Investor-friendly laws aim to foster further development

Kenya is at a pivotal point in its economic development, buoyed by a peaceful transition of power to a new government and the historic 50th anniversary of independence from colonial rule. Despite the turbulence occasioned by the changes to the political power structure and the country’s continuing engagement in Somalia, Kenya continues to witness significant growth and economic expansion.

The economy has shown great resilience and absorbed the effects of various challenges – the 2013 elections were perhaps the first since independence in which economic activity did not dip, showing a marked increase in investor confidence.

Economic expansion has been supported by factors such as increased government investment in infrastructure and agriculture, the rapid growth of the micro-economic subsector, a dynamic and stable private sector, continual innovations in the information and communications technology sector, ongoing discoveries of petroleum reserves and developments in regional integration. Furthermore, numerous legislative changes have been made to steer Kenya towards its goal of becoming a middle income economy by the year 2030, a target set out in the country’s developmental plan, Vision 2030.

Legal Forms Of Incorporation 

Corporate entities in Kenya may be set up as sole proprietorships, partnerships, limited liability partnerships, cooperative societies or companies. The main vehicles utilised by investors are limited liability companies, which can be incorporated either as private limited liability companies or as public limited liability companies. The law also allows foreign companies to setup a branch office in Kenya with the same legal status as the foreign company.

Investment Promotion 

To encourage investment in Kenya the Investment Promotion Act 2004 (IPA) was enacted with the aim of reducing bureaucratic delays in relation to licensing, immigration, and negotiating tax incentives and exemptions from the relevant authorities. The IPA also established a corporate body known as the Kenya Investment Authority (KIA) to implement the objectives of the legislation. If a foreign investor has an investment that is worth more than $100,000 (or the equivalent in another currency), he will be issued with an investment certificate.

Investment Incentives 

An investment certificate granted under the IPA offers investors some important benefits, including the facilitation of the issuance of relevant licences and permits required for the investor’s operations.

Investment certificate holders are also entitled to apply for entry work permits for three members of the holder’s management or technical staff and three co-owners, shareholders or partners.

In general, foreign and local investors receive equal treatment. Foreign and local investors can operate in all sectors except those in which state corporations still enjoy a statutory monopoly, such as certain infrastructure, or where there are quotas on minimum local ownership, such as the insurance, telecommunications and banking sectors. Ownership restrictions also apply to listed companies. Kenya has taken steps towards partial liberalisation of state monopolies in certain sectors – a number of public corporations have been privatised and essential sectors such as energy have been opened to private investors. In addition, Kenya has signed bilateral investment treaties with a range of countries.

Income Tax

Resident and non-resident corporate entities with a permanent establishment in Kenya are subject to tax on all income accrued in or derived from the country. The corporate income tax rate for a locally incorporated company is 30%. The tax rate for a non-resident company having a permanent establishment in Kenya (a foreign branch) is 37.5%. Newly listed companies on the Nairobi Stock Exchange (NSE) receive a reduced rate for the first 3-5 years following the year of listing. The reduced rate varies between 20% and 27% and applies for a period of between three and five years, depending on the percentage of capital listed by the entity on the NSE. Individual income tax rates are based on a graduated scale based on income brackets with the lowest rate being 10% and the highest rate being 30%.

Withholding Tax

For dividends paid to Kenyan residents and on listed shares for citizens of the East African Community the rate of withholding tax is 5%. A 10% rate applies for dividend payments to non-residents. No withholding tax is imposed if the recipient is a resident company which controls 12.5% or more of the capital in the paying company. Loan interest paid to residents and non-residents is subject to a 15% withholding tax. No withholding tax is imposed if the recipient is a qualifying Kenyan financial institution. Royalties paid by a resident to another resident person are subject to a 5% withholding tax. Royalties paid by a resident person to a non-resident person are subject to a 20% withholding tax.

Withholding tax is also chargeable on management and professional fees. Payments in respect of management and professional fees made by a resident person to another resident person are subject to a 5% withholding tax. Payments in respect of management and professional fees made by a resident person to a non-resident person are subject to 20% withholding tax. The rate of withholding tax may be reduced where the recipient of the income subject to withholding is resident in a country which has a double taxation treaty with Kenya.

