dividend distribution.

“To balance revenue objectives and business sustainability, the committee observes that a 60 percent deemed dividend threshold could place undue pressure on companies and constrain investment decisions,” the Kimani-led team wrote in the report tabled in the House.

The reduced threshold, however, failed to survive amid strong resistance from MPs.

During debate preceding passage of the Finance Bill 2026 last Thursday, Mr Kimani gave notice to drop the clause entirely, handing businesses a victory.

The collapse of the dividend tax proposal removes a potential source of additional revenue at a time when corporate tax growth is slowing.

While total tax collections continue to grow, taxes linked directly to company profits are losing momentum.

The annual increase in corporate tax receipts has fallen from Sh43.4 billion in 2021/22 to Sh37.3 billion, Sh28.8 billion, Sh21 billion and now Sh17.5 billion.

At the same time, the share of total tax revenue contributed by corporations has started to decline, falling to the lowest levels in four years.

Corporate taxes accounted for 17.94 percent of total collections in the nine months to March, down from 18.72 percent a year earlier and below the recent peak of 19.1 percent recorded in 2023/24.

The collections expanded by 21.3 percent in the nine months to March 2022 before easing to 15.1 percent in 2023, 10.1 percent in 2024, 6.7 percent in 2025 and now 5.24 percent in 2026.

The trend mirrors the challenges many firms have reported in recent years, including elevated borrowing costs, higher energy and transport expenses, exchange-rate volatility and subdued household spending.

Listed companies across sectors have increasingly pointed to shrinking consumer purchasing power as households grapple with higher living costs and heavier tax burdens, making it harder for businesses to sustain rapid revenue growth.