Setting up a Foreign Company in Kenya: Branches vs Subsidiaries

Introduction

For foreign companies wishing to operate businesses in Kenya, one of the key considerations is whether they should register a Branch of the Parent company or incorporate a subsidiary company.

Depending on a company’s vision with regards to its operations in Kenya, below are some considerations to apply when choosing whether to register a Kenyan branch or set up a subsidiary company:

???? i.?Taxation of Branches vs Subsidiaries

For the purposes of taxation, it is important to note that in Kenya, a?Branch?is taxed as a non-resident/foreign company which has a permanent establishment in Kenya, while a?Subsidiary?is taxed like a local company incorporated in Kenya.

A subsidiary company is liable to pay corporate income tax at a rate of 30%. The income that shall be subject to taxation for a subsidiary is the worldwide business income, meaning that the income subject to taxation shall not only be that accrued in Kenya but also income derived from outside Kenya. Further, as a local entity, a subsidiary may be required to register for social security (NSSF) and national health insurance (NHIF) contributions to be paid by its employees.

On the other hand, a branch is taxed as a non-resident entity and is liable to pay corporate income tax at a rate of 37.5%, which income tax is chargeable on the total income accrued within Kenya. Many a times, a Branch may deploy expatriate employees to the branch office to assist with setting up or to otherwise implement the foreign company’s organization structure, knowledge or organizational culture in the workplace. A branch office which has in their employ foreign nationals must address the immigration issues posed by having a work force consisting of foreign nationals. The foreign company will need to ensure that their expatriate employees procure the requisite permits, such as the?employment work permit (class D permit).

??? ii.?Extent of Liability

Given that a subsidiary company is construed as a separate legal entity that is distinct from its parent company, its liabilities are limited to the subsidiary, however, noting that branches only operate as an extension of the parent company, the parent company shall also be subject to and payable for any liabilities accrued by their Kenyan branch office.

? iii.?Legal Personality

The establishment of a subsidiary company involves the setting up of an entirely new company that is separate and distinct from the foreign company. The subsidiary may also be wholly owned by the foreign company, provided that one of its directors is a natural person.

The establishment of a branch office in Kenya is simply the formal recognition of a foreign company’s presence in Kenya. A branch operates as an extension of the foreign company, which means that it does not a have a legal identity separate from the foreign company. A branch would therefore be required to have the same directors, be governed by the same constitutive documents and shall be subject to the foreign company’s policies and procedures. Upon registration, the Branch shall be formally recognized as a foreign company that has legally established a place of business in Kenya and shall be issued with a Certificate of Compliance.

? iv.?Appointment of local representatives/Directors

For a subsidiary, there is no legal requirement for the appointment of a Kenyan director/local representative as the Company shall be set up as a new entity in Kenya with its own legal personality that is separate from its parent company, however, for some crucial reasons, the company may opt to appoint a Kenyan director temporarily during the initial set up stage.

For a Branch, despite not being required to have a Kenyan director, it is required to appoint a local representative.? The local representative shall be answerable for all acts and matters relating to the operations of the branch company here in Kenya. It is important to mention that such local representative can either be a citizen or non-citizen, and in most scenarios, a Company Secretary is usually appointed to the said role.

Conclusion

The highlighted points above form some of the key considerations that foreign companies should take into account before setting up shop in Kenya. Arguably, these are not the only considerations, since foreign companies may also need to take into account the requirements of the specific sector that they intend to invest in.

Article by Rachael Mboya, an Advocate of the High Court of Kenya and a Master of Laws (LLM) holder with a specialization in International Trade and Investments Law.

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