Taxing retained earnings: Align CFC provisions with deeming distribution provisions
Tanzania has amended its 'deeming distribution' tax provisions in the Finance Act 2026, reducing the tax base on undistributed profits from 30 percent to 15 percent. The move aims to balance the need to prevent revenue leakage with the desire to encourage business growth through retained earnings.
Why it matters
This policy adjustment is critical for the Tanzanian business climate, as it directly impacts how corporations manage capital and tax liabilities.
Many scholars argue that the strength of an entity is measured by what it retains, not just what it earns. This assertion underscores the importance of retained earnings (RE) to the business community.
These scholars believe that fiscal policy, particularly tax legislation, should be designed in a way that encourages entities to retain earnings, thereby supporting their long-term growth prospects.
In a bid to curb the indefinite accumulation of retained earnings, the Government introduced anti-tax avoidance measures through the Finance Act 2025, which took effect on July 1, 2025. The amendments empowered the Commissioner General (CG) of the Tanzania Revenue Authority (TRA) to deem up to 30 percent of a resident entity's undistributed profits for a period of 12 months as distributed and subsequently impose withholding tax (WHT) on the deemed distributed profits, commonly referred to as deemed dividends. These measures have become widely known as the "deeming distribution provisions".
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