From the Ground up: Enhancing Kenya’s Economic Rebound Through Start-Ups

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Introduction

According to the Association of Countrywide Innovation Hubs, Kenyan tech start-ups topped the continent as they raised an impressive KES 21.4 Billion of funding in 2020. This level of funding is attributed to a socio-professional environment that is conducive to work in, even though Kenya’s start-up ecosystem remains unregulated. Whereas countries like South Africa, Tunisia, Senegal, and Nigeria have pegged regulatory policies to govern start-ups, Kenya has no government policy that caters for start-ups.

Things are now, however, steered towards change. In 2021, through the Start-Up Bill, 2021 (the Bill), Kenya took its first steps toward regulating the start-up ecosystem.

The Bill seeks to govern the interactions and relationships between the government, incubators, start-ups, investors, and the ultimate consumers of innovative products. To do this, the Bill has been modelled to attract talent and capital which will, in turn, create innovative thinking, jobs, entrepreneurial culture, and wealth. This article seeks to analyse the possible impacts of the proposed legislation.

It has been observed that cumbersome regulations, the digital-skills gaps, limited funding, and highly fragmented markets continue to hold back African start-ups. Against this backdrop, this article postulates that the proposed legislation would be good for start-ups if the aim is to encourage their growth by providing a legally conducive and enabling environment.

Start-Ups Defined

A start-up is a business entity formed to develop a new product or service which changes the normal way of doing business and becomes ingeniously irresistible for end-users and customers. The Bill defines a start-up to include a technology-based innovative entity, that is legally recognized under the laws of Kenya with strong growth potential and a disruptive economic model.

There is a definitional difference between start-ups and micro and small enterprises (MSEs). MSEs are generally profit-making businesses with a small annual turnover in any sector whereas start-ups, in addition to conventional business qualities, must have a novel and innovative edge with the potential to disrupt the usual manner of doing business in that industry.

A start-up must bring a novel business idea and thus the government’s efforts at regulation should focus on assisting the innovator in developing and growing the idea into a business product or service. MSEs are focused primarily on profits only whilst start-ups are focused more on the growth and development of the idea into a business product or service. These differences determine the manner of raising funds, the level of legal protection that should be afforded, the nature of government support, and the latitude to allow international investors to inject into the economy. It is therefore not at all surprising to find that the provisions of the Micro and Small Enterprises Act, 2012 are fundamentally different from those contained in the Bill.

Key Objectives

The Bill aims to foster a culture of innovative thinking and entrepreneurship; link start-ups with private investors, financial institutions, the private sector, research institutions and other institutions at the county, national and international levels; facilitate the provision of fiscal and non-fiscal support to start-ups; promote an enabling environment for the establishment, development, conduct of business, and registration of start-ups; establishment of incubation facilities at the national and county levels of government; and entrench an environment that promotes the establishment of start-ups.

The overarching goal of the Bill is to set up an ecosystem where start-ups may be created and supported to enable them to grow and spill over into the various sectors of the economy. Noting that Kenya’s national economic blueprint is heavily reliant on technology and innovation which thus far remains unregulated, the proposed law comes in handy insofar as it aims to support the digital and the knowledge-based sector of the economy.

Incubation Programmes

Incubation programmes are made up of incubators that are either companies, partnerships, non-governmental organisations, or limited liability partnerships, whose principal objective is to support the birth and development of start-ups, innovation, and activities related to the transfer of technological research, development, and innovation process, through the offer of dedicated physical spaces and services or advice. These programmes provide an enabling environment for infant technologies, ideas, and industries to grow.

As the country moves away from a resource-driven economy to a knowledge-driven economy, the government has a significant interest in setting up incubation programmes that would assist startups to grow, given that successful start-ups ultimately create large-scale employment opportunities, thereby helping the government solve the unemployment problem.

Incubation is meant to support nascent ideas, innovations, and technologies ideologically. As such, incubators must be capable of giving such supportive infrastructure that can help start-ups access skillset talents, finances, and technological capacity. The Bill proposes certification of incubators as a prerequisite to ensure that incubators meet the required standards for technical capacity and technological know-how and that they possess the right conditions or environment to support start-ups.

