This legal advice canvasses the following terms of reference:
(a) licences, permits and authorizations that a company will require to establish a real estate development business in Kenya;
(b) the applicable labour laws;
(c) immigration and visa requirements; and
(d) other relevant matters related to the above matters.
1. LAND ACQUISITION
A foreign company desirous of establishing a real estate development business operation in Kenya will often need to acquire interest land in Kenyan for its business activities. In this regard, please note that although there are no restrictions on foreigners or corporations whose shareholders are foreign citizens owning leasehold interests in non-agricultural land, the provisions of the Land Control Act (Chapter 302 of the Laws of Kenya) prohibit any dealings in “agricultural land” by foreigner or private companies whose shareholders are not all the citizen of Kenya. For such persons to be permitted to hold agricultural land, they will have to obtain presidential approval pursuant to section 24 of the Land Control Act. Fortunately, however, most of the land in urban area is non-agricultural and there are no restrictions on foreigners or foreign companies acquiring such land. It will therefore, be imperative for a company to make arrangement to obtain “non-agricultural” leaseholds.
To acquire land in Kenya, you company will need to engage the services of a licensed land agent firm to scout for suitable for acquisition. We would be happy to recommend to you reputable land agent firms that you may contact for this purpose. Besides, after you have identified suitable land for acquisition, you will have to instruct a Kenyan Advocate to act for you in the purchase transaction. We would be pleased to recommend to you a reputable law firm to act for you in such a transaction.
As the purchaser of land in Kenya, you shall have the transfer documents stamped with duty of 4% of the purchase price applicable where the land, the subject of the transaction, is situated within a municipality and 2 % of the purchase price applicable where the land is situated outside a municipality.
Please note further that before acquiring land you shall require to satisfy yourselves that the land you intend to purchase can be used for the intended purpose. In this regard, please note that in land title deeds normally contain the conditions stipulating the permitted user of the land. Thus, where the permitted user of a parcel of land is stated as “agricultural” such land cannot be used for any other purposes unless the change of user from the intended purpose has been procured from the Commissioner of Lands. The change of user is usually a time consuming process and may take about 3 to 9 months. It is therefore advisable for one to identify that the land he intend to purchase is suitable for intended user to avoid change of user procedure and consequent delays. We would be pleased to undertake such due diligence exercises on your behalf.
2. POST ACQUISITION PERMITS AND PERMITS
Once you have acquired suitable land, before commencing construction, as prerequisites, you shall be obliged to obtain an environmental permit as well as building permission.
2.1. An Environmental Permit to develop a property must be procured from the National Environmental Management Authority (NEMA) before the project implementation is commenced. NEMA is mandated to grant or refuse to such permit under the provisions of the Environmental Management and Co-ordination Act, 1990 (EMCA). Under this Act, before an environmental permit to develop a property is granted, the developer must commission an environmental impact assessment study to be prepared on the environmental impacts of the proposed project for delivery to NEMA. Such a report should be prepared by a duly licensed environmental specialist and should highlight the environmental impacts that the proposed project to the environment and how any negative environmental impact will be mitigated by the project proponent.
2.2. The Building Permission: this is normally granted by the local authority within whose jurisdiction the property to be developed is situated. The building permission usually involves the approval of the project architectural plans prepared by a qualified architect by the relevant local authority. The building plans to be submitted for approval will usually be prepared in accordance the requirements of the Building Code and the provisions of the Physical Planning Act and Regulations.
3. IMMIGRATION AND EMPLOYMENTS ISSUES
3.1. Work Permit and Visa Requirements
Under the Immigration Act (Chapter 172 of the Laws of Kenya) and Regulations made thereunder, no foreigner is permitted to work in Kenya unless he/she is a holder of a work permit issued by the Kenyan Immigration Department. Specifically, Non-Kenyan citizens will require class “A” entry permits to work for a specific employer or company in Kenya. Work permits in Kenya are issued at the discretion of the Immigration Department. It has to be at least, to the minimum established that the work which the expatriates are coming to do in Kenya cannot be done by the local people and that there is no local experience. Dependants’ passes are invariably issued to the dependants of the expatriate employees.
In light of the above any employee you shall send to oversee the activities of the main contractor will require obtaining a work permit. This will be the case whether such employee is seconded from you foreign country’s office or employed by your Kenyan branch office or subsidiary company.
For any foreigners coming into Kenya for SHORT BUSINESS VISIT, he must be a holder of A BUSINESS VISA. For those who wish to WORK FOR THREE (3) MONTHS OR LESS, they will be required to obtain a SPECIAL PASS which is renewable only once and become invalid if someone leaves the country.
In addition, under the INVESTMENT PROMOTION ACT, provision has been made for the entitlement to ENTRY PERMITS for expatriates to be employed by a holder of an “investment certificate” (discussed below).
