Tribunal Scraps KSh70 Million KRA Tax Bill Over Mwanzi Road Developers’ Bonus Shares

Tax Tribunal rules Mwanzi Road Developers’ KSh197.9 million bonus-share issue was capitalisation, not dividend distribution, overturning the KSh70.23 million tax assessment.

The Tax Appeals Tribunal has overturned a KSh70.23 million tax assessment imposed against Mwanzi Road Developers Limited.

The Tribunal found that the company’s bonus-share issue did not constitute a taxable dividend.

It consequently cancelled both the income tax and withholding tax assessments.

The judgement was delivered in Nairobi on September 4, 2026, by chairman Robert M. Mutuma.

Members Gloria A. Ogaga, Dr Timothy B. Vikuru and Jimmy M. Malla also sat.

The dispute arose from a corporate restructuring completed by Mwanzi several years earlier.

At its centre was one crucial question concerning accumulated company profits.

When retained earnings become bonus shares, have those profits actually been distributed?

KRA said they had.

Mwanzi argued they had simply been converted into share capital.

The Tribunal ultimately accepted the company’s interpretation.

KRA’s Tax Strike

The dispute began after KRA flagged Mwanzi Road Developers for review in January 2024.

The authority had noticed a Capital Gains Tax declaration requiring further examination.

Mwanzi had reported a capital loss of KSh10.86 million against capital gains.

KRA consequently launched an audit covering the years 2020 through 2024.

The review examined Capital Gains Tax, PAYE and corporate Income Tax obligations.

The audit found no anomalies in the company’s PAYE or Capital Gains Tax declarations.

KRA instead focused on retained earnings and a subsequent share issue.

In December 2021, Mwanzi increased its nominal share capital from KSh100,000 to KSh400 million.

Part of that increase was financed through capitalisation of retained earnings.

On January 28, 2022, directors approved another share allotment.

The Foundation received 2,000 shares after paying KSh2 million in consideration.

It also received 197,900 bonus shares worth KSh197.9 million.

Those shares were issued from retained earnings and accumulated profits.

Costronal Holdings S.A. separately received 200,000 ordinary shares.

KRA treated the KSh197.9 million bonus issue as a deemed dividend.

The authority relied on Section 7(1)(b)(ii) of the Income Tax Act.

That provision applies where a shareholder is discharged from monetary obligations owed to the company.

KRA argued that the Foundation should have paid for the additional shares.

Instead, Mwanzi allegedly used retained earnings to satisfy that obligation.

The Commissioner therefore treated the transaction as a deemed dividend distribution.

Tribunal Draws Line

Mwanzi challenged that interpretation on both legal and accounting grounds.

The company argued that retained earnings already formed part of shareholders’ equity.

Share capital likewise formed part of shareholders’ equity.

Converting retained earnings into shares therefore merely changed their classification.

No money or property left the company during that transaction.

The shareholder’s proportional interest also remained unchanged.

The Tribunal agreed that Section 7(1)(b)(ii) required something more.

There had to be an obligation measurable in money owed by the shareholder.

The shareholder then had to be discharged from that specific obligation.

The Tribunal found KRA had failed to establish such an obligation.

KRA had relied on Mwanzi’s Articles of Association, requiring shares to be fully paid.

But the Tribunal found that provision restricted the company rather than creating shareholder debt.

“Where shares are instead allotted credited as fully paid out of capitalised reserves, no sum ever falls due,” the Tribunal held.

“No debt being owed by the Foundation, nothing was capable of being discharged.”

The Tribunal also identified an inconsistency in KRA’s calculations.

The Commissioner claimed the Foundation owed KSh199.9 million for its shares.

Yet KRA said only KSh197.9 million had allegedly been forgiven.

The remaining KSh2 million had actually been paid for the separate shares.

The Tribunal said the evidence did not support KRA’s theory.

The documents showed payment for 2,000 shares, but none for bonus shares.

The Tribunal then examined established principles governing capitalisation issues.

It cited Bouch v Sproule and Inland Revenue Commissioners v Blott.

Those authorities recognise that companies can convert accumulated profits into capital.

Nothing leaves the company during such a transaction.

Its assets and net worth remain unchanged after the conversion.

Only the internal composition of shareholders’ equity changes.

The Tribunal therefore distinguished a capitalisation issue from dividend distribution.

KSh70 Million Falls

The finding on dividends immediately affected the remaining tax assessments.

Section 7A applies where dividends are distributed from untaxed gains or profits.

However, the provision first requires an actual dividend distribution.

The Tribunal described that distribution as the essential “gateway” to Section 7A.

Because no dividend existed, the gateway remained closed.

The Tribunal consequently cancelled the KSh56.47 million Section 7A assessment.

The KSh13.75 million withholding-tax assessment suffered the same fate.

KRA’s withholding-tax claim depended entirely upon the alleged deemed dividend.

Once that premise failed, the related tax liability could not survive.

The Tribunal therefore rejected the withholding-tax assessment as well.

KRA had also challenged the Foundation’s tax status and exemption certificate.

It argued that the Foundation was an incorporated irrevocable trust.

But the Tribunal found those questions irrelevant without an underlying dividend.

“They cannot supply a dividend where none exists,” the Tribunal ruled.

The judgement also reaffirmed the strict interpretation applicable to taxing statutes.

The Tribunal said Parliament could have expressly treated capitalisation issues as deemed dividends.

It had not done so under the provision relied upon by KRA.

The Tribunal therefore declined to create a tax charge through implication.

The final orders were decisive.

The appeal was allowed, and KRA’s January 28, 2026, objection decision was set aside.

Each party was ordered to bear its own costs.

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For Mwanzi Road Developers, the decision wipes away a KSh70.23 million tax liability.

As for KRA, it underscores the need to establish every statutory requirement supporting an assessment.

For companies capitalising retained earnings, the ruling draws an important legal distinction.

Turning accumulated profits into share capital is not automatically the same as distributing those profits.

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