Not all start-ups necessarily have the potential or ability to disrupt any sector of the economy, as such, there must be a means of identifying qualifying start-ups that are innovative, research-based, and have technological components. This would effectively prevent the admission of non-viable start-ups into incubation programmes.

Likewise, an entity cannot remain in incubation indefinitely. There must be a means of exiting from incubation - either by attaining a certain capital threshold or by incubating for a specified number of years.

Fiscal Incentives

Innovative entrepreneurial activities do not happen randomly or in a vacuum hence, the Bill proposes to mandate the national and county governments to provide economic conditions such as incentives, opportunities, and to remove barriers to innovative businesses, thinking and ideas. This can be achieved by funding startups, tax exemptions, grants, and by reducing regulatory red tape in the registration processes.

As earlier indicated, unlike MSEs, start-ups are not necessarily started for profit-making, hence the mode of funding is fundamentally different from normal business associations. For instance, getting a loan to support a novel or innovative idea may prove to be challenging due to uncertainties attendant with developing new ideas. In that regard, section 31 of the Bill proposes to amend section 29(1) of the Science, Technology, and Innovation Act 2013 (the STI Act, 2013), to include innovative start-ups to receive financial support from the Fund created under the STI Act, 2013.

Further, the government needs to put in place measures for the granting of other fiscal incentives including tax incentives considered necessary for the development of start-ups in the country. Incentivization is crucial for start-ups since most of the time they lack capital and tax burdens make them dwindle in number instead of growing especially in the incubation stages.

Non-Fiscal Incentives

In addition to fiscal incentives, the government needs to enable access to markets, ease foreign investors’ ability to get into the market, raise awareness about and encourage the use of start-up products, and encourage public procurement procedures that consider the application of start-up products and services.

Also, as noted above, start-ups are part of the migration to a knowledge-based economy that is embedded in science, technology, and innovation. As such, it is important to ensure continuous training and capacity-building to facilitate the acquisition and sustenance of skills that are innovative and novel. The government should thus support research and development activities undertaken by startups.

Conclusion

The uplifting of start-ups in the country enhances economic growth. Successful start-ups quickly transform the manner of doing business and the government should support innovative business culture by closing the funding gaps, building a flourishing business environment, and providing a link to institutions of growth. As observed by Dr. Jesper Vasell of KTH Royal Institute of Technology in Stockholm: “Innovation is changing the business landscape across Africa and any entity that fails to adapt will eventually be phased out.”

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“Dad: A son’s first hero, a daughter’s first love.” —Unknown

A RECOGNITION OF FATHERS IN THEIR CHILDREN’S AFFAIRS

  1. Introduction

This coming Sunday, 19th June 2022, will be a special day dedicated to fathers worldwide and we at Oraro & Company Advocates, would like to join in the tribute.

In line with our appreciation, we dedicate this article particularly to the Kenyan fathers, as we reflect on recent developments in child custody matters.

A father’s place in any child’s life cannot be ignored and extensive research has been done on the role of fathers in children’s lives. In parental disputes, however, there is often a prevalent assumption, that fathers cannot adequately take care of their children. This has informed the layman’s view, that mothers are most likely to be granted custody by courts, when there is a custody dispute.

It is on this premise, that we would like to address the Kenyan position, regarding fathers and child custody.

2. Understanding Child Custody

First, it is imperative to deconstruct the terms “Child” and "Custody" within their underlying legal framework. It is noteworthy that the Constitution, the Children Act (No.8 of 2001) and international conventions vide Article 2(5) and (6) of our Constitution, largely regulate matters of child custody in Kenya.

A child is defined in section 2 of the Children Act as any human being below the age of 18 years. On the other hand, section 81 of the Act defines custody as the parental rights and duties relating to the possession of the child. There are the two main types of custody, as per sections 81(1)(c) and (d) of the Act. These are, “Legal custody” and “Actual custody.”

Legal custody is defined as the parental rights and duties to possession of a child as conferred by a court order, while actual custody is understood to mean the actual possession of the child, whether or not such possession is shared between different persons.

The simplest distinction to these seemingly conflicting definitions, is that legal custody is parental entitlement and responsibility granted by a court order, while actual custody focuses on the physical custody of the child by a parent.

