Deemed WHT on Deemed Dividends Across Africa – What You Need to Know

Tax authorities in several African countries have taken a rather unusual approach to taxing company profits: if a company makes good profits but doesn’t pay them out as dividends, the tax authority may simply pretend that it did. These so-called “deemed dividends” rules impose withholding tax as if shareholders had received a distribution, even though no cash has actually left the company.

The idea is to protect or accelerate tax revenues, particularly withholding taxes that would otherwise be triggered on dividends to foreign shareholders. But in practice, these rules can create double taxation, unexpected cash-flow costs, and compliance headaches for companies reinvesting their profits.

We’ve set out below a tour of the main countries that currently apply deemed dividend or undistributed profits rules in Africa: Nigeria, Kenya, Tanzania and Ethiopia, together with how they work, when they were introduced, and what this means in practice.

Nigeria: the long-standing rule for closely held companies

Nigeria has had a deemed dividend rule for many years, found in its Companies Income Tax Act. The law allows the Federal Inland Revenue Service to treat the undistributed profits of certain closely held companies (those controlled by five or fewer persons) as though they were distributed. The key condition is that the company could have distributed the profits “without detriment to its business.”

In practice, this means:

• If a small group of shareholders controls a profitable company but keeps all the money in the company, the tax authority can step in and impose withholding tax as though a dividend had been paid.

• The notional dividend is allocated to shareholders in proportion to their holdings.

• Companies can defend themselves by showing evidence that the retained profits were genuinely needed for reinvestment or working capital.

This rule has been around for decades, but has not been used very much by the tax authorities, so far. Companies should keep strong board minutes and financial forecasts to justify why they have retained earnings. This rule is set to be slightly altered with effect from 1 January 2026 and the introduction of the Nigerian Tax Act. The provision will then apply to a company that is controlled by five or fewer individuals (which may encompass an indirect shareholding). However, this will be supplemented by two other new provisions. One introduces a concept of a controlled foreign company, being a foreign company which is not a resident of Nigeria, which is controlled by a Nigerian company.

The tax authority can deem a controlled foreign company to have declared a dividend to the Nigerian shareholder of that part of the profits that could have been distributed without detriment to the company’s business. Again, the company should retain compelling evidence to show that the retained profits could not have been distributed without detriment to its business, bearing in mind that there is a burden of proof on the Nigerian shareholder to show why it should not be taxed on this basis. If this cannot be done, it may be better to declare a dividend, and bring it into Nigeria through official channels, as the dividend will then be exempt from Nigerian tax.

Alternatively, if the dividend is declared and not brought back to Nigeria, it will be taxable, but a full credit can be claimed for any foreign withholding tax levied on the dividend.

Secondly, a new provision will clarify that a Limited Liability Partnership (LLP) is subject to income tax at the rate applying to a company, but it will also be deemed to have declared the full amount of profits as a dividend, and thus the withholding tax on dividends will apply immediately. Members of an LLP could consider what remuneration the members should earn, given the difference between the maximum rate of individual income tax (25% after 1 January 2026), and the overall rate on distributed profits of a company, which will be 40.6% after 1 January 2026.

Kenya: taxing dividends from “untaxed profits”

Kenya’s modern version of the deemed dividend concept was introduced in the Finance Act of 2018, effective from 1 January 2019. It provides that where a company distributes dividends out of profits that have not been subject to corporate income tax, the company itself must pay tax on those profits at the normal corporate tax rate.

Key points:

• The rule does not apply to all retained earnings, but specifically to profits that escaped taxation in the first place (for example, disallowed expenses or exempt income).

• The Kenya Revenue Authority expects companies to track carefully which reserves come from taxed profits and which do not.

• This has created real administrative pressure, as companies must maintain clear audit trails showing that their dividend distributions are sourced from already-taxed income.

In effect, Kenya’s rule ensures that all profits eventually distributed to shareholders suffer tax at least once.

The bigger problem is in Section 24 of the Income Tax Act. Profits that have not been distributed within 12 months of the end of the financial year of the company, and KRA believes the profits could have been distributed without harming the business, can be deemed to have been distributed, and thus subject to withholding tax. Like the Nigerian provision, this is rather subjective. However, companies must also remember that the burden of proof lies with them, not with the KRA. There was a case on this issue (Ocean Freight (EA) Lt v Commissioner of Domestic Taxes), which the company lost.