Kenya has signed double-tax agreements with Canada, Denmark, France, Germany, India, Norway, Sweden, the UK and Zambia. A treaty with Mauritius has recently been ratified and is expected to come into force in January 2015. A treaty with the UAE has been signed but is not yet in force, while a treaty with Uganda and Tanzania has been negotiated but remains to be ratified by the three countries. Kenya also has investment promotion and protection agreements with France, Finland, Germany, Italy, the Netherlands, China, Libya, Iran, Burundi and the UK. For example, the withholding tax rate for management and professional fees under the Kenya-UK double taxation treaty is 12.5% CAPITAL GAINS TAX: Capital gains tax was abolished in 1985. However, a 5% capital gains tax was signed into law in September 2014, effective January 2015.

Value-Added Tax

The VAT Act requires that VAT be charged on the supply of goods and services in Kenya and on the importation of goods and services into Kenya. The VAT rate is currently 16%.

All exported goods are exempt from VAT. Exported services which satisfy certain criteria are exempt from VAT. Zero-rated VAT applies to the import of specified goods including those used in agriculture, health and education, computer hardware and software, international air travel and supplies to licensed oil exploration companies.

Supplies that are exempt from VAT include financial services provided by banks and most agricultural produce in its unprocessed state.

Transfer Pricing & Thin Capitalisation 

undefined Transfer pricing regulations require pricing arrangements in cross-border transactions such as the sale of goods, provision of services, transfer of intangible assets and lending or borrowing of money between related entities to be at an arm’s length.

Thin capitalisation rules apply to limit the deductibility of loans for any year of income with respect to interest payments in proportion to the extent that the highest amount of all loans held by the company at any time during the year of income exceeds three times the sum of the revenue reserves and the issued and paid-up capital of all classes of shares of the company where the company is in the control of a non-resident person alone or together with four or fewer other persons and where the company is not a bank or a financial institution licensed under the Banking Act.

Kenya has recently enacted “deemed interest” provisions which apply in respect of interest-free loans from non-resident shareholders.

Stamp Duty & Transfer Duty

Stamp duty is charged at nominal or ad valorem rates on certain financial instruments and transactions. Stamp duty of 1% is payable upon the transfer of shares. A stamp duty of 4% of the value of land is payable on the transfer of land in municipal areas. In rural areas the stamp duty is 2% of the value of land. There is no stamp duty on transfer of shares in a listed company. Other agreements and documents attract also stamp duty at varying rates.

Accounting Principles

Kenya has adopted and applies International Financial Reporting Standards.

Labour Laws & Immigration

Employment and labour matters are governed by the 2010 Constitution of Kenya, which provides employees with basic rights, including the right to fair remuneration and the right to reasonable working conditions. The primary statute governing the employment relationship is the Employment Act 2007 which declares and defines the fundamental rights of employees, provides for the basic conditions of employment and matters connected thereto. There are several other statutes that govern labour matters, including the regulation of labour institutions, the safety, health and welfare of workers and all persons lawfully present at workplaces, and the compensation available to employees for work-related injuries and diseases contracted in the course of their employment.

Normal working hours cannot exceed 52 hours per week for day shifts, and 60 hours per week for night shifts, and no person under the age of 16 is allowed to work for more than six hours a day. Employees are also entitled to annual leave with full pay of not less than 21 working days after every year of continuous service and not less than 1.75 days per month when employment is terminated after two or more months of continuous service. The annual leave is in addition to all public holidays, weekly rest days and sick leave as fixed by law or by written agreement. Wage councils formulate wage orders, which constitute the minimum rates of remuneration and terms and conditions of employment and may not be reduced even by agreement. The quantum of the minimum wage and other terms depends on the industry in which the employee is engaged. Disputes relating to employment and labour relations are handled by the Industrial Court and arbitration does not apply.

Kenya has put in place stringent laws to govern the issuance of entry permits and passes to foreign nationals who wish to visit Kenya to engage in any type of business activity. The conditions are contained in the Kenya Citizenship and Immigration Act, 2011 and the Kenya Citizenship and Immigration Regulations, 2012.

Different categories of passes and permits are available depending on the activities of the visitor:

• Special passes are granted to business visitors who intend to temporarily conduct business, trades or profession in Kenya, including attending meetings or conferences. Such passes are valid for six months and cost approximately $175;

• Class-D permits are granted for employment lasting longer than six months and cost approximately $2325 per annum; and

• Class-C permits are granted to foreigners in prescribed professions, including medicine, engineering, legal practice, architecture, dentistry, accountancy and cost approximately $2300 per annum. Other specialised permits exist for prospecting and mining of minerals, agriculture and animal husbandry and specific manufacturing.

