Kaplan & Stratton Advocates

Kaplan & Stratton, Advocates

Kenya's Legal and Business Environment:

Background

Kenya is sub-Saharan Africa’s third largest economy (GDP of US$20.77 billion in 2006), after South Africa and Nigeria. Its economy is principally agriculture based (30% of GDP) with tea, coffee and horticulture providing the principal export commodities. Tourism is a major foreign exchange earner. Nairobi is the third largest centre in the world for the UN and is also home to numerous other international organizations, non-governmental organizations, press agencies and diplomatic missions who use Nairobi as their African or regional base. Significant resources have been committed to the East African region in recent years in terms of relief and conflict resolution in Somalia, Sudan, Rwanda, Democratic Republic of Congo and Burundi, and most of these operations have been conducted from Nairobi.

With relative political stability, a multi-party parliamentary democracy (since 1991), a well educated and hard-working people (population 33 million) and a sound legal system Kenya has the potential to be the power-house of development for East Africa. The current surge in tourism, infrastructure development (notably roads and telecommunications), regional economic integration demand for products through the reconstruction of Southern Sudan and improved prospects for agriculture suggest, among other factors, that economic growth should strengthen in the short to medium term (2006 growth rate of 5.8% with 6% plus predicted for 2007). However, a highly partisan political climate and an endemic malaise of corruption within most aspects of public services continues to hamper Kenya ’s development. Parliamentary and Presidential elections are due before the end of 2007.

Inflation is running at an annual rate of approximately 10.3%. Exchange rate are relatively stable in a range of 69 to 72 Kenya shillings to 1 US Dollar for 2006.

Kenya is a member of The Common Market for East and Central African States (COMESA) and of the East African Community (EAC) (with Uganda and Tanzania). Both entities seek to establish a common market for trade and economic activity, free movement of goods and labour with common external tariffs. Other international memberships include the UN, the African Union and the British Commonwealth.

The Legal System

Kenya has a well-developed legal system, partially inherited from its colonial past, with English common law forming the basis, combining with traditional customary law and elements of Islamic law in the realm of marriage and succession. Business enterprises range from limited companies of various forms, branch office registration, and partnerships. Trusts are recognised and land law is a mixture of English statutes, Indian colonial laws and local codes. Statutes that govern the business and commercial area are: The Companies Act, The Insurance Act, The Banking Act, The Kenya Communications Act, The Capital Markets Act, The Investment Promotion Act, The Environmental Management and Co-ordination Act, The Transfer of Businesses Act, The Trade Marks Act, The Arbitration Act, The Restrictive Trade Practices, Monopolies and Price Control Act, The Retirement Benefits Act, The Partnership Act and various statutes providing for land titles (leasehold and freehold).

Kenya has a three tier courts system – Magistrates, High Court and Court of Appeal. Judicial proceedings are slow and inefficient and sometimes are tainted by corruption. The courts are overloaded with lack of capacity caused by failure to invest adequately in technology and training. As a result many litigants resort to arbitration and other ADR for resolving their differences. Membership of COMESA and the EAC also provides recourse for appeals in treaty-specific areas.

There are public registries for lands, companies, trade and service marks, designs and patents – although most require a major modernization exercise.

Statutory protection of intellectual property rights exists and Kenya is a signatory to the Paris and Berne Conventions, the TRIPS Agreement, the ARIPO (Harare) Protocol and the Madrid Agreement and Protocol.

There is provision for enforcement in Kenya of certain foreign judgments and arbitration awards. Kenya is a signatory and has adopted the 1923 Protocol on arbitration clauses of the League of Nations and the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Arbitration Act 1995 embodies most of the provisions of the UNCITRAL model law.

Investment Climate

Although official Government policy has been to encourage investment in Kenya, including from abroad, its record in attracting significant foreign investment has been poor. With a liberalized economy (price controls and foreign exchange controls were lifted more than a decade ago), and a vibrant market-driven private sector, Kenya could be further along the development path than it is. Government privatization has moved along slowly with a patchy record of success (Kenya Airways was a highly successful privatization (1996), while divestiture from the state owned incumbent telecommunications, electric power, railways, ports and other utilities has been dragged out).

