Munyao Kayurira Advocates

Loading...

Incorporation of Business Entities by Foreign Companies in Kenya

CAN FOREIGN COMPANIES ESTABLISH BUSINESS ENTITIES IN KENYA?

Introduction

Yes, foreign companies can incorporate/register a business entity. The incorporation/registration of a foreign entity in Kenya is governed by the Companies Act, 2015 as well as sector specific laws. Sector specific laws are laws governing the industry/ market where the foreign entity wishes to operate in. For instance, anyone wishing to operate a banking business must, before registration/incorporation seek a license from the Central Bank, the industry’s regulator.

A foreign entity duly registered in another country can register and operate the following business models in Kenya:

  • A subsidiary of the foreign entity;
  • A branch office of the foreign entity

Incorporation of a Subsidiary

A subsidiary is like a local incorporated company with the only difference being that it is wholly or largely owned by another incorporated entity. This can be incorporated either as a private limited liability company or a public limited liability company depending on the number of members.

The number of members for a private limited liability company can range from one (1) member up-to fifty (50) members excluding employees. This means that the subsidiary can be wholly owned by the parent company. On the other hand, there is a requirement that it must have at least one director who is a natural person.

Incorporation Process

The incorporation process of companies is currently undertaken on the e-citizen online platform that sought to eliminate the physical human interface though the process still relies on officials on the back end who review and approve applications. The process is currently a one-stop process where you apply for reservation of name as you make the full application for incorporation.

One is at liberty to adopt the model articles of association or customize the same to suit their requirements, particularly where one wishes to align the articles with those of a parent company.

Advantages of incorporating a subsidiary

  • The subsidiary may or may not carry out the same business as its parent company;
  • It has a separate legal personality from the parent company. This means that the liabilities of the subsidiary do not accrue to the parent company;
  • Tax benefits. A subsidiary is taxed at the rate of 30% of the income generated in Kenya which is the same as a local company. This is cheaper compared to the corporate income tax rate of a branch which is at 37.5%. The tax is only chargeable on the income accrued and derived in Kenya.
  •  The subsidiary can choose to retain the name of the parent company or get another one altogether.

Disadvantages of incorporating a subsidiary

  • Should you not have Kenyan shareholders and/or directors then you will be required to take out an investor permit to be able to get tax registration, open bank accounts and generally run your business in Kenya;
  • The winding up process of a subsidiary is complex as it is treated as a company incorporated in Kenya and hence has to follow the procedure in accordance with the Insolvency Act 2015.

Timelines

The process currently takes anywhere between 3-7 working days if there are no sector specific approvals required once we are provided with all requirements. A request to amend, provide alternative names etc. may delay the process.

A branch of a Foreign Company

A branch is essentially a company organized to conduct business on behalf of a parent company in another jurisdiction. The branch office is like a new placement, department or division that is set up under the parent company’s name and forms part of that legal entity.

Registration Process

The registration process of a foreign company is provided for under Part 37 of the companies Act, 2015. Section 974 of the Companies Act, provides that a foreign company shall not carry on business in Kenya unless it is registered or has applied to be registered and the application has not been dealt with within the prescribed period.

Thus the first step is to apply to for registration of foreign company to the Registrar of Companies through the e-citizen portal. The application is usual done under Form FC1.

Branches must have a local representative resident in Kenya, who may be a citizen or a non-citizen. This is also the person responsible for the company’s compliances in Kenya. We offer local representative services at an annual fee.

Advantages of setting up a branch of a Foreign Company

  • The registration system for branches is simple and thus foreign companies seeking to set up a place of business in Kenya do not face complex procedures of registration;
  • There is more control by the parent company since the activities of the branch are fully managed by the parent company especially decision making;
  • Opening a branch allows the parent company access to a new market and target new consumers of their goods and service without the need for creation of a new entity.

Disadvantages of setting up a branch of a Foreign Company

  • The parent company is liable for the actions /liabilities of the branch office;
  • Losses incurred by the branch office are included in the parent company’s income statement;
  • All actions by the branch office need ratification by the board of directors of the parent company which in turn may limit the performance of the branch office;
  • A branch has limited business scope as it must be within the scope of that of the parent company. It cannot go beyond the scope provided for by the parent company’s incorporation and constituting instruments.
  • The current rate of corporate income tax for a branch is 37.5%.

Registration will take approximately 3-7 working days.

Sector Specific Regulations

Different sectors are regulated by different statutes and bodies. These regulations may place a cap on the shareholding of such businesses. For example, telco companies are required to have at least 30% shareholding to be Kenyan either at the inception or within three years after being licensed. These sector specific regulations are important when it comes to issuance of licenses and future compliances.

Waiver of Court Filing Fees

During Jamhuri Day Celebrations last year (12th December 2019) the President of Kenya, Uhuru Muigai Kenyatta, directed the National Treasury, the Attorney General, and the Judiciary to work together to develop a legal regime for waiver of fees for commercial disputes below KES 1 Million. This was one of the measures aimed at reduction or the elimination of fees levied by government agencies in order to enhance the simplification of processes in trade, access to credit, and consumer protection.