Work permits may not be issued for a period exceeding five years. In practice, the Immigration Department issues work permits for a period not exceeding two years which are renewable upon application by the permit holder.

Foreign nationals who have held work permits for a minimum of seven years will be eligible to apply for permanent residency. A foreigner may also become a citizen through registration. To be eligible for registration, they must have lawfully resided in Kenya for a continuous period of not less than seven years immediately preceding the application.

The Department of Immigration Services within the Ministry of Immigration and Registration of Persons is the government agency tasked with the mandate of overseeing compliance with immigration laws and policies. A foreign national should ensure that they obtain the correct visa, pass or entry/work permit, as the case may be. Immigration officials are empowered to visit or inspect employers’ premises without prior notice or warning to ascertain the number of foreign nationals employed and to confirm the propriety of their immigration status or documents.

Property Law

Land in Kenya is classified by the constitution in three categories: public land, private land and community land. Community land occupies the largest surface area. The freedom to own and deal with property is a constitutional right. There are three main land-tenure systems under which land may be held according to national law.

The first of these is freehold tenure; the holding of registered land in perpetuity subject to statutory and common law qualifications. The second is leasehold tenure; the holding of land on a lease between the lessor and lessee for a given period from a specified date of commencement, on such terms and conditions as the parties may agree on. A third way in which land may be acquired and used is by having it allocated by the government.

The constitution restricts foreign ownership of private land in Kenya to a leasehold tenure for a maximum of 99 years and prohibits foreigners from owning agricultural land in the country.

The Constitution of Kenya provides protection against the expropriation of private property except in cases of public interest and where due process is followed. In such cases, adequate and prompt compensation must be provided. The process of compensation is detailed in the Land Act (Act 6 of 2012). Further protection for landowners is guaranteed by the various bilateral agreements with other countries. Kenya is also a member of the World Bank’s Multilateral Investment Guaranty Agency, which offers insurance against non-commercial risk.

Easing Access

In a bid to make dealing in land easier and more accessible, and to address historical injustices, the government overhauled Kenya’s land laws in 2012. Previously, property was governed by a four-statute registration regime with different rules and regulations applying to different parts of the country. Property in Kenya is now predominantly governed by the Land Act, 2012 and the Land Registration Act, 2012. The new laws have led to several practical challenges, however, these are being ironed out with new supporting regulations.

In addition, new Real Estate Investment Trust (REIT) legislation allows investors to utilise collective investment platforms for investments in retail and commercial real estate with favourable tax incentives and to list those REITs on the NSE.

Although REITs are heavily regulated by the Kenyan Capital Markets Authority (CMA), the CMA is very willing to accommodate and assist in setting them up and is keen to ensure that REITs are established in Kenya. It is envisaged that this will continue to spur expansion and development in the real estate market in Kenya and East Africa.

The property market in Kenya has seen major changes in the last 10 years. A growing middle class and a correction in the traditionally low property prices together with improved investor confidence have led to a significant increase in property prices. The demand for property has resulted in unprecedented investment and development in Kenya. In 2012 Nairobi was cited as having the highest increase in property prices in the world. In response, property developers (both local and international) have continued to undertake a series of large-scale residential, commercial and mixed-use developments.

In terms of growth, Kenya’s real estate market remains superior to its neighbours in the region. There is increased demand for middle-income housing in urban areas, and more particularly, growing demand in the high-end market. It is thought that devolution will lead to keener interest in real estate developments in the new counties.

Major ongoing property projects include the Tatu City project, a large mixed-use development; the multibillion Konza City, a 2000-ha technology city project; a commercial cum residential development being undertaken by Actis which brings a large shopping mall to Kenya together with numerous commercial, retail and office developments; institutional developments by several universities; and industrial developments like the Sameer modern corporate office cum showroom complex.

In addition, plans are under way to construct the large-scale Two Rivers project which envisages major commercial, residential and mixed-use developments, including a large shopping mall. In addition, there are numerous residential developments such as Edenville and Karibu Homes, both encompassing more than 1000 houses and the Actis residential development, to name a few.

Public-Prrivate Partnerships (PPPS):

The government is struggling to bridge an infrastructure deficit estimated at $35bn over the next eight years. In order to plug this deficit, the government is looking to develop public infrastructure through PPPs. These efforts have been centred on creating a favourable legal framework for the uptake of PPPs.

