KENYA Law and Practice Contributed by: Ombo Malumbe, Jack Ong’anya and Faith Ngarama O’Bang Law (Ong’anya Ombo Advocates LLP)
O’Bang Law (Ong’anya Ombo Advocates LLP) Mayfair Suites, 4th Floor Parklands Gardens Westlands, Parklands Road PO Box 15598 – 00400 Nairobi Kenya Tel: +254 208 400 629 Email: hello@onganyaombo.com Web: www.obang.law
1. Corporate Structures, Residence and Tax Treatment 1.1 Corporate Forms and Their Tax Treatment The corporate form a business takes is influenced by various factors, which may include promoters’ opera - tional interests, statutory compliance issues, tax impli - cations or budget factors. Generally, the laws in place provide for business forms such as sole proprietor - ship, limited partnership (LP), limited liability partner - ship (LLP), limited liability company (LTD), public lim - ited company (PLC), and foreign company (FC). In general, there are entities that are tax pass-through and those where tax is applied to the entity. For instance, for a sole proprietor, LP and LLP, tax applies to the founder(s) or partners, while for an LTD, PLC and FC, tax applies to the corporate structure. How - ever, there can be a further distinction between the tax applied to an FC and a subsidiary of a foreign company (LTD). 1.2 Use and Taxation of Transparent Business Structures The three key transparent entities are: • sole proprietor, mostly preferred for their simple formation and flexible arrangements of sharing of profits; • limited partnership, preferred for the flexibility with limitation of liability for passive investors; and
• limited liability partnership, which is the most pre - ferred of partnerships for the purposes of limited liability protection for the founders and partners. All these entities are preferred because of the pass- through nature of taxation which helps avoid double taxation. Private equity firms may take the form of an LLP due to the near replication of an LTD in terms of limiting the founders’ liability. With regard to venture capital firms and for the purposes of enjoying certain tax benefits, there is no option to opt in for trans - parent entities, since the Income Tax (Venture Capital Enterprises) Rules require the venture capital firm to be a corporate structure as per the Companies Act. Hedge funds will most often take the shape of limited partnerships and limited companies, especially for the purposes of accommodating foreign investors. While taxation will apply as per the form used, the investors could benefit from various tax incentives offered in Kenya, including the existing double taxation agree - ments. 1.3 Tests for Determining Tax Residence An entity’s residence, other than its incorporation in Kenya, is determined through various operational factors. A business is considered to be resident in Kenya if its management and control of its activities take place in Kenya or the Cabinet Secretary declares a given entity to be a resident entity through a Gazette Notice. Therefore, there are instances where a non- resident entity may be considered to have a perma - nent establishment (PE) in Kenya. Some of the key
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