Business Structures in Kenya

Transcription

1 Business Structures in Kenya REDD+ Law Project - Briefing Paper July 2014 Mona Doshi Partner, Anjarwalla & Khanna (Africa Legal Network), Mombasa office. Caroline Wanjiku Kago Chairperson, Department of Private Law, Kenyatta University School of Law (KUSOL) Leah Kiguatha Lecturer, Department of Public Law, Kenyatta University School of Law (KUSOL) Dr Sophie Chapman Research Associate, Cambridge Centre for Climate Change Mitigation Research The REDD+ Law Project is led by Baker & McKenzie and the Cambridge Centre for Climate Change Mitigation Research (University of Cambridge), working with international and local advisers/institutions to assist countries in the development and implementation of their national REDD+ legal frameworks. More information regarding this initiative is available at 1

2 CONTENTS About this brief 1 Comparative table of business structures (Company limited by guarantee, Bare Trust, Society, Non-governmental organisation) 2 Company limited by guarantee 3 Bare Trust 4 Society 5 Non-governmental organisation 6 Joint Venture ABOUT THIS BRIEF The finance required to halve emissions from the forest sector to 2030 is expected to be substantial, with a role for both the public and private sectors. Early involvement by the private sector has largely been in the role as offset buyers in the voluntary market for forest carbon credits. However, with no certainty that a future REDD+ market will be established, alternative ways for the private sector to participate in REDD+ are being contemplated. Given that REDD+ is increasingly being framed as a sustainable development opportunity that supports green growth, the role of the private sector in the REDD+ value chain and green economy are being explored at a high level in many countries, including Kenya. In any sector, businesses usually adopt one of several legal structures (often called business structures. ) It can be expected that businesses seeking to engage in REDD+ implementation or, more broadly, business opportunities in the green economy will do the same. Different business structures offer different benefits and impose different obligations. A business therefore needs to consider its aims and needs in order to choose the most appropriate type of business structure. This Brief summarises the types of business structures available under Kenyan law. It provides both a comparison table and individual summaries. 2

3 1 COMPARATIVE TABLE OF KENYAN BUSINESS STRUCTURES Company limited by guarantee Bare Trust Society Non-governmental organisation Governing legislation Companies Act (Cap 486) Trustees Act (Cap 167) Trustees (Perpetual Succession) Act (Cap 164) Societies Act (Cap.108) Formerly governed by the Non- Governmental Organizations Co-Ordination Act, 1990 Now governed by the Public Benefit Organisation Act Act No. 18 of 2013 Overview In the event of a wind up, the liability of members is limited to the amount that members have guaranteed to contribute to the assets of the company. Also known as a simple trust. A flexible method of constituting an association for charitable purposes. A private voluntary grouping of individuals or associations not operated for profit or for other commercial purposes. When should this structure be used? Can be incorporated either with or without share capital. However, in most cases companies limited by guarantees are incorporated without share capital. Appropriate for professional, trade and research associations, and clubs supported by annual subscription. Can also be used for registration of charitable and not for profit organizations. Each beneficiary has an immediate and absolute right to both capital and income. Beneficiaries also have the right to actual possession of trust property. Can be used in any situation where a trust is required. Best suited for a charity that is initiated by a group of ten or more people rather than a single founder and that relies on subscriptions, voluntary contributions and fundraising efforts rather than on substantial endowments. Have organized themselves nationally or internationally for the public benefit, and the promotion of social welfare, charity or research in areas including health, relief, agriculture, education, industry and the supply of amenities and services. Incorporated for public benefit and to promote social welfare, health, relief, agriculture, education, industry and the supply of amenities and services. In Kenya, the type of organizations that are registered as societies include political parties, self-help groups, 3

4 Members and officers Company limited by guarantee No maximum number of members. Minimum number of members is two (2) for a private company or seven (7) for a public company. No restrictions on non-kenyan citizens. Bare Trust Society Non-governmental organisation neighborhood associations and a wide variety of charitable associations. No minimum or maximum number of members prescribed by law but this is set out in the trust deed. Trustees may be individuals (whether local or foreigners), or a body corporate in the nature of a trust corporation, or a mixture of both. Under Section 36 of the Trustee Act, in the case of settlements and dispositions on trust for sale of land the number of trustees shall not exceed four, and, where more than four persons are named as trustees, the four first named (who are able and willing to act) shall alone be the trustees, and the other persons named shall not be trustees unless appointed on the occurrence of a vacancy. This section only applies to settlements and dispositions of land, and the restrictions imposed on the number of trustees do not apply - (a) in the case of land vested in trustees for charitable, ecclesiastical or public By its definition, the minimum number of members is ten. No restrictions on non-kenyan citizens. No restrictions on non-kenyan citizens 4

