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The global wave of increased transparency and disclosure requirements of ultimate beneficial owners (UBOs) has finally landed on East Africa’s shores. In 2020 and 2021, Kenya and Tanzania adopted regulations mandating disclosure of UBOs for entities registered in both jurisdictions. The UBO regulations are far-reaching in their scope and have important operational and tax implications for portfolio companies and investments held by private equity and venture capital investors in the region.
The Kenya regulations came into effect in January 2021 and the compliance deadline was extended to 31 July 2021 due to make time allowance for compliance. The deadline for compliance in Tanzania was extended to 31 December 2021, again due to making time allowance for compliance. The Kenya regulations are at a more advanced stage of implementation and require companies incorporated in Kenya to disclose information on natural persons who are “beneficial owners” of shares. The definition of beneficial ownership is very broad and includes direct and indirect ownership or effective control of legal entities, as well as control arrangements created by off-shore trusts or voting rights agreements.
Beneficial ownership is disclosable in relation to persons directly or indirectly holding at least 10% of the issued shares or voting rights of a Kenyan company. Disclosure also applies if persons have a right to appoint or remove a director of a Kenyan company or if the person exercises “significant influence or control” over the company. Significant influence or control includes the ability to approve annual budgets or other financial or operational requirements of an entity in Kenya, such as strategic plans or borrowings. The broad definition of beneficial ownership means that disclosures are not restricted only to natural persons who are shareholders, but could also include directors and officers of investee companies or other entities within the ownership structure. At present, the Kenyan regulatory regime does not provide distinct rules for foundations, non-profits or partnership structures.
Many such rights exist in relation to reserved matters and pre-emption and governance rights that are standard in most private equity or venture capital shareholder agreements, joint venture agreements or other documentation that often sits offshore and is not immediately available to portfolio companies, which are now required to comply with the UBO disclosure requirements.
The regulations do not include a carve-out for private equity funds or development finance institutions (DFIs) and there is no procedure to seek an exemption from disclosures from the Registrar. Complications may therefore arise in cases of private equity funds as it likely to prove impractical or impossible to establish the natural persons who ultimately own or exercise effective control in a private equity fund or a venture capital fund structure.
In addition, the information disclosed to the Registrar is also accessible by the Kenya Revenue Authority (KRA), raising potential tax compliance risks where a Kenyan company is ultimately controlled by a non-Kenyan beneficial owner but is presented as being controlled by a Kenyan tax resident, and the Kenyan company has not recognised that it is thinly capitalised (by virtue of being foreign controlled). Furthermore, it will now be possible for the KRA to identify transactions involving a Kenyan entity and an offshore related party, especially bearing in mind that Kenya has recently ratified the Common Reporting Standards and is expected to start participating in the automatic exchange of information imminently.
A Kenyan company has responsibility to investigate and obtain particulars of its beneficial owners. Failure to comply would lead to potential criminal and financial penalties being imposed on the company and its officers. The regulations provide for stepped-up escalation for the company to identify its beneficial owners, and failure to respond to requests for information could ultimately lead to restrictions being imposed on the relevant shares, voting rights or appointment and removal rights of the affected person. As a practical matter, the digitization of company’s statutory records in Kenya has meant that the system is configured in a way that restricts a company’s ability to update any statutory records, unless its beneficial ownership register information is up to date.
Kenyan portfolio companies need to establish a process of compliance with the beneficial ownership requirements and identify relevant beneficial owners, and consider tax advice in relation to possible thin capitalisation or transfer pricing implications of existing arrangements.
Should you have any questions regarding the information in this article, please do not hesitate to contact Wangui Kaniaru.
This article was first published by AVCA Legal & Regulatory Bulletin March edition.