The PPP Act 2013 came into effect in February 2013, replacing the PPP regulations under the Public Procurement and Disposal Act, No. 3 of 2005 and the PPP arrangements under the Privatisation Act, 2005. The PPP Act defines a PPP as an arrangement between a state department or agency, government corporation or county government (contracting authority) and a private party, where the private partner performs a public function or provides a service on behalf of the contracting authority and receives a benefit for it either in the form of compensation from a public fund and/or charges to consumers and is generally liable for risks arising from the performance of the function.

The PPP Act applies to the financing, construction, operation, equipping or maintenance of infrastructure projects, the development of a facility or the provision of public services undertaken as PPPs. Structures established under the PPP Act include:

• PPP Committee: responsible for formulating policy on PPPs, approving project lists and project proposals, and ensuring that each project agreement is consistent with the PPP Act;

• PPP Unit: established by the National Treasury, the unit acts as the secretariat and technical arm of the PPP committee; and

• PPP nodes: established by each contracting authority intending to enter into a PPP arrangement. PPP nodes are responsible for identifying and screening each project, undertaking the tendering process, preparing the project agreements and monitoring the implementation of the project once it is awarded. Before undertaking any project, a contracting authority must first assess the advantages of a PPP over developing the facility or providing the service itself based on three indicators: value for money, affordability for the contracting authority and the end users, and appropriate transfer of risks to the private party. Once determined, PPP projects may be undertaken either by way of solicited bids or by privately initiated proposals.

Solicited Bids

In solicited bids, a contracting authority conceptualises the projects it wishes to undertake and submits the project to the PPP Unit. The PPP Unit reviews the project lists submitted to it and makes its recommendations to the PPP Committee, which will then compile and forward a national priority list for approval by the Cabinet. Once a project is on the national priority list, the relevant contracting authority conducts a sector diagnostic study covering technical issues, legal and regulatory framework, institutional capacity and the commercial aspects of the project and submits a project proposal for approval to the PPP Unit.

If approved, a competitive bidding process begins with private parties first applying, either individually or as a consortium, for prequalification followed by technical and financial bids by the prequalified parties. The successful party may then establish a project company in which the contracting authority may be a minority shareholder.

Privately Initiated Bids

A private party may also field a PPP project to a contracting authority. Such a proposal would not be subject to a competitive bidding process where:

• There is an urgent need for continuity;

• Costs relating to intellectual property rights in relation to the project design are substantial;

• There exists only one person capable of undertaking the project; or

• There exists any of the circumstance as the Cabinet secretary may prescribe. The contracting authority must submit a proposal to the PPP Unit for approval. Once approved negotiations can commence with the private party.

Project Agreements

All project agreements are subject to the laws of Kenya and must fall within the 13 arrangements provided in the second schedule of the PPP Act or any other arrangement approved by the Cabinet secretary.

Draft PPP Regulations 2013:

The National Treasury has circulated draft regulations to be promulgated under the PPP Act for public comment. These regulations are expected to provide thresholds for the application of the PPP Act as well as thresholds for projects which can be undertaken by county governments without necessarily getting approval from the Cabinet. This latter move would allow many small to medium-sized PPP projects to be undertaken more quickly directly at the county level.

Energy:

Kenya is rich in renewable energy resources, with an estimated 2000 MW of geothermal resources in the Great Rift Valley. Kenya is also estimated to have coal reserves capable of generating some 4500 MW of electricity, and substantial deposits of oil and natural gas. Despite this, the energy sector is dominated by biomass and fossil fuels, with 68% of energy needs being met by biomass including wood and charcoal. To address this imbalance, the government has adopted a National Energy Policy aimed at ensuring an affordable, sustainable and reliable supply of energy in line with Vision 2030.

The central government is responsible for the development of the National Energy Policy, public investment, and protection of the environment and natural resources. County governments are responsible for planning, development, regulation, electricity and gas reticulation in each of their counties. The Energy Bill of 2014 is intended to align the current regulatory framework to the devolved structure of government outlined under the constitution. If enacted, the Energy Bill will repeal the Energy Act, the Geothermal Resources Act and the Petroleum (Exploration and Production) Act, thus consolidating the regulation of electricity, fossil fuels and renewable energy under one framework.