This directive gained the force of law in Legal Notice no. 59 published on 20th April 2020 under the Public Finance Management Act (No. 18 of 2012). Through this notice, the Cabinet Secretary for the National Treasury and Planning exercised his powers under Section 77 of the Act to waive court filing fees in respect of commercial disputes where the value of the suit does not exceed one million (1,000,000) shillings for a period of two (2) years.

Before this waiver, a dispute whose value was one million (1,000,000) shillings would attract a filing fee of about seventy thousand (70,000) shillings.

This waiver takes effect on 20th April 2020 and applies to commercial cases filed after this date and will go a long way in easing the overall costs that go into the institution of cases/claims.

If you have any question regarding this alert, please do not hesitate to contact Scola Kayugira on E-mail: scola@smkadvocates.com, Tel:+254 723 495 054, Skype: Scola Munyao-Kayugira.

This alert is meant for general information only and should not be relied upon without seeking specific legal advice.

Amendment to Business Laws to Facilitate the Ease of Doing Business in Kenya

Key Amendments to Business Laws in Kenya

The Business Laws (Amendment) Act, 2020 (the Act) was became law on 18th March, 2020.
The purpose of the Act is indicated as making amendments to various business laws to facilitate the ease of doing business in Kenya and for connected purposes.

Some of the changes brought in by the amendments to the law and their anticipated impact are as follows:

  1. The Law of Contract Act (Cap 23)

Section 2 of the Act amends the Law of Contract Act to provide for use of electronic and advanced electronic signatures as an alternative to physical signatures. The Act adopts the definition provided for under the Kenya Information and Communications Act (No. 2 of 1998) which is as follows:

‘an advanced electronic signature’ is one that meets the following requirements:

  • Is uniquely linked to the signatory;
  • Is capable of identifying the signatory;
  • Is created using means that the signatory can maintain under his sole control; and
  • Is linked to data to which it relates in such a manner that any subsequent change to the date is detectable.

With this amendment, contracts will now be deemed valid if signed by way of an electronic/advanced electronic signature.

The effect of this amendment is that parties will save on time and other resources required to attend offices/meetings to sign documents.

  1. The Registration of Documents Act (Cap 285)

Sections 4, 5 and 6 amend Sections 2, 3 and 4 the Registration of Documents Act to create an electronic register of documents and the electronic signing and filing of documents required to be filed under the Act.

  1. The Survey Act (Cap 299)

Sections 7,8 9 & 10 of the Act amend sections 2, 5, 30 &32 of the Survey Act to permit:

  • the use of electronic signatures and advanced electronic signatures;
  • electronic processing of documents or plans and the electronic imprinting of the seal of Survey of Kenya;
  • electronic submission of documents by surveyors to the Director of Surveys; and
  • electronic authentication of documents by the Director of Survey.

Following these amendments, it is expected that the time taken to process survey plans/deed plans and related records will improve and hopefully translate to reduction of survey costs. The introduction of security features will enhance confidence in the process.

  1. The Income Tax Act (Cap 470)

Section 11 of the Act amends Part V of the Second Schedule of the Income Tax Act to provide a tax incentive for investors spending over five billion in construction of bulk storage and handling facilities to support the standard gauge railway. The amount so spent shall be permitted as an investment deduction in the calculation of income tax.

  1. The Stamp Duty Act (Cap 480)

Sections 12 and 13 of the Act amend sections 2 and 19 of the Stamp Duty Act to provide for the stamping of documents by marks embossed or impressed by electronic means. This is intended to support the digitization of land registration transactions that have in the past been partly electronic, partly manual.

  1. Occupational Safety and Healthy Act (OSHA) (no.15 of 2007)

Section 15 of the Act amends section 44 of the OSHA to exempt business premises from the requirement for registration of work places for the first twelve months after incorporation where one has less than one hundred employees. This, therefore, means that no fee for such registration will be payable.

The amendment is aimed at easing the cost of doing business for startups.

  1. National Construction Authority Act (the NCAA) (Act No. 41 of 2011)

Sections 16—20 of the Act amend sections 2, 5, 23 and 42 of the NCAA to the following effect:

  • Enforcement of prescribed Building Codes;
  • Mandatory inspections to be undertaken by the National Construction Authority (NCA);
  • Additional powers to the board of the NCA to appoint investigation officers to conduct investigations; and
  • Create an offence for failure to comply with an order given by an investigating officer which is punishable by a fine of KES 1 million or an imprisonment term of 3 years or both.

These amendments seek to bring about accountability in the construction industry. The construction industry in Kenya has, for a long time, been plagued with issues around poor workmanship, negligence, recklessness and blatant disregard for the law (such as the Building Codes). The mandatory inspections and the appointment of investigating officers will assist in ensuring that these issues are dealt with.

  1. The Land Registration Act (the LRA) (No. 3 of 2012)

Sections 21-26 of the Act amend section 2, 44, 45 and 83 as well as repeal (deletion) of sections 38 and 39 of the LRA. The effect of these amendments is to provide for use of electronic signatures and advanced electronic signatures as well as permit electronic processing of instruments relating to land.

