Taxation of dividends by SACCOs

In Kenya, many individuals are turning to Savings and Credit Cooperative Societies (SACCOs) to invest and save their incomes. A SACCO, registered under the Cooperatives Act of Kenya, allows members to invest through withdrawable deposits (referred to as member’s deposits) and non-withdrawable deposits (known as share capital). The returns on share capital investments are termed as dividends. Some SACCOs may also refer to these returns as bonuses, but the Income Tax Act treats bonuses and dividends synonymously. Essentially, dividends represent a percentage return on a member’s share capital in the SACCO.
When Do SACCOs Pay Dividends?
The process of paying dividends begins with the SACCO’s management, which recommends a dividend percentage based on the financial performance during the preparation of the financial statements. This recommendation is then submitted to the regulator, either the Ministry of Cooperatives or the SACCO Society Regulatory Authority (SASRA), for approval or registration of the financial statements. Once approval is obtained, the SACCO’s Board Members seek the approval of the members during the Annual General Meeting (AGM) or Annual Delegate Meeting (ADM). If the members approve the recommendation, the SACCO is authorized to distribute dividends to its members.
Tax Implications on Dividends
However, distributing dividends is subject to tax regulations. According to section 35(3)(d) of the Income Tax Act, SACCOs are responsible for withholding tax on dividend payments. The applicable withholding tax rate is 5% for residents and 15% for non-residents, as stipulated in the 3rd Schedule of the Income Tax Act. Section 84(2)(b) of the Tax Procedures Act specifies that SACCOs must deduct and remit this withholding tax to the Kenya Revenue Authority (KRA) by the 20th day of the month following the dividend payment.
Penalties for Non-Compliance
Failure to comply with these tax obligations results in penalties and interest. SACCOs that do not withhold and remit the required tax face penalties and an interest rate of 1% compounded monthly from the due date. It is therefore imperative for SACCOs to ensure timely compliance with the withholding tax requirements to avoid financial penalties and maintain their financial integrity.