Currently, state-owned corporations dominate the generation, transmission and distribution of electricity, with limited participation in generation activities by independent power producers (IPPs). State-owned companies also oversee the exploitation, appraisal, development and management of geothermal resources. The Energy Bill proposes the liberalisation of the power sector in Kenya by unbundling the transmission and distribution of electricity and liberalising the licensing regime for generation, transmission and distribution of electricity.

The national and county governments have distinct licensing functions under the proposed Energy Bill. The former is responsible for regulation and licensing fossil fuels (exploration, production, importation, refining, exportation, transportation, storage and bulk sales); renewable energy (production, conversion, distribution, supply, marketing and use); and electrical energy (generation, importation, exportation, transmission, distribution, retail and use). The latter, meanwhile, are responsible for the regulation and licensing of retail supply of petroleum, gas and coal products, as well as biomass and charcoal producers, transporters and distributors.

National and county authorities also have distinct functions concerning the operation and development of energy resources, with county governments playing a key role in protection of energy infrastructure, including oil and gas fields and pipelines, refineries, power plants, control centres, electricity supply lines, substations and depots. Investors will therefore need to engage both levels of government when pursuing PPPs aimed at operating and developing energy resources. The national government retains responsibility for exploration, production, importation, exportation and refining or processing of fossil fuels, geothermal resources and other natural resources that are energy-based. In addition, it is also responsible operation and development of facilities for generation, transmission, distribution and retailing of electrical energy.

Given Kenya’s challenges in meeting its growing energy demands to cater for development and industrialisation targets, there are numerous opportunities for investors in PPPs and infrastructure projects with respect to the operation and development of a number of energy-related resources.

Oil & Gas

The development of the country’s oil and gas sector offers a number of exciting prospects with significant opportunities for exploration and production (E&P) companies interested in identifying their next emerging venture. Kenya is seen as a stabilising force in the region and has strong human resources and is becoming an increasingly attractive investor-friendly centre in Africa.

The recent discoveries of oil and gas have led to a flurry of activity and there has been a scramble to develop exploration opportunities to tap into what could be a lucrative and transformational resource for the people of Kenya.

The primary legislation relating to the sector is the Petroleum and Exploration Act which was enacted in 1986 (and in need of updating) and the Energy Act 2006. Following the promulgation of the new constitution in 2010, the National Assembly has been actively enacting a range of new legislation aimed at fulfil the aspirations of the Kenyan people enshrined in the constitution.

The oil and gas sector is no exception to this – a new National Energy Policy (which is currently in its seventh draft) has been published and sets out the policy framework that will oversee the management of the entire energy sector in Kenya.

In addition, as discussed above, the Energy Bill of 2014 has also recently been published and proposed for enactment into law. If enacted into law, the Energy Bill will repeal and overhaul the bulk of the energy legislation that exists today and consolidate it into one comprehensive statute.

The key ingredient required to ensure that Kenya is able to prosper from its recent oil and gas discoveries is to have robust, clear and fair legislation which creates an enabling environment for investment and the management of the energy sector.

Kenya adopts the production-sharing contract (PSC) model in the oil and gas sector. Currently, E&P rights to petroleum in respect of any block are granted to the resource company (the PSC holder) by the state pursuant to the Kenya’s model PSC. The model PSC is annexed to the Petroleum (Exploration and Production) Act.

In many ways, the model PSC is “cast in stone” and rarely are any proposed amendments to the model PSC permitted. The PSC provides the PSC holder with the right to undertake E&P activities for an initial exploration period (with the potential to extend this period on certain events) within a defined area ( subject to surrendering an agreed percentage of acreage at the end of each exploration period). In the event a commercial discovery is found in this stage, the contract duration is then negotiable.

Kenya retains ownership of the underlying hydrocarbons, and the PSC holder is in effect hired as a contractor to conduct E&P activities. In exchange for entitlement to a stipulated share between the government and the PSC holder of petroleum reserves, the cost of, and responsibility for, undertaking E&P activity falls on the PSC holder.

The PSC also sets out the negotiated quantum of signing bonuses, surface fees and minimum work and expenditure requirements.

The proposed new legislation in the form of the Energy Bill and the National Energy Policy are expected to address the shortcomings of the existing framework. Whilst the both the policy and the bill have made great strides at doing so, there are key areas in the proposed new legislation that still fall short and which need to be addressed before the proposed new legal framework is adopted.

