Section 24 of the income tax Act, CAP 470, empowers the commissioner to collect tax on dividend where a company is deemed to be avoiding tax by non-distribution of dividend.
However, subsection 4, provides that a company may be exempted from this provision if it proves that payment of dividend will prejudice its operations.
Oceanfreight (EA) Limited was caught up in such circumstances of not making a dividend distribution and was unable to demonstrate how dividend payment would imperil the company.
The matter was presented to the tax appeals tribunal alongside a cocktail of other tax matters.
The company failed to demonstrate that nonpayment of dividends was not a tax avoidance scheme. The TAT decision was later upheld by the high court.
Read the full case –
http://kenyalaw.org/caselaw/cases/view/190925/