In all matters involving custody, the Constitution stipulates in Article 53(2) that the best interest of the child should be the primary concern of all parties. The same principle is replicated in Sections 4(2) and (3) and 83 of the Children Act.

  1. General Considerations in Granting Custody

Apart from the best interest of the child, other factors the court considers include the age of the child, parental conduct and wishes, as well as the child’s ascertainable wishes.

Concerning the age of the child, the position is that a child of tender years (i.e. a child of less than 10 years) should remain with the mother, except where exceptional circumstances warrant custody to be granted to the father or other person. The Court of Appeal in J.O v S.A.O [2016] eKLR elaborated such exceptional circumstances to include the mother being unsettled, or where she has remarried or lives in deplorable conditions hence an unsuitable environment to raise a child.

Regarding parental conduct, the detrimental behaviour of a parent may influence the court to award custody to the other parent. In the case of MARTHA OLELA & ANOTHER v. JACKSON OBIERA (CA of 1979), the court considered factors such as disgraceful conduct, immorality, drunkenness and bad company kept by a parent, to award custody to the other parent.

The mental state of the parents is also considered in awarding custody. The court in JKN v HWN [2019] eKLR noted that where a parent suffers from a mental condition, the court has to ascertain whether such condition is a continuing one and whether it impacts on the parent’s fitness, to take care of the child. The court further noted that custody may be granted to the other parent, where a mental illness interferes with a parenting ability or capacity to provide a safe home environment to the child. [Emphasis supplied].

With regard to the child’s wishes, the Court in J.O v S.A.O (supra) affirmed that a child’s preference to staying with one parent over the other, should be assessed objectively. Therefore, it implied that the court can overlook a child’s wishes, where they may not be in the child’s best interest.

  1. Busting the myth

The right to have custody of a child is not based on the gender of the parent, it is based on law. It is an equal right for both parents with the primary consideration being “the best interest of the child” as noted above.

The above issue was discussed in JKN v HWN (supra), where the High Court (in an appellate capacity) analysed the lower court’s finding on child custody. The High Court observed inter alia as follows:

“…Lastly, it is important to point out a serious misdirection regarding the Lower Court’s reasoning in awarding custody to the Respondent. In my view, the Lower Court’s reasoning was steeped in a dangerous fallacy born of stereotypes. The Learned Trial Magistrate reasons that it is not possible for a man to be the primary caregiver because “he shall from time to time be required to attend to his bread-winning duties and will soon leave the duties to the house girls…..[therefore]….If I am to call a spade a spade, it is difficult for a man to take the role of caregiving.” The Learned Magistrate then proceeds to reason that “it would be much safer for the Respondent to take custody of the children than they be in the care of house helps…”

The two biggest problems with the reasoning in this portion of the judgment are that it assumes that:

  1. There is a clear and natural bifurcation between “caregiving” and “bread winning” and that men do the latter while women do the former; and
  2. Mothers should be given custody because they are not involved in “bread winning” (especially if they are living with a man) and that, therefore, they take care of the children themselves rather than rely on paid help. This strand of reasoning is dangerous because it somewhat implies that women who rely on paid help to supplement their caregiving work as they pursue their careers or business opportunities are somewhat giving less optimal form of caregiving than women who have chosen to be stay-at-home mothers. This is a strand of judicial reasoning that could easily send a message that “good” mothers stay home with their children while “good” fathers go out and “win bread” for the family.

With tremendous respect, I find this reasoning to be dangerously problematic. It does no favours to women to espouse these kinds of stereotypes. Moreover, relying on the stereotypes to reach a verdict on an individual and specific case is unfair to the parties concerned…” [Emphasis Supplied].

From the above commentary, the High Court noted that it was erroneous for the lower court to award custody based on societal stereotypes. On this basis, the High Court held that section 83 of the Children Act, does not direct that custody should be awarded to a particular parent.

  1. Conclusion

As we celebrate fathers this Sunday, applauding their efforts and important contribution to the lives of their children, we appreciate the developments in the law that recognize the critical role that fathers play in the lives of their children.

The law, as highlighted above, recognizes that both parents play an important role in parenting, even at a tender age. We encourage fathers to seek legal redress where there is a custody dispute, without the assumption that the court only recognises mothers in custody matters.