5 Company limited by guarantee Bare Trust Society Non-governmental organisation purposes; or (b) Where the net proceeds of the sale of the land are held for those purposes. Foreign investment restrictions Initial steps to establishment No foreign investment restrictions Members propose a name and the objects of the Company. The following details must be provided upon Registration: 1. Address, nationality, and occupation of each proposed director; 2. Address and CPS number of the Company Secretary; and 3. Address of the proposed Registered Office, including its postal and physical address (plot and section number, and road name). Suitable Memorandum and Articles to be prepared and filed. The capital that each member undertakes to contribute must be stated in the Memorandum. The Memorandum and Articles must be stamped and registered with the Registrar of Companies. No foreign investment restrictions Trustees prepare a Trust Deed which defines: - the objects of the Trust; - the Name of the Trust; - the powers of the trustees; - the powers to change and appoint additional trustees; - resignation and removal of trustees; and - meeting of trustees. Once the trust deed has been approved by the trustees, the deed is signed and thereafter stamped. After stamping, the trust deed is presented for registration at the Registry of Documents Upon Registration, a certified copy of the trust deed and a petition for incorporation is prepared in the prescribed form then lodged with the Cabinet Secretary for land for incorporation of the trust. No foreign investment restrictions A society may be classified as 'registered' or 'exempt'. Societies are exempt when they do not have to comply with certain requirements, such as rendering accounts and annual returns to the Registrar of Societies. Applications for registration, or for exemption from registration, are made to the Registrar of Societies. Applications must be lodged together with a copy of the society s (proposed) constitution and rules. Once a society has been registered or is exempt from registration, the Registrar shall issue a certificate of registration or exemption from registration to the society, in the prescribed form. No foreign investment restrictions Applications for registration must be submitted to the executive director of the Non- Governmental Organizations Co-ordination Board in the prescribed form. An application for registration is made by the chief officer of the proposed organization and must specify: (a) other offices of the organization; (b) the head office and postal address of the organization; (c) the sectors of the proposed operations; (d) the districts, divisions and locations of the proposed activities; (e) the proposed average annual budgets; (f) the duration of the activities; (g) all sources of funding; (h) the national and international affiliation and the certificates of incorporation. 5

6 Company limited by guarantee Bare Trust Society Non-governmental organisation Please note that this process is very extensive. Upon registration a certificate of registration is issued to the nongovernmental organization. Fees Taxes applicable For incorporation K.Shs.75,000/= Value Added Tax (where applicable) For incorporation K.Shs.50,000/= Value Added Tax (where applicable) Income Tax: The Trust may be exempted from income tax pursuant to paragraph 10 of the First Schedule to the Income Tax Act (Cap 470) if the trust is established solely for the purposes of the relief of poverty or distress of the public, or for the advancement of religion or education The transfer of property into a charitable organisation is only exempt from stamp duty if the sale or transfer is for the purposes of construction or expansion of educational institutions. For incorporation K.Shs.50,000/= Income Tax Value Added Tax (where applicable) For incorporation K.Shs.50,000/= Income Tax (subject to the exemptions under Paragraph 10 of the first schedule of the Income Tax Act) Section 138 (1) of The Customs and Excise Act (Cap 472) allows the Finance Minister to remit, in whole or in part, duty payable by any person on certain goods, aircraft, vessels or vehicles imported by that person, if the Minister is satisfied that: it is in the public interest to do so if such goods are donated or purchased for donation by any person to non-profit making organizations or institutions approved by the Government, for their official use or for free distribution to poor and needy persons, or for use in medical treatment, educational, religious or rehabilitation work. 6

7 Reporting and compliance Company limited by guarantee If the company has share capital, it must file an annual return to the Companies Registry like any other limited liability company. If the company has no share capital, it must file an annual return stating the address of the registered office. Particulars of the total amount of the company s indebtedness in respect of all mortgages and charges are required to be registered with the Registrar of Bare Trust Society Non-governmental organisation In Sections 29 and 30 of the Non-Governmental Organizations Co-Ordination Act (1990) a non-governmental organisation may be entitled to various tax exemptions (upon making the necessary applications and procuring the necessary consents) relating to: a. duty in respect of imported goods or equipment; b. value added tax on goods and services required to meet the Organization s objectives; c. value added tax on income generating activities; and d. Income tax for expatriate employees. Subject to less onerous accounting and reporting requirements than companies. Notice in the prescribed form of any change of the situation of the office, or of the postal address, must be given to the Registrar of Societies within 14 days of such change. Every registered society shall keep a register of its members in such form as the Registrar of Societies may specify, containing the: name and address of each member, the date of their admission to membership, and The Non-Governmental Organisations Co-ordination Board shall keep books of records of the nongovernmental organisation's income, expenditure, assets and liabilities. 7

