What is the legal process for establishing a business entity in Kenya?
The Business Registration Service (BRS) is the government agency responsible for business entity registration. A person wishing to register a business must do so personally or by an agent. The process is fully digitised.
In addition to registration with the BRS, foreign companies or local companies with no director holding a personal identification number (PIN), are required to separately register with the Kenya Revenue Authority (KRA), through the online iTax portal. Local companies with directors holding a KRA PIN are automatically issued with a KRA PIN at incorporation.
What are the different types of business structures available in Kenya, and what are their advantages and disadvantages?
This is the simplest form of business ownership, the business owner registers a business name for trading purposes. Owners are not subject to additional compliance or taxation requirements. However, sole proprietors are personally liable for any business debts. The lack of continuity also poses a challenge when the owner retires or passes away.
Companies may be public or private and the liability of shareholders may be limited or unlimited.
Public limited companies have the opportunity to raise capital through offering their securities to the public. As a result, they have more stringent compliance requirements compared to private companies. The liability of the shareholders, in both instances, is limited to the extent of the shares held and unpaid.
Companies limited by guarantee do not have share capital. They are ideal for non-profit objectives. Incorporation may take up to 12 months, owing to vetting of directors and members by national security organs. This vetting is not provided for in law, but has been the practice for decades.
A foreign company is a company incorporated outside Kenya and registered to carry on business in Kenya. No separate legal entity is established, the foreign company is therefore for all purposes a branch and not a subsidiary.
Our experience is that while a local director is not a legal requirement for foreign company registration, there are practical benefits of having one including ease of registration with KRA and bank account opening.
In a partnership the business is owned by two or more individuals who share its profits and losses. Partnerships can be general or limited, general partnerships offer unlimited liability to all partners while limited partnerships provide limited liability to its limited partners to the extent of their capital contribution.
Limited Liability Partnerships (LLPs)
LLPs blend features of partnerships and limited companies. They have perpetual succession, can own property and sue and be sued in their name. Partner liability is limited to the extent of their capital contribution.
LLPs are required to appoint at least one manager who is a natural person and a Kenyan resident. The manager is personally responsible for ensuring the LLP’s statutory filing obligations are carried out.
LLPs are tax transparent.
What are the requirements and procedures for obtaining the necessary licenses and permits to operate a business in Kenya?
Licenses and permits required are not centralised and differ depending on the sector the business operates in. A business must obtain an annual business license from the respective county where its business premises are located.
The business may also be required to obtain additional approvals where it is regulated; for instance approval is often required for businesses operating in the financial services and telecommunication sectors or businesses where the government had identified the need to protect public interest or welfare because the nature of the business touches on the health, financial wellbeing of its citizens or the environment. The specific regulators have online portals through which applications are made.
Are there any specific industry-specific regulations or restrictions that we should be aware of in Kenya?
Certain regulated industries have additional compliance requirements that must be complied with, on minimum capital requirements, local shareholding, and key man qualifications.
Kenya has established the Nairobi International Financial Centre (NIFC). Businesses operating within NIFC are exempt from local shareholding
restrictions on and have the freedom to repatriate profits.
Are there any recent legal developments or pending legislation that could impact businesses operating in Kenya?
The Tax Procedures (Common Reporting Standards) Regulations, 2023, establishes guidelines for the reporting of information by both financial and non-financial entities in order to comply with international requirements for the exchange of information with other jurisdictions.
The Finance Act 2023
The Finance Act 2023 has introduced the following key changes:
- Affordable housing levy
Employees and employers are now subject to a 1.5% levy on the employee’s gross salary.
- Interest restriction
Interest restriction based on 30% of EBITDA, now only applies to foreign loans. Interest expenses on foreign loans exceeding 30% of the EBITDA will be deductible in the subsequent three years, provided the interest expense claimed in each year does not exceed 30% of the EBITDA.
- Deferral of foreign exchange losses
Foreign exchange losses incurred by persons whose gross interest paid or payable to a non-resident exceeds 30% of its EBITDA in a financial year, will be deferred and claimed over a period of five years from the date the losses were realised.
- Shares in lieu of cash emoluments by an eligible start-up company
Start-ups meeting certain prescribed thresholds will now be able to compensate their employees through shares in lieu of cash. This is important since the Employment Act mandates that salaries are paid in cash and in Kenya shillings.
- Preferential tax rate on qualifying intellectual property income
Income derived from intellectual property will be subject to a preferential tax rate. The Act does not specify the new rate applicable.
- The Anti-Money Laundering and Combating of Terrorism Financing Laws (Amendment) Bill, 2023
This is pending legislation to introduce the obligation to maintain a beneficial ownership register for LLPs. Other registers proposed include nominee director and shareholder registers, for companies and mandatory registration of foreign LLPs. The impact is increased compliance even as Kenya seeks to improve its AML ranking.