The Investment Promotion Act 2004 aims to encourage foreign investment and facilitate the issue of licences and permits for foreign investors by the issue of Investment Certificates by the Kenya Investment Authority. The licences include both general and industry-specific licences.

Foreign investment in the private sector has generally had a good record. Kenya ’s membership of the EAC and COMESA presents opportunities for manufacturing operations to exploit the benefits of those markets.

There are limited foreign investment incentives available in Kenya. The main area of growth has been in light assembly manufacturing in export processing zones where 10 year tax holidays are available to approved enterprises.

There are no restrictions on investment by foreigners in private companies and foreigners can be directors of companies. Minimum Kenyan co-ownership in insurance companies, banks and telecommunications companies is mandatory, while at least 25% of the shares of companies listed on the Nairobi Stock Exchange must be held by Kenyans. Certain dealings in agricultural land and beach-front property involving non-citizens are prohibited unless special approval is obtained; otherwise foreigners are free to own land.

Tax System

The Kenya Revenue Authority is responsible for all revenue collection and management of the tax system. Briefly the main taxes are as follows:

Tax	Rate
Income tax on individuals	30%
Corporate tax	30%
Branch of a foreign company	37.5% (non-resident)
VAT	16%
Stamp Duty:
Creation or increase in share capital	1%
Transfer of stock or marketable securities Transfer of securities listed on the stock exchange	1% nil
Debentures and Mortgages - Primary security - Auxiliary security	0.2% 0.1%
Leases up to 3 years over 3 years	1% of annual rent 2% of annual rent
Assignment of debts	2%
Conveyance of land urban area outside urban area	4% 2%
Withholding Taxes:	Resident Rate	Non-resident rate
Management and professional fees	-	20%
Royalties	5%	20%
Consultancy and Agency fees	5%	20%
Interest	15%	15%
Dividends	5% if own less than 12.5% voting power nil if own more than 12.5%	10%
Rent – immoveable property	-	30%
Rent – other than immoveable property	-	15%

Kenya has double taxation treaties which can, in certain circumstances, mitigate the tax charge. Treaty countries are Canada, Denmark, Norway, Sweden, India, Zambia, United Kingdom and Germany. Neither the USA nor South Africa have double taxation treaties with Kenya.

Various capital deductions are available on industrial buildings, hotels, plant and machinery and mining investment. Capital allowances are provided for on the basis of cost on a reducing balance basis.

Benefits-in-kind paid to employees such a motor cars, housing and loans are taxable. Employee taxes are based around a pay-as-you-earn income tax deduction, a national social security fund and a national hospital insurance levy.

Excise and customs duties are also payable depending on the nature of the goods produced or imported.

There is no capital gains tax system presently in force. There are no death duties/taxes payable on personal estates.

Financial and Capital Markets

Kenya has the most sophisticated financial and capital markets in the East African region. Professional standards among bankers, investment advisers, fund managers, accountants, lawyers, brokers and other intermediaries are high.

The Central Bank of Kenya is responsible for management of Kenya's financial and banking system, in tandem with the Treasury. Bank supervision is of a high standard. There are over 40 licensed banks and numerous other financial institutions such as building societies, foreign exchange bureau and credit reference agencies.

The Capital Markets Authority is responsible for regulation and supervision of the capital markets, including the Nairobi Stock Exchange. There are 52 listed companies with their combined market capitalization standing at over US$ 10 billion. The market is divided between a main segment, an alternative investment market (for smaller companies) and a fixed income segment (for debt issuers). Corporate bonds have been issued by a number of regional multilateral institutions (East African Development Bank, PTA Bank) and on a secured basis by Kenya ’s two mobile telecoms companies.

Competition law is supervised by the Monopolies and Prices Commission. Most mergers and acquisitions fall within the scope of the law and require an approval.

The law is stated as at 1st March 2007.

This summary does not purport to be a comprehensive statement of the law and no reliance may be placed on the contents. For further information and answers to your questions please contact us using the contact details provided.