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Incorporation of Business Entities by Foreign Companies in Kenya

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.

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