Local Content

Both the Energy Bill and the National Energy Policy provide for participation by Kenyans in the oil and gas sector in various forms. The energy policy provides that all foreign investments in the energy sector should have local equity participation of 30%. The Energy Bill, meanwhile, provides that revenue derived from petroleum operations should be shared between the national government, county government and local community in the ratio of 80:15:5, respectively.

The Energy Bill also requires a contractor that undertakes petroleum explorations to ensure local content participation in all of its operations.

While to an extent it is desirable to have local equity participation in the oil and gas sector generally, and it is indeed feasible to enforce this requirement in certain categories of the contracts or operations, imposing a mandatory requirement to have local equity participation in each and every project undertaken may impede investment and growth. Most upstream projects are very high risk (exploration companies will often undertake activities with as little as a 5% chance of success).

Furthermore, oil and gas projects are also extremely investment-heavy early on in the lifecycle of the project, with returns (if any) accumulating years later. Global sector players usually provide the capital required to undertake the E&P activities. As Kenya is still developing its energy sector, it is challenging, at least in the medium term, for local equity participants to raise the requisite capital and contribute the necessary expertise to see many of these projects through to fruition. Local financial markets are starting to open up to support the Kenyan oil and gas sector, but high cash investment values are unlikely to be seen for some years yet. Other alternative means of ensuring nationals benefits from the E&P activities ought to be explored. These may include having a carried interest in favour of the Kenyan government so that the returns from the carried interest can then be applied in projects for the benefit of the Kenyan people.

Petroleum Sovereign Fund

The Energy Bill provides for the creation of a petroleum sovereign fund which will be managed by the national government. The fund will be created using all the revenue received from the proceeds of petroleum. The objectives of the fund is to build a savings base for the people of Kenya and to develop infrastructure, among other uses. Sovereign wealth funds have successfully been implemented in other oil-producing countries around the world, notably in the Middle East and certain Nordic countries. The efficient management and careful investing of the resources accumulated under such a fund could have a tremendous multiplier effect on the prosperity and the development of Kenya, and could place the country as one of the foremost emerging economies in the world.

Upstream Oversight

The Energy Bill provides for any upstream petroleum operations to be carried out in accordance with a licence.

In light of this, it is unclear what the status of preexisting PSCs will be. The Energy Bill does not go into sufficient detail as to how licences will be issued, and whether these will be different from PSCs.

The proposed legislation in its current form also contains a number of ambiguities. For example, the Energy Bill provides for petroleum operations to be carried out in accordance with “good oil field practices”, however this term is not defined in the Energy Bill. Ideally, robust and effective legislation will have little or no ambiguity in its application.

It is hoped that these and any other shortcomings in the proposed legislation will be addressed before the Energy Bill is enacted into law.

The key to a stable and sustainable oil and gas sector is the creation of an investor-friendly, market-competitive, certain and transparent investment environment and there is every indication that this is the strategy of the government with a view to securing the best outcome for the development of the oil and gas sector for the benefit of the people of Kenya. Such a balanced approach will no doubt go a long way in ensuring the hydrocarbons sector continues to remain vibrant.

Tax Regime For Extractive Industry 

The Finance Bill, 2014 introduced a new taxation regime for the extractive industry which will repeal the withholding tax regime relating to mining and oil and gas operations set out under the Income Tax Act (Cap. 470, Laws of Kenya) (the ITA). Effective January 1, 2015, the Finance Bill 2014 proposes to introduce a new income tax based on the following factors:

• The net gain derived on the disposal of an interest in an entity in certain circumstances;

• Mining operations and petroleum operations, including on the assignment or transfer of a right under a licence or PSC; and

• The operations or services rendered by a subcontractor to a holder of a mining right or a holder of a PSC. Save with respect to the services rendered by a nonresident subcontractor to a holder of a mining right or a contractor under a PSC, income tax charged pursuant to the new regime will be at the rate of 30% in the case of a resident company and 37.5% in the case of a non-resident company having a permanent establishment in Kenya.

Dispute Resolution

The legal system is adversarial and most disputes are resolved through litigation in court, although arbitration and alternative dispute resolution are becoming popular.

The new constitution of 2010 redefined the dispute resolution process in Kenya. The judiciary was also reworked through a rigorous vetting and recruitment process. This clean-up exercise was considered by many to be successful as it resulted in the removal of corrupt court officers.

