MPs back Bill to exempt company shareholders from taxes

A parliamentary committee has endorsed a proposal to amend the law to exempt shareholders from paying taxes on assets they acquire from their own company.

In a report tabled yesterday, the National Assembly Committee on Finance and Planning threw its weight behind the Bill while asking the house to approve the changes.

The Bill seeks to amend the Income Tax Act to provide for the exemption of capital gains tax in the transfer of property by a company to its shareholders as part of an internal reorganisation or the transfer of property to the company by the shareholders as consideration for the transfer.

The proposed amendment introduces a new exemption to provide that transfers of property between a company and its shareholders, as part of an internal reorganisation, shall not be subject to Capital Gains Tax, provided certain conditions are met.

These conditions include that the property must be distributed in proportion to the shareholders' existing shareholding immediately before the transfer and where shares are involved, they must relate to а subsidiary of the company undertaking the reorganisation.

The Income Tax (Amendment) Bill (National Assembly Bill No 20 of 2026) is a Bill sponsored by the committee chair Kuria Kimani.

Currently, transfers of property between company and its shareholders are generally subject to Capital Gains Tax where such transfers result in a disposal for tax purposes.

This means that even where a company undertakes internal restructuring involving the transfer of assets within the same economic group, such transactions may still attract Capital Gains Tax if they fall within the definition of a chargeable transfer.

“The proposed amendment introduces a new exemption under item 6 of the Eighth Schedule to address this gap,” the report states.

At present, the committee report states that Income Tax Act does not define the term "internal reorganisation" for purposes of the Eighth Schedule.

“This lack of definition creates uncertainty in determining which transactions qualify for tax relief and may expose taxpayers to differing interpretations tax authorities,” the report adds.

In some cases, the MPs said this ambiguity may lead to disputes regarding whether a particular restructuring qualifies for exemption or constitutes a taxable disposal.

The Bill also defines "internal reorganisation". Under the proposed Bill, internal reorganisation is defined as any restructuring of the ownership, control or assets of a company that does not involve a transfer of property to a third party.

The effect of this definition is to limit the exemption strictly to intra-group transactions, thereby ensuring only genuine internal restructuring exercises qualify for relief while excluding transactions involving external parties

Under the current provisions of Section 7 of the Income Tax Act, certain distributions made by a company to its shareholders may be treated as dividends for income tax purposes and therefore subject to taxation.

“In situations where a company undertakes restructuring involving the transfer of assets to shareholders, such transfers could potentially be reclassified as dividends, depending on their nature and structure.”

The proposed amendment to Section 7 provides that transfers of property made under the new exemption, as part of an internal reorganisation, shall not be treated as distributions for purposes of income tax.

The effect of the provision is to prevent such transactions from being classified as dividends, thereby ensuring that they are subjected to income tax.