8 Company limited by guarantee Companies Bare Trust Society Non-governmental organisation the date on which he ceases to be a member. Liability of members Members have limited liability. In the event of a company being wound up, a company's members are only liable for the start-up capital they invested. A member continues to be held liable for a period of one year after their membership ceases. Trustees are personally liable for all contractual relationship that arise with third parties. Trustees are also personally liable for the actions of employees which were done in the course of their employment and within the scope of their authority. Every registered society shall annually furnish to the Registrar of Societies, on or before the prescribed date, such returns, accounts and other documents as may be prescribed. Once the society is registered, all current and subsequent members are collectively considered to be a body corporate under the name of the society. The incorporated society takes on a separate legal identity distinct from its members. Body corporate capable of suing and being sued in its corporate name. Third parties have no direct right to payment out of the trust assets. Trustees may, however, be entitled to an indemnity out of the trust fund for liabilities properly incurred. Further, a trustee s personal liability may be limited or exempted by creating express provisions in the trust instrument. 8

9 Company limited by guarantee Bare Trust Society Non-governmental organisation Trustees of a charity may also apply pursuant to the provisions of the Trustees (Perpetual Succession) Act for a certificate of incorporation of the trustees as a corporate body. If this certificate is granted to the trustees, the trustees shall thereupon become a body corporate by the name described in that certificate, and shall have perpetual succession and a common seal, and power to sue and be sued in their corporate name. Therefore, the combination of registering a trust under the Trustees (Perpetual Succession) Act and utilising corporate trustees may significantly reduce the risk associated with exposing individual trustees to unlimited personal liability. Trustees may be liable for breach of trust if, for example, they act with negligence or in excess of the duties imposed on them by the trust. Where several trustees are implicated in a breach of trust, all such trustees will be jointly and severally liable to the person entitled to sue. 9

10 Company limited by guarantee Bare Trust Society Non-governmental organisation However, for those trustees not implicated in such breach, they can benefit from the statutory liability exemption provisions set out in Section 32 of the Trustee Act (Cap 167) which states that: A trustee shall be chargeable only for money and securities actually received by him notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts, receipts, neglects or defaults, and not for those of any other trustee." Jurisdiction National National National National Disposal of assets on winding up After a winding-up order has been made, the liquidator takes into his custody or under his control all the property to which the company is or appears to be entitled. No procedure for winding up is provided. As such, the trust deed should set out how the assets of the trust will be disposed in the event of it being wound up. Upon winding up, the court appoints a Receiver who shall then be responsible for the winding up of the assets of the society. No procedure for winding up is provided. As such, the procedure for disposal of assets should be set out in the constitutional documents. Restrictions on the activities of the entity, i.e. commercial activities, land holding, etc. Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure for a term not exceeding ninetynine years. Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure for a term not exceeding ninetynine years. Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure for a term not exceeding ninetynine years. Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure only, and any such lease, however granted, shall not exceed ninety-nine years. 10

11 Company limited by guarantee A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens. This means land held by a company which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years. Where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the Land Control Board is required, then under the Land Control Act, the Land Control Board will not grant its consent if the transaction is to a non-kenyan citizen, or a private company, or co-operative society, all of whose members are non-citizens of Kenya. Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land. This is another form of restriction in land holding (a user of land is the specific use to which that land may be applied, eg. industrial, residential, commercial, etc. The user is normally stated on the Bare Trust Society Non-governmental organisation A body corporate shall be A body corporate shall be regarded as a citizen only if the regarded as a citizen only if the body corporate is wholly owned body corporate is wholly owned by one or more citizens. by one or more citizens. Property held in trust shall be regarded as being held by a citizen only if all of the beneficial interest of the trust is held by Kenyan citizens. This means that land held by a trust which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years. Where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the Land Control Board is required, then under the Land Control Act, the Land Control Board will not grant its consent if the transaction is to a non-kenyan citizen, or a private company, or co-operative society, all of whose members are non-citizens of Kenya. Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land (a user of land is the specific use to This means that land held by a society which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years. Where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the Land Control Board is required, then under the Land Control Act, the Land Control Board will not grant its consent if the transaction is to a non-kenyan citizen, or a private company, or co-operative society, all of whose members are non-citizens of Kenya. Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land (a user of land is the specific use to which that land may be applied, eg. industrial, residential, commercial, etc. The user is normally stated on the document of title to that land). This is another form of A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens. This means that land held by an NGO which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years. Where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the Land Control Board is required, then under the Land Control Act, the Land Control Board will not grant its consent if the transaction is to a non-kenyan citizen, or a private company, or co-operative society, all of whose members are non-citizens of Kenya. Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land. This is another form of restriction in land holding. 11