The judiciary is now independent of the other arms of government and consists of judges of the superior courts, magistrates, other judicial officers and staff. The chief justice, as the head of the judiciary, has security of tenure alongside the other judges. There is also a deputy chief justice and chief registrar. The overall objective of the judiciary is to uphold the constitution and rule of law.

The superior courts established under the new judiciary are the Supreme Court, the Court of Appeal and the High Court, which includes the Industrial Court and the Environment and Land Court. The subordinate courts are the magistrates courts, courts martial and the kadhis’ courts. These courts have their jurisdictions clearly defined in the constitution and enabling Acts of Parliament to hear all matters. The High Court has original and unlimited jurisdiction to hear and determine both civil and criminal cases. The Environment and Land Court has jurisdiction to hear and determine disputes relating to the environment and the use and occupation of land. The Industrial Court has jurisdiction to hear and determine disputes relating to employment and labour relations.

There are also other High Court divisions, namely the commercial and admiralty division, the civil division, the criminal division, the judicial review, constitutional and human rights division, the family division and the newly created international crimes division. These are specialist administrative units that hear specialist matters implied by their names.

The magistrates courts hear matters that do not fall within the monetary and statutory jurisdiction of the High Court. Courts are established in various parts of the country making justice easily accessible to Kenyans and investors.

Foreign investors enjoy similar protections as Kenyan citizens under the constitution. All parties have equal rights in the courts, including the right to appeal. Similar to the rest of the world, litigation is time-consuming and unhurried.

Kenyan advocates have the right of standing in the courts while foreign advocates may practice in Kenya upon making an application to the attorney general and meeting certain conditions.

Enforcing Rules

In Kenya, court fees are reasonable and can be waived in suitable cases. There is a scale defining legal costs. Similar to other common law jurisdictions, the legal costs follow the event, meaning the losing party will be required to pay court fees and legal costs. The process for enforcing a judgment in Kenya is well defined with courts assisting the winning party to enforce its judgment. The Foreign Judgments (Reciprocal Enforcement) Act provides for the enforcement in Kenya of judgments given in other countries that accord reciprocal treatment to judgments given in Kenya. The countries which Kenya has entered into reciprocal enforcement agreements are Australia, Malawi, Rwanda, Seychelles, United Republic of Tanzania, Uganda, the UK and Zambia. Without such an agreement, a foreign judgment is not enforceable in the domestic courts except by filing suit on the judgment.

Kenyan courts, as a general rule, recognise a governing-law clause in an agreement that provides for foreign law. However, the selection of such a law must be real, genuine, bona fide, legal and responsible.

A Kenyan court would not give effect to a foreign law if the parties intended to apply it in order to evade the mandatory provisions of a domestic law with which the agreement has its most substantial connection and which, for this reason, the court would normally have applied to the case.

Tribunals

As well as Kenya’s courts, independent tribunals and constitutional commissions exercise judicial authority. There are a number of specialised tribunals that hear and determine disputes. These tribunals are composed of members who have specialised knowledge in their respective fields, thereby ensuring fair and competent determinations. Some of these tribunals include the Business Premises Rent Tribunal, the National Environmental Tribunal and the Tax Appeals Tribunal.

Some constitutional commissions exercise quasi-judicial functions. They include the National Land Commission, the Kenya National Human Rights and Equality Commission, and the Independent Electoral and Boundaries Commission.

Arbitration

Apart from the court system, alternative forms of dispute resolution are common in Kenya and encouraged under the constitution. Arbitration, mediation, conciliation, reconciliation and traditional dispute resolution are all used. Arbitration in Kenya is modelled on the United Nations Commission on International Trade Law.

To underscore the unique place of arbitration in the country, the government and the Law Society of Kenya (LSK) are both dedicated to making Kenya’s capital, Nairobi, a centre for international arbitration. The government is in the process of establishing the Nairobi Centre for International Arbitration while the law society is currently developing the LSK International Arbitration Centre.

In addition, the Chartered Institute of Arbitrators has a Kenyan chapter. Kenya is also a member of the International Centre for the Settlement of Investment Disputes (ICSID), a World Bank agreement for the settlement of disputes between states and nationals of other states. Under the agreement, Kenya is required to recognise ICSID arbitral awards.

Arbitration is governed by the Arbitration Act. Parties opting to refer their present or future disputes to arbitration must include an arbitration clause in their agreement. The authority of an arbitrator appointed by virtue of such an agreement is irrevocable, except by leave of the High Court or unless a contrary intention appears in the agreement.