Introduction
Kenya is a prime destination for foreign companies looking to expand into Africa. This strategic location is highly connected to the East African Community, the wider African continent, has a growing economy and a favourable business environment.
This article is a guide for foreign companies looking to set up local operations in Kenya. It is an analysis of the options to operate as a branch, a subsidiary, or a representative office.
Branch of A Foreign Company
A branch of a foreign company acts as an extension of its parent company and engages in the same business activities. This definition is specified under the Companies Act when referring to foreign companies. A branch shares the same legal identity as its parent company and generally operates under the same name. The management of the parent company governs the branch and retains full responsibility for its operations, profits, debts, and liabilities. Essentially, the branch remains part of the original legal entity.
Operating as a branch of a foreign company is recommended for:
- Foreign companies that want to test the Kenyan market.
- Companies offering professional or technical services.
- Businesses that do not require a full-fledged local entity.
Setup and Operations
A branch of a foreign company is registered as a Foreign company with the Registrar of Companies. Upon registration, it receives a Certificate of Registration and must appoint and maintain a local representative and a registered office for compliance and communication.
Learn more in our article: How to Register a Foreign Company in Kenya
Tax Implications
A branch office is subject to the following:
- Corporate tax at the rate of 37.5% for non-resident companies.
- 16% VAT on taxable supplies (both goods and services).
- Withholding tax, where applicable including on payments made to non-residents.
- No transfer pricing rules since it is not a separate entity.
Subsidiary of A Foreign Company
The subsidiary of a foreign company is a separate legal entity. It is registered as a local company, regardless of the type of company it is registered as. A subsidiary can be set up as any one of the Different Types of Companies available to best suit its circumstances.
A subsidiary can be entirely owned by the parent company or may have additional shareholders. While the parent company may hold a stake in the new entity and take part in its control, the subsidiary operates independently. It has its own management team and is fully responsible for its profits, debts, and other liabilities.
- Read More: How to Register a Company in Kenya
A subsidiary is recommended for:
- Companies seeking long-term investment in Kenya.
- Businesses that need local credibility and flexibility.
- Businesses in sectors that are legally mandated to have full or majority ownership by Kenyan citizens.
- Firms planning to engage in commercial activities.
Setup and Operation
A subsidiary is registered as a local company under the Companies Act. It operates like any other local company with its own profits, liabilities and obligations.
Subsidiaries are required to have at least one director and a local registered office.
Tax Implications
- A Corporate tax of 30% for a resident company.
- 16% VAT on taxable goods and services.
- Withholding tax is applicable on payments such as dividends, interest, and royalties to non-residents.
- Transfer pricing rules apply to transactions between the subsidiary and the parent company.
A Representative Office of A Foreign Company
A representative office is a temporary, non-legal entity set up to engage in non-commercial activities like market research, promotional activities, and brand awareness. It cannot engage in revenue-generating operations.
A representative office acts as a liaison between the parent company and the Kenyan market. It cannot engage in profit-making activities.
A representative office is best for
- Market research and brand promotion.
- Companies that are exploring business opportunities.
- Firms that manage local partnerships before full-scale entry.
Setup and Operation
A local representative office requires registration with the Registrar of Companies. The office cannot conduct direct business, but can market and research. It must have a local representative and maintain a registered office.
Tax Implications
- A Local Representative Office is not subject to corporate tax as it does not generate revenue. Therefore, it may not need to file annual tax returns.
- Its employees are subject to PAYE.
- It has no VAT obligations unless it offers taxable services.
Choosing the Right Structure
Selecting the right structure depends on business objectives, tax considerations, and operational needs.
| Structure | Legal Entity? | Tax Rate | Activities Allowed |
|---|---|---|---|
| Subsidiary | Yes | 30% | Full business operations |
| Branch Office | No | 37.5% | Limited business operations |
| Representative Office | No | None | Marketing & research only |
Recommendations
- Choose a subsidiary if you plan to operate in Kenya long-term.
- Opt for a branch office if you need market presence but want control from the parent company.
- Set up a representative office if your goal is research or brand visibility without engaging in direct business.
Conclusion
Each structure has its pros and cons. Understanding legal and tax implications helps in making the right decision. Foreign companies should consult a legal expert to ensure compliance and efficient business operations in Kenya.
If you are considering setting up your foreign company in Kenya, Schedule A Consultation with our team, Email Us or fill out the form on our Contact Us page for more personalized assistance.