12 Company limited by guarantee document of title to that land). Bare Trust Society Non-governmental organisation which that land may be applied, restriction in land holding. eg. industrial, residential, commercial, etc. The user is normally stated on the document of title to that land) This is another form of restriction in land holding. 12

13 2 COMPANY LIMITED BY GUARANTEE Company limited by guarantee Governing legislation Companies Act (Cap 486) Overview When should this structure be used? Members and officers In the event of a wind up, the liability of members is limited to the amount that members have guaranteed to contribute to the assets of the company Can be incorporated either with or without share capital. However, in most cases companies limited by guarantees are incorporated without share capital. Appropriate for professional, trade and research association, and clubs supported by annual subscription. Can also be used for registration or charitable and not-for-profit organizations. No maximum number of members provided for Minimum number of members is two (2) for a private company or seven (7) for a public company No restrictions on non-kenyan citizens Foreign investment restrictions Initial steps to establishment Fees No foreign investment restrictions Members propose a name and objects of the Company Provide details of the addresses, nationality and occupations of the persons proposed to be the directors of the company Details of the person who is to be the company secretary Details of the registered office of the company, that is its postal and physical address (plot and section number and road name) Suitable Memorandum and Articles be prepared and filed The amount of money that each member undertakes to contribute must be stated in the Memorandum. The Memorandum and Articles must be stamped and registered with the Registrar of Companies. For incorporation K.Shs.75,000/= Taxes applicable Value Added Tax (where applicable) 13

14 Reporting and compliance Liability of members If the company has share capital, it must file an annual return like any other limited liability company If it has no share capital, it must file an annual return stating the address of the registered office. If the register of members is not kept at the registered office, the address of the place where it is kept. The particulars of the directors and the secretary, which are required to be kept in the register of directors and secretaries. Particulars of the total amount of the company s indebtedness in respect of all mortgages and charges required to be registered with the Registrar of Companies Members have limited liability: only liable to the specified amount which a member undertakes to contribute towards the assets of the company in the event of its being wound up. Liability extends to one year after a member ceases to be one. Jurisdiction Disposal of assets on winding up Restrictions on the activities of the entity, i.e. commercial activities, land holding, etc. National After a winding-up order has been made the liquidator takes into his custody or under his control all the property to which the company is or appears to be entitled. The liquidator may, after giving such indemnity, if any, as the court may direct, bring or defend in his official name action or other legal proceeding which relates to that property or which it is necessary to bring or defend for the purpose of effectually winding up the company. Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure for a term not exceeding ninety-nine years. A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens. This means that land held by a company which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years. Under the Land Control Act, where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the relevant Land Control Board is required, the Land Control Board will not grant its consent if such sale, lease or transfer is to a non-kenyan citizen or a private company or co-operative society all of whose members are not citizens of Kenya Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land. This is another form of restriction in land holding. 14

15 Formation of a Limited Liability Company Companies are registered under the Companies Act Chapter 486, Laws of Kenya: 1. Reservation of Name. 1 The lawyer requests the Registrar of Companies to reserve the three names notified to him by letter. This prompts the Registrar to conduct a search to confirm the names availability and desirability. 2. Preparation of Memorandum & Articles of Association and requisite forms. 2 The lawyer then proceeds to prepare the Memorandum & Articles of Association. They incorporate the information procured during the client meeting. The Memorandum and Articles are the constitution of the company and lay out its objects, its management structure and moderates the relationship between shareholders, directors and third parties. The constitution documents are prepared along with the requisite registration forms. 3. The constitution and the registration forms are then signed by the founders and the designated company secretary They are then forwarded to the collector of stamp duty for the assessment of stamp duty (tax) payable and thereafter the stamp duty is paid. This is a process that takes 3 to 5 working days. 5. Once the stamp duty payment receipt is back, the constitution and all the registration 4 forms are submitted to the Registrar of Companies for the incorporation of the company. 6. In the case of a Company Limited by Guarantee, the National Intelligence Service then undertakes a security check on all the subscribers to the Memorandum and Articles of Association. 7. Once the documents are lodged, the certificate of incorporation is prepared and issued within fourteen (14) days. In the case of a Company Limited by Guarantee, the certificate of incorporation 5 is released after a period of between 6 to 12 months owing to the security checks. 1 Section 19(1)(a) of the Companies Act. 2 Section 4 (1), 5, 9, 10, 11, 12 Companies Act. 3 Section 12 Companies Act. 4 Section 15 Companies Act. 5 Section 16(1) Companies Act. 15

