Residency raises tax burden

The tax rate of a company branch and a subsidiary of a non-resident is basically at 0.5 per cent, which for many purposes can be deemed to be insignificant.

The main disadvantage of branches in Kenya is probably the limitation of the expenses they can deduct for corporation tax purposes.

For branches of Kenyan entities elsewhere, there are tax advantages where they are in a loss position.

However, where they are profitable, the foreign tax is an expense and not an advance hence better from a tax point of view to incorporate.

Another major advantage of Kenyan branches is that due to the fact that they have no equity, the issue of thin capitalisation does not arise.

Effectively a branch of a foreign company can be fully financed by interest bearing loans without the risk of the interest being restricted.

Despite the flexibility and seeming tax advantages of branches, they carry a significant liability risk for the head office as they are transparent to the headquarters.

Moreover, when filing their tax returns they are required to file the financial statements of the head office.

The very fact that one takes legal and financial affairs across territories is often enough to discourage the formation of branches.

Nonetheless, one cannot discount establishing branches depending on the nature of their businesses.

kthuo@vivafricaltd.com