Moreover, any expatriate employee working in Kenya shall be required to register as an alien within 90 days of arrival. The fee for initial registration is Shs.2,000. The registration must be renewed every two years at a fee of Shs.1,000 per annum. Dependants over the age of 18 residing in Kenya must also register.
3.2. Employment Laws
Terms and conditions of employment are regulated under the Employment Act, 2007 and the Regulations of Wages and Conditions of Employment Act. Under the latter, various orders have been made regulating wages and conditions of employment in specific industries and generally. The relevant order which covers your proposed business is the Regulation of Wages (General) Order.
The Order includes provision for minimum wages and other matters. The prescribed minimum wage varies for different categories of employees/expatriates. The minimum wage also differs depending on the area of employment.
Paid absences required by law
In addition to public holidays, an employee is entitled to fully paid sick leave of up to 45 days in each period of 12 months, fully paid holiday or vacation leave (not less than 21 days in each period of 12 months).
Standard work hours
The statutory number of days of work in a week is six days with a rest period entitlement of one day. There is nothing in Kenya Law which states that Saturday is a rest day and employers can insist on their employees working on that day at no higher rate than normal.
Any time which is worked by an employee in excess of the normal daily hours of work specified above is deemed overtime to which higher rates of pay apply.
Severance pay costs
If employment of an employee is terminated on account of redundancy, the employee is entitled to severance pay at the rate of fifteen days for each year served plus one month’s notice or pay in lieu of notice plus any accrued leave or leave pay which is due to the employee.
Health, welfare and life insurance schemes
Under the Employment Act an employer is under an obligation to provide medical treatment to an expatriate taken ill or make full reimbursement of the costs incurred. As a result, many employers participate in medical insurance schemes for their employees.
Under the Workmen’s Compensation Act, an employer is liable to pay compensation to an employee who has sustained personal injury or death as a result of accidents sustained out of and in the course of employment. Again, most employers take out workmen’s compensation insurance to meet such claims.
National Social Security Fund (“NSSF”)
This fund provides the employee with a lump-sum retirement benefit. Historically, the rate of return paid by the State is considerably less than that achieved by private schemes but participation is mandatory. The employer pays a standard contribution of approximately 1% of salary subject to a maximum of Shs.200 (approximately US $ 2) per month. One half of the contribution is deductible from the employee’s salary. The precise amount of the contribution (where less than the maximum) is determined by reference to salary bands.
National Hospital Insurance Fund (“NHIF”)
The employee contributes a fixed sum which must be deducted by the employer from the expatriate’s salary. The maximum contribution is Shs.320 (approximately US$ 3.2) per month. The contributions are used to offset the costs of medical treatment but they only cover a fraction of actual costs.
Social Security Obligations
The employer must register with the NSSF if it employs more than 4 persons in Kenya and may register if it employs less. The contributions are described above. The medical benefit and NHIF requirements are also described above.
3.3. Taxation of employees
Under section 5(1)(a) of the Income Tax of Kenya, a person is taxable in respect of employment or services rendered in Kenya if he is resident in Kenya at the time of services were rendered in Kenya.
“resident” as defined in section 2 of the Income Tax means in relation to an individual that either:
(a) he has a permanent home in Kenya and was present in Kenya for any period in a particular year of income under consideration.
(b) he has no permanent home in Kenya, but was present in Kenya for a period or periods amounting in aggregate to 183 days or more in tax year of income;
(c) has no permanent home in Kenya but was present in Kenya and in that year of income and in each of the two preceding years of income for period averaging more that 122 days in each year.
From the above, if a foreign is working in Kenya for a Kenyan or foreign employer, he shall be taxed under section 5(1) (a) above if he falls within (b) or (c) above (i.e., number of days in Kenya). If however such a foreigner is working for a local employer, and therefore housed in Kenya, he shall be treated as “resident” and therefore taxed under paragraph (a) of the definition of “resident” above.
Please note that under section 5(1) (a) of the Income Tax Act, resident persons are taxable in Kenya for their employment income derived from or accrued in Kenya as well as on their employment income from world-wide employment.
Moreover, under section 5(1) (b) of the Income Tax Act, an amount paid to a non-resident person in respect of any employment with or services rendered to any employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident, shall be deemed to have accrued in or to have been derived from Kenya, and therefore taxable in Kenya.
Therefore, resident employees will pay tax income tax for all their income which is derived or accrue in Kenya and also world wide whereas the non-resident employees will pay taxes only for their income which is derived from or accrued in Kenya.
Please note that taxable income on employment or services rendered in widely defined under section 5(2)(a) of the Income Tax Act and it included inter alia “wages, salary leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity…”. Travelling, entertainment and other similar allowances are also taxable unless they are purely a reimbursement of expenses incurred in the production of income.
The top rate of tax is 30%. There is a sliding scale starting at 10%. The top rate applies for income over Shs.466,704 per annum. Tax is also payable on deemed income attributable to any employment benefits e.g. car, telephone, housing etc. There is only very minor personal tax relief available.