16 8. If requested to do so, the lawyer who is engaged would proceed to procure for the Company a Personal Identification Number (PIN) from the Kenya Revenue Authority for taxation purposes. In addition the lawyer may also procure a company seal. There are two points to note: A Company Limited by Guarantee means that the member of the company have agreed to an amount that will each contribute toward the debts of the company on winding up. While a Company Limited by shares has the liability of the members limited to the extent to the extent of the share capital not paid up. The incorporation of the Company Limited by Guarantee involves a security check on the members that prescribe to the Memorandum. This prolongs the registration process. A successful completion of all these steps establishes 6 the company as a body corporate with limited liability. The liability is limited either to the extent to the uncalled up amount on the shares held by a member where the company is limited shares while it is limited to the amount guaranteed by a clause in the Memorandum of Association. The company also enjoys perpetual succession and the power to hold land. 6 Section 16(2) Companies Act. 16

17 3 BARE TRUST Bare Trust Governing legislation Trustees Act (Cap 167) Trustees (Perpetual Succession) Act (Cap 164) Overview When should this structure be used? Members and officers Foreign investment restrictions Initial steps to establishment Also known as a simple trust Each beneficiary has an immediate and absolute right to both capital and income Beneficiaries have the right to take actual possession of trust property Can be used in any situation where a trust is required No minimum or maximum number of members prescribed by law but this is set out in the trust deed Trustees may be individuals, both local and foreigners, or a body corporate in the nature of a trust corporation, or a mixture of both. Under section 36 of the Trustee Act, in the case of settlements and dispositions on trust for sale of land the number of trustees shall not exceed four, and, where more than four persons are named as trustees, the four first named (who are able and willing to act) shall alone be the trustees, and the other persons named shall not be trustees unless appointed on the occurrence of a vacancy. This section only applies to settlements and dispositions of land, and the restrictions imposed on the number of trustees do not apply - (a) in the case of land vested in trustees for charitable, ecclesiastical or public purposes; or (b) where the net proceeds of the sale of the land are held for those purposes. No foreign investment restrictions Trustees prepare a Trust Deed which defines: the objects of the Trust; the Name of the Trust; the powers of the trustees; the powers to change and appoint additional trustees; resignation and removal of trustees; and meeting of trustees. Once the trust deed has been approved by the trustees, the deed is signed and thereafter stamped. After stamping the trust deed is presented for registration at the Registry of Documents. 17

18 After registration under the Registry of Documents, a certified copy of the trust deed and a petition for incorporation is prepared in the prescribed form then lodged with the Minister responsible for Land matters for incorporation of the trust. Please note that this is a very long process. Fees For incorporation K.Shs.50,000/= Taxes applicable Value Added Tax (where applicable) Income Tax The Trust may be exempted from income tax pursuant to paragraph 10 of the First Schedule to the Income Tax Act (Cap 470) if the trust is established solely for the purposes of the relief of poverty or distress of the public, or for the advancement of religion or education. The transfer of property into a charitable organisation would be exempted from payment of stamp duty if it is for the sale or transfer of land for the construction or expansion of educational institutions. Reporting and Subject to less onerous accounting and reporting requirements than companies compliance Liability of members Trustees are personally liable to third parties for a contractual relationship. Third parties would not have a direct right to payment out of the trust assets. Trustees are also liable personally for the acts of employees done in the course of their employment and within the scope of their authority. Trustees may, however, be entitled to an indemnity out of the trust fund for liabilities properly incurred. Further, a Trustee s personal liability may be limited or exempted by creating express provisions in the trust instrument. Trustees of a charity may also apply pursuant to the provisions of the Trustees (Perpetual Succession) Act for a certificate of incorporation of the trustees as a corporate body. If such a certificate is granted to the trustees the trustees shall thereupon become a body corporate by the name described in that certificate, and shall have perpetual succession and a common seal, and power to sue and be sued in their corporate name. Therefore, the combination of registering a trust under the Trustees (Perpetual Succession) Act and utilising corporate trustees may significantly reduce the risk associated with exposing individual trustees to unlimited personal liability. Trustees may be liable for breach of trust if, for example, they act with reference to trust property in contravention of the duties imposed on them by the trust, in excess of those duties or negligently. Where several trustees are implicated in a breach of trust, all such trustees will be jointly and severally liable to the person entitled to sue in respect thereof. However, for those trustees not implicated in such breach, they can benefit from the statutory liability exemption provisions set out in Section 32 of the Trustee Act (Cap 167) which states that: A trustee shall be chargeable only for money and securities actually received by him notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts, receipts, neglects or defaults, and not for those of any other trustee. 18

