Tanzania’s 2025/2026 Budget: The Proposed 10% Withholding Tax on Retained Earnings

In the 2025/2026 National Budget, the Government of Tanzania proposed the introduction of a 10% withholding tax on retained earnings that remain undistributed beyond a defined period. The proposal was announced by the Minister for Finance during the Budget Speech presented to Parliament and forms part of a broader fiscal strategy to strengthen domestic revenue mobilisation.

If enacted through the Finance Act, 2025, this measure will mark a notable shift in how corporate profits are taxed in Tanzania, particularly affecting companies that traditionally retain earnings for reinvestment rather than immediate dividend distribution.

Legal Status: Proposal Pending Enactment

It is important to note that, as at the date of this publication:

• The 10% withholding tax on retained earnings is a budgetary proposal
• It will only become legally binding upon enactment of the Finance Act, 2025
• Implementation and enforcement will be administered by the Tanzania Revenue Authority (TRA)

Companies should therefore treat this measure as high-probability upcoming law and begin preparing, while monitoring the final wording of the Finance Act and any related regulations or TRA guidance.

What Are Retained Earnings?

Retained earnings are the portion of a company’s net profits that are not distributed to shareholders as dividends, but instead kept within the business. They are commonly used to:

• Finance expansion or capital expenditure
• Strengthen working capital
• Service debt obligations
• Build financial reserves

Under existing tax rules, retained earnings are not subject to additional tax once corporate income tax has been paid. The proposed measure introduces a new layer of taxation based on timing of distribution.

How the Proposed Withholding Tax Will Work

Under the Budget proposal:

• A 10% withholding tax will apply to undistributed retained earnings
• The tax is triggered where profits remain undistributed more than six months after the end of the financial year
• The obligation to withhold and remit the tax will rest with the company
• TRA will oversee assessment, collection, and enforcement

Key Features at a Glance

Feature	Description
Tax rate	10%
Tax base	Retained earnings not distributed within six months after year-end
Effective period	Financial year 2025/2026 (subject to Finance Act)
Administering authority	Tanzania Revenue Authority (TRA)
Government revenue estimate	Approx. TZS 130.6 billion

Policy Rationale Behind the Measure

According to the Government’s fiscal policy objectives, the introduction of this tax aims to:

• Expand the domestic tax base
• Encourage timely distribution or productive utilisation of profits
• Reduce long-term accumulation of idle corporate reserves
• Improve fiscal sustainability and reduce reliance on external borrowing

From a policy perspective, the measure seeks to influence corporate behaviour rather than merely raise revenue.

Who Will Be Affected?

If enacted, the tax will primarily affect:

• Resident companies generating taxable profits
• Businesses that retain earnings for extended periods
• Mature companies with stable cash flows and dividend discretion

Potentially impacted sectors include:

• Holding companies
• Family-owned and closely-held companies
• Capital-intensive businesses with long reinvestment cycles

Start-ups and growth-stage companies may face particular pressure where retained earnings are essential for expansion but distributions are deferred.

Practical Implications for Corporate Planning

The proposed tax requires companies to reassess several core financial and governance practices:

Dividend Policy Review

Boards will need to reconsider:

• Timing of dividend declarations
• Partial versus full distributions
• Alignment between profit retention and tax efficiency

Cash Flow and Treasury Management

Companies may need to:

• Model the cost of retaining earnings beyond six months
• Budget for potential withholding tax liabilities
• Balance reinvestment needs against tax exposure

Corporate Governance and Board Decisions

Dividend decisions are often discretionary. This measure effectively introduces tax consequences for inaction, elevating the importance of documented board resolutions and financial justifications.

Compliance and Risk Considerations

Once enacted, failure to comply may expose companies to:

• Withholding tax penalties
• Interest on late payments
• Additional scrutiny from TRA during tax audits

Companies should ensure:

• Accurate tracking of retained earnings
• Clear timelines for profit distribution decisions
• Proper documentation supporting reinvestment strategies

Strategic Considerations for Investors

For investors, particularly foreign shareholders:

• Dividend timing may change
• After-tax returns could be affected
• Investment structures may require review

This development reinforces the need for early tax structuring and legal advice when investing in Tanzanian companies.

Preparing Ahead: What Companies Should Do Now

Even before the Finance Act is passed, companies are advised to:

• Review historical and projected retained earnings
• Model the financial impact of the proposed tax
• Engage boards and shareholders early
• Align accounting, legal, and tax teams
• Monitor the Finance Act and TRA guidance closely

Early preparation will reduce compliance risk and avoid rushed decisions once the law takes effect.

Final Words

The proposed 10% withholding tax on retained earnings represents a meaningful shift in Tanzania’s corporate tax landscape. While still awaiting formal enactment, its inclusion in the 2025/2026 Budget signals a clear policy direction.

Companies that proactively adapt their financial planning, dividend strategies, and governance processes will be better positioned to remain compliant and financially resilient.

Need Guidance on the New Tax Measure?

Mak Africa Legal advises local and international clients on:

• Corporate tax planning and compliance
• Dividend structuring and retained earnings strategies
• TRA engagements and tax risk management
• Budget-driven legal and regulatory changes

Contact Mak Africa Legal to assess how this proposed tax may affect your business and to prepare ahead of enactment.

Legal Disclaimer

This publication is provided for general information purposes only and does not constitute legal advice. Mak Africa Legal accepts no liability for reliance placed on this publication. Specific legal advice should be sought before acting on the information contained herein.

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