It is essential that all tax dead-lines are understood and carefully observed as the penalties and interest are substantial. The expatriate is responsible for making his/her own tax return on a self-assessment basis. This is usually done in April (in order to calculate any tax which may be due over and above the PAYE). If there is no such additional tax, the return may be filed before the end of June.
Section 36 of the Income Tax Act imposes an obligation on the employer to deduct the amount of tax due from its employees’ emoluments as they accrue i.e. Pay As You Earn (PAYE). However, under the Income Tax Act, the definition of “employer” is restricted to any resident person responsible for the payment of any emoluments to any employee, and any agent, manager or other representatives so responsible in Kenya on behalf of any non-resident employer. Therefore this obligation will be lifted where the employer, as in this instance, is a non-resident company for tax purposes making direct payments to the resident expatriate (not through an agent). In the latter case, it is the employee’s obligation to pay the relevant amount of tax in Kenya and to file his annual return.
Please note that under section 15(2)(r) of the Income Tax Act, one third of the total gains and profits paid to an individual who is not a citizen of Kenya are deducted in computation income tax is the employer can show that he meets the criteria listed in that section, which are:
(i) that the employer is a non-resident company (i.e., branch company) or partnership trading for profit;
(ii) the expatriate is in Kenya solely for the performance of his duties in relation to his employer’s regional office, which office has been approved by the Commissioner of Domestic Taxes;
(iii) the expatriate is absent from Kenya for the performance of those duties for a period or periods amounting in the aggregate to 122 days or more in that year of income; and
(iv) the expatriate’s gains and profits from that employment are not deductible in ascertaining the total income chargeable to tax under the Act of his employer or of any company or partnership which controls, or is controlled by, that employer.
The payments to the expatriate under the terms of engagement will not be chargeable to tax in the their country of origin to the extent that such tax has been paid in Kenya by virtue of the provisions such as provisions of the Double Taxation Relief (United Kingdom of Great Britain and Northern Ireland) Notice 1977 (Legal Notice No. 253/77). The relevant article is Article 17. That Article specifically states that salaries, wages and other similar remuneration derived by a resident of a Contracting State (in this case, Kenya is a Contracting State) in respect of an employment shall be taxable only in that State unless the employment is exercised in UK which is not the case in this instance.
It must be noted however, that the expatriate will only receive a tax credit in, for instance, the UK, to the extent of the amount of tax remitted to the relevant Kenyan authorities.
4. INVESTMENT CERTIFICATE
Please note that under section 4(2) of the Investment Certificate Act, a foreign investor how intended to invested at least US$ 100,000/- or equivalent in whatever currency denominated is entitled to apply for an Investment Certificate under the Act. Among other benefits, as a holder of an investment certificate, under section thereof, you shall be entitled to the following entry permits under the Immigration Act::
(a) three Class A permits for management and technical staff; and
(b) three Class H, I, or J entry permits for owners, shareholders and partners.
Besides, under section 12(1) of the Investment Promotion Act, a holder of an investment certificate is entitled to other licences as are listed under Schedule 2 of the Act and to which, on application he would be legally entitled. Further, under section 12(2) thereof, upon the issue of an investment certificate, the following benefits will apply in respect of licences set out in the investment certificates:
a) the holder of the investment certificate is entitled to have the licence issued, subject to any conditions set out in the Second Schedule to the Act or in the investment certificate, upon application made within twelve months after the investment certificate is issued and upon payment of the applicable fee, if any; and
b) until the licence is issued or twelve months elapse after the investment certificate is issued, whichever occurs first, the licence shall be deemed to have been issued, subject to any conditions set out in the Second Schedule or in the investment certificate and subject to the payment of prescribed fees for such licences.
The holder of an investment certificate must is obliged to pay fees that would be payable under the relevant legislation for the licences set out in the investment certificate in respect of the time period commencing on the day the investment certificate is issued and such fees shall be paid within six months after the issue the investment certificate.
Please note that the entitlement to licences under subsection 12(2)(a) above is for the initial issue of such licences only and following that initial issue the laws under which the licences are issued apply in the same way as they application to all licences, including renewal or revocation of such licences.
Moreover, under section 12(5) of the Investment Promotion Act, the Investment Authority is required to facilitate the issue of licences to which the holder of an investment certificate is entitled under that section (i.e., those discussed above)
We hope that the above adequately addresses your concerns as may be captured in the terms of reference hereinabove. However, if you require any further any further information or clarification on this or any related matter, please contact our Teddy OKELLO at firstname.lastname@example.org, especially on taxation issues on establishment of branch offices and local subsidiaries of foreign companies. You may also call us on +254 715 310 677.
Meanwhile, we remain available on any question pertaining to establishment of business operations in Kenya.
For: Taxlex Consulting Group Limited
* Taxlex Consulting Group Limited a participating tax and business consultancy firm in the SLS GROUP of consultancies.