19 Jurisdiction Disposal of assets on winding up Restrictions on the activities of the entity, i.e. commercial activities, land holding, etc. National No procedure for winding up is provided. As such the trust deed should set out how the assets of the trust will be disposed in the event of it being wound up. Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure for a term not exceeding ninety-nine years. A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens. Property held in trust shall be regarded as being held by a citizen only if all of the beneficial interest of the trust is held by persons who are citizens. This means that land held by a trust which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years. Under the Land Control Act, where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the relevant Land Control Board is required, the Land Control Board will not grant its consent if such sale, lease or transfer is to a non-kenyan citizen or a private company or co-operative society all of whose members are not citizens of Kenya. Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land. 19

20 4 SOCIETY Society Governing legislation Societies Act (Cap.108) Overview It is a flexible method of constituting an association for charitable purposes. When should this structure be used? Best suited for a charity that is initiated by a group of ten or more people rather than a single founder and that relies on subscriptions, voluntary contributions and fundraising efforts rather than on substantial endowments. In Kenya, the type of organizations that are registered as societies include political parties, self-help groups, neighborhood associations and a wide variety of charitable associations. Members and officers By its definition, the minimum number of members is ten. No restrictions on non-kenyan citizens. Foreign investment restrictions Initial steps to establishment Fees Taxes applicable No foreign investment restrictions. A society may be a registered society or an exempt society. Societies are exempt when they do not have to comply with certain requirements of societies such as rendering accounts and annual returns to the Registrar of Societies. Applications for registration or for exemption from registration for societies are made to the Registrar of Societies together with a copy of the society s constitution and rules Upon registering a society or exempting it from registration, the Registrar shall issue to the society a certificate of registration or exemption from registration in the prescribed form. For incorporation K.Shs.50,000/= Income Tax Value Added Tax (where applicable) 20

21 Reporting and compliance Notice in the prescribed form of any change of the situation of the office, or of the postal address, of a registered or exempted society must be given to the Registrar of Societies within fourteen days of such change. Every registered society shall keep a register of its members in such form as the Registrar of Societies may specify or as may be prescribed containing the name and address of each member, the date of his admission to membership and the date on which he ceases to be a member. Every registered society shall furnish annually to the Registrar of Societies, on or before the prescribed date, such returns, accounts and other documents as may be prescribed. Liability of members Once the society is registered, all current and subsequent members are collectively considered to be a body corporate under the name of the society. The incorporated society takes on a separate legal identity distinct from its members. Jurisdiction Disposal of assets on winding up Restrictions on the activities of the entity, i.e. commercial activities, land holding, etc. National Upon winding up, the court appoints a Receiver who shall then be responsible for the winding up of the assets of the society. Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure for a term not exceeding ninety-nine years. A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens. This means that land held by a society which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years. Under the Land Control Act, where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the relevant Land Control Board is required, the Land Control Board will not grant its consent if such sale, lease or transfer is to a non-kenyan citizen or a private company or co-operative society all of whose members are not citizens of Kenya. Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land (ie. this is a form of restriction in land holding). 21

22 Establishing a Common Law (non-corporate) Trust Trusts are common forms of association intended for both profit making and not-for-profit. Trusts are regulated under the Trustee Act Chapter 167 Law of Kenya. The law allows a lot of room for the formulator of the trust deed to set out the nitty-gritty of the trust. A trust is formed as follows: 1. Identify the name of the trust being created. 2. Identify the persons that will be the first trustees (full names and addresses). 3. Identify clearly and accurately the property that will constitute the trust funds 4. Identify clearly and accurately the people or class of persons that will be the beneficiaries of the trust fund. 5. Based on the above information, the Trust Deed (which is the constitution of the Trust) is prepared. In addition to the information in 1 4, the Deed should set out the following to avoid application of the default provisions of the Trustee Act: a. The person who may appoint new or additional trustees and the extent of that power b. The reasons for the removal of a trustee c. The procedure for the amendment of the trust deed d. Powers of investment and nature of investments that might be made by the trustees or their agents. Care needs to be taken to ensure that the power granted under the deed does not purport to grant power to allow investments prohibited by the Trustee Act. e. Power of appointment of official of the trust f. Extent of the powers of the trustees g. Dissolution and winding up procedure and powers h. In the case of a trust set up for charitable purposes, the trust ought be formed as an irrevocable trust The Trustees will then be required to sign the Trust Deed which is then assessed for stamping and on the payment of a fee, it is stamped. Once this is done, the trust deed is presented for registration under the Registration of Documents Act (Cap. 285). The process of establishing a common law (non - corporate) trust ordinarily ends here. 22

