Foreign Company vs Subsidiary: What Is The Difference

With the age of globalization, Companies are seeking to venture past their existing areas of operations into new jurisdictions whose potential for returns is deemed to be high. However, prior undertaking such an expansion, these Companies need to consider and determine the type of entity they would wish to operate as and the applicable compliance requirements that will arise. For such Companies, a common question that always arise, whether to register as a Foreign Company (formerly Foreign Branch) or a Subsidiary.

A Foreign Company refers to a Company registered under a foreign jurisdiction but has since registered and been issued with a Certificate of Compliance by the Registrar of Companies to enable it to operate locally. Think of it as an extension of the Company, similar to opening a branch.

Whilst a subsidiary is an entity registered in Kenya and in which the foreign registered Company is the majority or sole shareholder. Unlike a Foreign Company, a subsidiary is legally separate from its foreign registered corporate shareholders and with a separate governance structure.

In this article we look at an overview of the features of the two options:

1. Governance Structures 

When it comes to the governance structures of the entities, a Foreign Company is restricted in terms of its directorship such that it is tied to that of the Company registered in the Country of origin. The statutory records to be registered in Kenya are an absolute reflection of the registered documentation in the Country of origin. Further, the Foreign Company is governed by the Constitution of the Company registered in the Country of origin.

However, a subsidiary’s directorship may vary from that of its holding Company as the two entities are legally separate and is governed by its own Constitution different from that of its holding Company.

2. Registered Offices & Established Place of Business

Regardless of the type of entity, every Company must have a registered office or established place of business.

 However, the law relating to Foreign Companies, is more stringent as it provides that the place of business ought to be open on the prescribed business operating hours.

3. Taxation

Both entities are subject to payment of corporate tax at a rate of 30% and 37.5% for Subsidiaries and Foreign Companies, respectively. The Foreign Company corporation tax is a final tax however for the subsidiary, an additional withholding tax is applied on dividend declared at a rate of  5% and 15% for residents and non-residents, respectively.

4. Compliance

The compliance requirements for Foreign Companies are not as stringent as those relating to subsidiaries. For instance, Foreign Companies are not required to have annual external audits nor convene statutory meetings whereas subsidiaries are required to have these resulting in higher cost of operation. Additionally, Subsidiaries with a Share Capital that exceeds KShs 5 Million are required to appoint a duly qualified Company Secretary, while in the case of a Foreign Company, a Local Representative resident in Kenya is required to be in place.

You don’t have to decide on the most suitable approach alone, as Scribe Services Secretaries we are willing to offer guidance on establishing either a Foreign Company or a Subsidiary and to act in either capacity.