In a major development for businesses operating in Tanzania, the Government has announced a new withholding tax on retained earnings, set to take effect in the 2025/2026 financial year.
This new measure was introduced as part of the Minister for Finance’s Budget Speech presented in Parliament and reflects the Government’s broader strategy to enhance domestic revenue mobilization and expand the national tax base.
Under this proposed policy, a 10% withholding tax will be levied on undistributed retained earnings that remain in a company’s books for more than six months after the end of the financial year. The Tanzania Revenue Authority (TRA) will oversee the administration and enforcement of this tax.
What Are Retained Earnings?
Retained earnings represent the portion of a company’s net profits that are not paid out to shareholders as dividends. Instead, these profits are reinvested into the business to support operations, fund expansion, settle debts, or strengthen financial reserves.
While retained earnings are essential for business growth and sustainability, the new tax measure seeks to ensure that companies actively utilize or distribute their profits within a reasonable time frame, or contribute to the national revenue pool.
Key Highlights of the New Withholding Tax on Retained Earnings
FEATURE | DETAILS |
Tax Rate | 10% |
Applicability | Retained earnings that are not distributed within six months after a financial year ends |
Effective Date | Financial year 2025/2026, pending enactment of the Finance Act |
Administered By | Tanzania Revenue Authority (TRA) |
Expected Revenue | TSh 130.6 billion in additional domestic revenue |
What Does This Mean for Your Business?
The new measure will have significant implications for corporate financial management in Tanzania. Businesses—especially profit-making companies—must now reassess their dividend distribution policies, cash flow strategies, and capital retention practices to remain compliant.
Here are some practical steps companies should consider:
- Review Dividend Policies: Assess how and when profits are distributed to avoid unnecessary tax burdens.
- Plan Ahead for Tax Liabilities: Factor in the 10% withholding tax when managing retained profits.
- Stay Compliant: Ensure timely reporting and payment to TRA within the required timeframe.
- Engage Tax Experts: Consider consulting tax advisors or legal experts to fully understand the implications on your financial statements and corporate structure.
Who Will Be Affected?
This measure affects all resident companies in Tanzania that record retained profits in their financial statements. It particularly impacts businesses that traditionally reinvest earnings over longer horizons without immediate distribution.
While startups and high-growth companies may view this as a challenge to their capital strategy, it also presents an opportunity to rethink investment efficiency and explore structured dividend plans that align with compliance requirements.
Policy intent: boosting revenue & encouraging profit utilization
According to the Government’s Budget Statement, the introduction of this withholding tax is anticipated to generate approximately TSh 130.6 billion in revenue. This aligns with Tanzania’s goal to strengthen fiscal sustainability and reduce dependence on external borrowing by tapping into internal revenue sources.
By implementing this tax, the Government also aims to encourage companies to make more productive use of their profits either by distributing dividends to stimulate consumption or reinvesting more strategically into the economy.
Final Thoughts: Prepare Early, Stay Compliant
As the Finance Act that will enact this measure is expected soon, businesses are urged to begin preparing now. Updating financial plans, aligning with accounting teams, and initiating internal discussions with boards and shareholders can help avoid last-minute challenges and tax penalties.
This is also a key moment to engage stakeholders, understand the broader fiscal policy environment, and ensure your company is not only compliant but also resilient in the face of changing tax landscapes.
Need Help Understanding the New Tax?
If you’re unsure how this policy may affect your business—or if you need professional support in adjusting your dividend strategy, managing retained earnings, or ensuring compliance with the new withholding tax. Mak Africa Legal is here to help.
Our team of experienced tax and legal professionals provides tailored advisory services to help companies:
- Understand the legal and financial implications of the new tax.
- Adjust dividend and cash flow policies to minimize risks.
- Stay ahead of upcoming regulatory changes in Tanzania’s corporate tax environment.
Contact Mak Africa Legal today at +255 746 954 394 or info@makafrica.com to schedule a consultation and ensure your business is fully prepared and protected under the 2025/2026 fiscal reforms.