23 This registration does not confer corporate status and the trustees will be liable in their individual capacity even though they may seek indemnity from the Trust. Establishing a Common Law (Corporate) Trust If a corporate trust is desired, then after completing the steps for a common law trust, the founders must application for incorporation under section 5 (1) of the Trustees (Perpetual Succession) Act (Cap. 164, Laws of Kenya). The objects of the trust must be limited to religious, educational, literary, scientific, social, athletic or charitable purpose and should be not-for-profit. 7 The minister having regard to the extent, nature and objects and other circumstances of the trust concerned, may grant a certificate accordingly, subject to such conditions or directions generally as he thinks fit to insert in the certificate. 8 The conditions may relate to the qualifications and number of the trustees, their tenure and avoidance of office, the mode of appointing new trustees, the custody and use of the common seal, the amount of movable or immovable property which the trustees may hold, and the purposes for which that property may be applied. 9 The incorporation of the trust in this manner makes the trustees a body corporate by the name described in the certificate with perpetual succession and a common seal, and power to sue and be sued in their corporate name and, subject to the conditions and directions contained in the certificate, to hold and acquire, and by instruments under the common seal to convey, transfer, assign, charge and demise any movable or immovable property Section 3(1) of the Trustees (Perpetual Succession) Act. 8 Section 3(2) of the Trustees (Perpetual Succession) Act. 9 Section 3(2) of the Trustees (Perpetual Succession) Act. 10 Section 3(3) of the Trustees (Perpetual Succession) Act. 23

24 5 NON-GOVERNMENTAL ORGANISATION Non-governmental organisation Governing legislation Formerly governed by the Non-Governmental Organizations Co-Ordination Act, Now governed by the Public Benefit Organisation Act Act No. 18 of Commencement by notice but pursuant to the transitional provisions under the Fifth Schedule of the Act, NGOs registered under the repealed law (Non-Governmental Organizations Co-Ordination Act, 1990) are deemed to be registered under the new law and have up to 1 year to seek registration as a Public Benefit Organization under the new law. Overview When should this structure be used? Members and officers Foreign investment restrictions Initial steps to establishment It is a private voluntary grouping of individuals or associations, not operated for profit or for other commercial purposes but which have organized themselves nationally or internationally for the benefit of the public at large and for the promotion of social welfare, development charity or research in the areas inclusive of, but not restricted to, health, relief, agriculture, education, industry and the supply of amenities and services. Incorporated for public benefit and to promote social welfare, health, relief, agriculture, education, industry and the supply of amenities and services. No restrictions on non-kenyan citizens. No foreign investment restrictions. Applications for registration must be submitted to the executive director of the Non-Governmental Organizations Co-ordination Board in the prescribed form. An application for registration is made by the chief officer of the proposed organization and it must specify - (a) other offices of the organization; (b) the head office and postal address of the organization; (c) the sectors of the proposed operations; (d) the districts, divisions and locations of the proposed activities; (e) the proposed average annual budgets; (f) the duration of the activities; (g) all sources of funding; (h) the national and international affiliation and the certificates of incorporation Upon registration a certificate of registration is issued. 24

25 Fees Taxes applicable For incorporation K.Shs.50,000/= Income Tax (subject to the exemptions under paragraph 10 of the first schedule of the Income Tax Act Section 138 (1) of The Customs and Excise Act (Cap 472) allows the Minister responsible for Finance to remit in whole or in part duty payable by any person on certain goods, aircraft, vessels or vehicles imported by that person if he is satisfied that it is in the public interest to do so if such goods are donated or purchased for donation by any person to non-profit making organizations or institutions approved by the Government, for their official use or for free distribution to poor and needy persons, or for use in medical treatment, educational, religious or rehabilitation work. The Non-Governmental Organizations Co-Ordination Act, 1990 states in Sections 29 and 30 of this Act that a non-governmental organisation may be entitled to various tax exemptions (upon making the necessary applications and procuring the necessary consents) relating to: duty in respect of imported goods or equipment; value added tax on goods and services required to meet the Organization s objectives; value added tax on income generating activities; and Income tax for expatriate employees. Reporting and compliance Liability of members Jurisdiction Disposal of assets on winding up Restrictions on the activities of the entity, i.e. commercial activities, land holding, etc. Books of records of account of its income, expenditure, assets and liabilities shall be kept with the Non-Governmental Organizations Coordination Board. Body corporate capable of suing and being sued in its corporate name National No procedure for winding up is provided. As such the procedure for disposal of assets should be set out in the constitutional documents Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure only, and any such lease, however granted, shall not exceed ninety-nine years. A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens. This means that land held by an NGO which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years. Under the Land Control Act, where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the relevant Land Control Board is required, the Land Control Board will not grant its consent if such sale, lease or transfer is to a non-kenyan citizen or a private company or co-operative society all of whose members are not citizens of Kenya. Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land. 25