The implication, therefore, is that documents used to confer interests in land may be signed, lodged and processed electronically. This will, however, only be possible once all registries become fully digitized.

The repeal of sections 38 and 39 was intended to do away with the need to obtain land rent and land rates clearance certificates as mandatory documents in a transaction for transfer of land. The certificates were a barrier to expeditious conclusion of land transactions and also an added expenditure. A rates clearance certificate from Nairobi county would, for instance, cost ten thousand (Kes 10,000) shillings.

The amendment, however, left sections 55 (b) and 56 (4) of the LRA intact and as such, land rent clearance certificates are required for registration of leases and charges.

Please note, however, that land rent and land rates are still payable under law. The amendment only does away with the need to obtain clearance certificates when effecting a transfer of land transaction.

  1. The Kenya Information and Communication Act (KICA) (No. 2 of 1998)

Section 14 of the Act amends the KICA to permit the use of electronic signatures.
Pursuant to the terms of the KICA, the Communication Authority of Kenya will license electronic certification service providers whose role will be to generally support electronic signatures and to adhere to procedures that ensure that the secrecy and privacy of the electronic signatures.

  1. The Companies Act ( No. 17 2015)

Sections 29-38 of the Act amend sections 35, 37, 289, 495, 504, 611 and Paragraph 21 of the Sixth Schedule besides repealing (annulling) sections 38, 42, and 43 in their entirety. The amendments have the following effect:

  1. Companies are no longer require a seal for purposes of execution of contracts, sealing of share certificates etc. Contracts entered into by companies may be executed by persons acting under the company’s authority- express or implied. These may be the directors, the company secretary or a person holding a power of attorney.
  2. Bearer shares had been phased out by the Act in 2015. However, through the amendment timelines for phasing them out through conversion have been issued. Companies are now required to convert all bearer shares to registered shares within 9 months of enactment of the Act and to notify the Registrar of such conversion within 30 days. Failure to do so is an offence and the company and any officers are liable, upon conviction to a fine not exceeding five hundred thousand shillings.
  3. Thresholds required for “squeezing-in” and “selling-out” have been amended. The threshold for “squeeze-ins” and “sell-outs” has now been reinstated at 90%. In 2019, the Companies Act had been amended to reduce the threshold from 90% to 50%.

“Squeeze-in rights” permit an investor, to acquire minority shareholdings on a compulsory basis if it has acquired or unconditionally contracted to acquire not less than 90% in value of the shares to which the takeover offer relates and not less than 90% of the voting rights carried by the shares to which the offer relates.

“selling-out rights” permit a minority shareholder to be bought out by the bidder if the bidder has acquired or unconditionally contracted to acquire 90% in value of the target company’s shares and 90% of the voting rights carried by the shares (whether by virtue of acceptances of the offer or by other acquisitions of the shares).

The reversion to 90% is in line with global best practice.

  1. Insolvency Act (No. 18 of 2015)

Section 39 of the Act deletes section 560A and substitutes it with a new section all together on considerations to take into account on applications for approval to lift a moratorium.
A moratoria refers to a period of time during which transactions or legal processes (in respect of companies under administration) are restricted from proceeding without the approval of the administrator or a court.

The conditions to be taken into account include: a consideration of the purpose of administration, the impact of the approval on the applicant and particularly whether they will suffer loss, the legitimate interests of the applicant, value of creditor’s claim, whether provision of protection may be feasible or overly burdensome, whether the asset is necessary to keep the debtor’s business as a going concern, relief required to preserve the value of assets such as perishable goods etc. Such an approval, if granted, is for a period of no more than twenty-eight days.

  1. Excise Duty Act (No. 23 of 2015)

Section 41 of the Act amends Paragraph 1 of the First Schedule to the Excise Duty Act, 2015 to include imported glass bottles (excluding bottles for packaging of pharmaceutical products) amongst excisable goods. The said bottles attract excise duty at the rate of 25%.

In 2019, the World Bank’s Ease of Doing Business (EODB) Index ranked Kenya at position 56 globally up from position 80 the previous year. Some of the issues noted in the 2019 report that were a hurdle to the ease of doing business included land registration processes which were found to be difficult, cumbersome and costly. The measures taken through the amendments highlighted above are intended to further ease the cost of doing business in Kenya. More, in terms of training, capacity building etc, however, needs to be done for the intended benefits to be realized.

If you have any questions regarding this write-up, please do not hesitate to contact Scola Kayugira on E-mail: scola@smkadvocates.com, Tel:+254 723 495 054, Skype: Scola Munyao-Kayugira.

This write up is meant for general information only and should not be relied upon without seeking specific legal advice.

Mentorship

The Partners are Associate Mentors at AKAD Education Africa (https://akadeducationafrica.com) which organisation is involved in capacity building through Careers, Mentorship & Value-Based Leadership training as a Social Enterprise. The firm also offers job shadowing opportunities to AKAD Mentees interested in pursuing a career in Law.