The court held that the company had not demonstrated that distributing profits would have prejudiced its business. A company can ask the KRA for a ruling, to give it certainty that the KRA will not later assert that it should have made a distribution, and the court said that seeking this ruling would have been a useful and diligent step for the company. There is a similar provision in Nigeria where a company can seek an advance ruling from the tax authority.

Tanzania: the brand-new undistributed profits tax

Tanzania has recently gone further. The Finance Act of 2025 introduced a specific 10% withholding tax on undistributed profits.

How it works:

• At the end of each financial year, if profits are still undistributed after 12 months, 10% withholding tax is imposed as if those profits had been paid out as a dividend.

• If the company later actually distributes those same profits, the law avoids double taxation by not requiring another round of withholding tax.

This is a very new rule and will likely reshape how Tanzanian companies plan their dividend policies. For groups, it creates an immediate cash-flow risk, as the tax must be paid even when no money leaves the company. This is, in effect, an increase in the corporate income tax rate. It is likely to encourage distributions of profit, and this, in turn, may reduce investment and re-investment.

Ethiopia: taxing retained earnings unless reinvested

Ethiopia has had rules on undistributed profits for over a decade, strengthened in the 2016 Federal Income Tax Proclamation and updated again in 2025.

The framework is simple in concept:

• After-tax profits must be distributed within 12 months, unless they are properly reinvested.

• If they are not distributed or formally reinvested, a tax (generally at 15%) applies on those profits as if they were dividends.

• To count as reinvestment, strict formalities must be followed, such as shareholder resolutions, capital increases, and, in some cases, government approvals.

Ethiopia’s rules have been tested in court, and the authorities are strict on documentation. It’s not enough to simply say you reinvested profits; companies must be able to show the paperwork.

Common themes across Africa

Looking across these countries, we see some clear design patterns:

1. Timing: Nigeria applies its rule at the discretion of the tax authority, while Tanzania and Ethiopia use a fixed 12-month deadline for distributing or reinvesting profits.
2. Scope: Nigeria’s rule applies only to closely held companies, whereas Kenya, Tanzania and Ethiopia cover all companies.
3. Form of tax: Sometimes it’s a withholding tax (Tanzania, Nigeria, Kenya), sometimes a corporate tax charge (Kenya), and sometimes a standalone undistributed profits tax (Ethiopia).
4. Rates: 10% in Tanzania, 15% in Ethiopia, and Nigeria and Kenya apply rates aligned with their existing dividend withholding or corporate tax systems.
5. Evidence: Across the board, keeping clear records of why profits were retained or how they were reinvested is critical.

Practical implications for businesses

• Cash-flow planning: These rules mean tax may be payable even without a dividend being declared. Groups must plan liquidity to avoid nasty surprises.

• Double taxation risks: Unless carefully managed, profits can suffer both corporate tax and deemed dividend tax, with limited relief.

• Reinvestment strategy: If profits are to be reinvested, the paperwork must be watertight. Board minutes, capital budgets, shareholder approvals and regulatory filings should all be in order.

• Group policies: Multinational groups need to align dividend and treasury policies with these rules. In some countries, the safest route may be to declare a modest dividend every year to avoid the deeming provisions.

Final thoughts

The spread of deemed dividend rules across Africa reflects governments’ determination to protect withholding tax revenues. While the policy rationale is understandable, the rules often penalise companies that are simply trying to reinvest in their businesses.

For companies operating across the continent, this means one thing: you cannot afford to ignore these rules. Whether in Nigeria, Kenya, Tanzania, or Ethiopia, the tax authority may decide to tax dividends you never actually paid. Careful planning, meticulous documentation, and early awareness are the only real defences. There is a risk that similar rules will be introduced in more African countries, as they adopt measures that have been introduced elsewhere.

Get in touch with Russell Eastaugh, Head of African Tax Advisory, to discuss how these rules could affect your group structures and dividend planning across Africa.