26 Establishing a Non-Governmental Organisation (NGO) A Non-Governmental Organization is registered under the Non-Governmental Organizations Co- Ordination Act, An NGO is defined under section of the Act as a private voluntary grouping of individuals or associations, not operated for profit or for other commercial purposes but which have organized themselves nationally or internationally for the promotion of social welfare, development, charity or research through mobilization of resources. 11 NGOs are regulated by the NGO Coordination Bureau ( the Bureau ). There is a distinction under the Act between a National NGO and an International NGO. National Non-Governmental Organization is an NGO registered exclusively in Kenya with authority to operate within Kenya. 12 An International NGO is a Non- Governmental Organization with the original incorporation in one or more countries other than Kenya, but operating within Kenya under a certificate of registration. 13 Despite a distinction in the definition of the National NGO and an International NGO, the registration of an International and a national NGO is the same. The process is as follows: 1. Application is made for approval of the name in which the organization is to be registered. 14 The name is reserved and the applicant notifies according if the name is in the opinion of the director desirable The registration is undertaken by Application to the Executive of the Bureau. 16 The application is made by the chief officer. Such application must specify: a. Who the other officers of the organization are; b. The head office and postal address of the organization; c. The sectors of the proposed operations; d. The districts, divisions and locations of the proposed activities; e. The proposed average annual budget; f. The duration of the activities; g. All sources of funding; and h. The national and international affiliation and certificates of incorporation; 11 Section 2 of the Non-Governmental Organizations Co-Ordination Act, Section 2 of the Non-Governmental Organizations Co-Ordination Act, Section 2 of the Non-Governmental Organizations Co-ordinations Act, Regulation 8 of the Non-Governmental Organizations Co-ordination Regulations, Regulation 8(3) of the Non-Governmental Organizations Co-ordination Regulations, Section 10(3) of the Non-Governmental Organizations Co-Ordination Act 1990, and Regulation 9(1). 26

27 The application must be signed by the chief officer of the intended organization and must be accompanied by: (i) a copy of the minutes of the meeting of the proposed organization authorizing the filing of the application; (ii) a copy of the constitution of the proposed organization, specifying the Name of Non- Governmental Organization, object for which the Non-Governmental Organization is established, administrative units, custody, use and investment of the funds and property of the Non-Governmental Organization and the designation of the persons responsible for them, purpose for which the funds may be used, persons to whom membership is open, Structure and management of the Organization, quorum and meetings, financial year, manner of amending the constitution and dissolution mechanisms. (iii) a notification of the situation of the registered office and postal address of the proposed organization of the proposed organization. The director may request other information as the Board may prescribe. If the Board approves the application for registration, the Director registers the proposed organization by entering in the register of organizations the name of the organization, postal address, physical address, classification by sector and date of registration in Kenya. 17 The Board then issues a certificate of registration. 18 Upon registration the NGO becomes: 19 a. a body corporate b. with capacity to sue and be sued; c. Able to take, purchase or otherwise acquire, hold, charge or dispose of movable and immovable property d. enter into contracts; and e. do or perform all such other things or acts necessary for the proper performance of its functions under the Act, which may lawfully be done or performed by a body corporate. The NGO will in the near future be superseded by a new legal regime and transform into a Public Benefits Organization. For the entity to survive the expected change it must re-register under the new 17 Regulation 10, Section 2 of the Non-Governmental Organizations Co-ordinations Act, Regulation 10 of the Non-Governmental Organizations Co-ordination Regulations, Section 12 (1) of the Non-Governmental Organizations Coordination Act 1990; and Regulation 11 of the Non-Governmental Organizations Coordination Regulations, Section 12(3) of the Non-Governmental Organizations Coordination Act