Should you register a branch of a foreign company or a subsidiary company in Kenya

Should you register a branch of a foreign company or a subsidiary company in Kenya

Foreign companies can establish their presence in Kenya through representative offices, foreign branches, or subsidiaries. Each option has unique features, permitted activities, and tax considerations. Below is a breakdown of these structures to guide businesses in making an informed choice.

1. Representative Office

A representative office acts as a liaison between the parent company and the Kenyan market. It facilitates market research, promotes the parent company, and gathers local data. However, it lacks a separate legal identity and cannot generate revenue independently. The parent company retains full liability for the office’s operations.

Permitted Activities

A representative office in Kenya may:

• Conduct market research and collect business intelligence.
• Promote goods and services on behalf of the parent company.
• Exhibit products at trade fairs or promotional events.
• Rent office space and employ staff locally.

It cannot engage in income-generating activities directly or enter contracts meant to produce profits within Kenya.

Tax Implications

Representative offices are generally not subject to corporate tax if they strictly adhere to their permitted activities. However, if their operations are deemed profit-generating, they may be classified as a permanent establishment, subject to Kenya’s corporate tax rates.

2. Foreign Branch

Overview

A foreign branch is an extension of the parent company, with broader operational rights than a representative office. It uses the parent company’s assets and name but does not have a separate legal identity. The parent company is liable for the branch’s debts and obligations.

Permitted Activities

A foreign branch in Kenya can:

• Conduct the sale and purchase of goods and services.
• Engage in manufacturing, construction, or processing activities.
• Perform contracts and generate revenue locally.

Branches may face restrictions in regulated sectors, such as banking, insurance, and telecommunications, which require additional approvals.

Tax Implications

Foreign branches are subject to taxation in Kenya, including:

1. Corporate Income Tax at 30% of taxable income.
2. VAT at 16% on taxable supplies.
3. Withholding Tax on payments to non-residents (rates vary from 5% to 20%, depending on the nature of the transaction).
4. Annual Business Permits and County Licenses based on the branch’s location.

Branches are also ineligible for certain tax incentives, such as Export Processing Zone (EPZ) benefits, which are available to locally incorporated entities.

3. Subsidiary

Overview

A subsidiary is an independent legal entity registered under Kenyan law but owned by a foreign parent company. Subsidiaries in Kenya are typically set up as private limited companies, offering limited liability to shareholders. This structure is favored by foreign investors for its flexibility and legal protections.

Permitted Activities

Subsidiaries enjoy the same operational rights as local companies, with few restrictions. However, foreign-owned subsidiaries cannot:

• Own agricultural land without government approval.
• Engage in certain industries requiring local shareholding, such as aviation and telecommunications.

Tax Implications

Subsidiaries are taxed as resident entities, with obligations including:

1. Corporate Income Tax at 30%.
2. VAT at 16%.
3. Withholding Tax on dividends, interest, and royalties paid to non-residents.
4. Capital Gains Tax at 15% on the transfer of shares or assets.

Additionally, subsidiaries may qualify for tax incentives under the EPZ, Special Economic Zones (SEZ), or other investment promotion programs.