The paramount consideration must however always be, “the best interest of the child” and in considering what is in the best interest of children in custody matters, courts have over time sought to strike a delicate balance in evaluating the various factors as discussed above. Nevertheless, each case has been determined based on its own circumstances.

However, the pronouncements in the recent case of JKN v HWN (supra), indicate the increasing appreciation that fathers are being equally considered in the custodial disputes.

As we celebrate fathers this Sunday, let us reflect on the critical role they play in the lives of their children.

Happy Father’s Day Gentlemen!

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Deposit before tax appeals to the High Court: Analysis of the proposed amendment contained in the Finance Bill, 2022

Background

On 7th April 2022, the Cabinet Secretary to the National Treasury (“the Cabinet Secretary”) read out the proposed 2022/23 National Budget to the National Assembly. One of the legislative amendments proposed therein was a requirement that all taxpayers appealing to the High Court against decisions of the Tax Appeals Tribunal (“TAT”) should deposit fifty percent (50%) of the total amount of the disputed taxes into a Kenya Revenue Authority (“KRA”) account at the Central Bank of Kenya (“CBK”) which amount would then be recoverable only if the taxpayer succeeds in the appeal to the High Court. The proposed amendment in the Finance Bill 2022 (“the Bill”) further proposed that KRA would be required to refund the same within thirty (30) days if the High Court issues a Judgment that is favourable to the taxpayer. The Cabinet Secretary justified this proposal on the basis that the KRA was experiencing difficulty recovering taxes from taxpayers upon issuance of TAT decisions and further claimed that the deposits would ease recovery of disputed taxes. The proposed amendment has elicited public uproar as it is perceived as an onerous requirement to the taxpayer.

The National Assembly’s Departmental Committee on Finance and National Planning (“the Committee”) has recommended the removal of the clause from the Bill on account of the significant negative impact it would have on the cashflow of businesses. The Committee was to submit its comments on the Bill to the National Assembly on 25th May 2022.

This article analyses reasoning behind the proposed amendment and its effect on taxpayer’s access to appellate justice.

The law on deposits pending appeals

The High Court of Kenya is empowered by the Civil Procedure Act (Cap. 21) Laws of Kenya to order a litigant to deposit funds into Court, or a joint interest earning account in the name of the parties Advocates name or provided security for costs pending the determination of an appeal. The Court generally exercises this power upon the application of one party and consideration of the parties’ arguments. Courts will only require a litigant to deposit part of the disputed funds if the adverse party provides compelling reasons that the party who the amount is claimed from may be unable to pay the disputed funds upon conclusion of the appeal. In essence, only the Court has the discretion to direct a litigant to deposit part or the entire disputed sum in Court, joint interest earning account or provide security for costs pending the outcome of the appeal. This system accords both parties a fair hearing before the Court considers ordering a party to deposit part of the disputed sum or security for costs.

Court have been categorical that the purpose of security for costs is not to punish judgment debtors but simply to ensure performance of a decree. Further, Courts have the discretion to consider different types of securities. This discretion enables litigants offer securities that are reasonable and do not grind their operations to a halt. It is also noteworthy that an appellant aggrieved by the magnitude of the security ordered by the High Court can appeal on the same to the Court of Appeal.

Basis for the proposed amendment

Before analyzing the effect of the effect on access to justice, it is important to analyse the reasoning behind the proposed amendment.

The primary reason for the proposed amendment was KRA’s supposed difficulties in recovering disputed taxes upon obtaining a favourable decision from the TAT. Unfortunately, the Cabinet Secretary did not support this position with any data. An analysis of the number of disputes and the total taxes tied up in this conundrum would have provided a more cogent basis for the proposed amendment.

Ironically, the High Court has on numerous occasions found that KRA has delayed refunding monies to taxpayers for years. In addition, the East African Court of Justice has taken judicial notice of KRA’s delays in refunding taxpayers. Based on the foregoing, this might be a good example of the pot calling the kettle black. Therefore, if average payment periods are relied on as the benchmark to assess KRA’s and taxpayers’ ability to adhere to Court decisions, KRA’s claim may not be the strongest.

Access to justice

Article 48 of the Constitution of Kenya mandates the state to ensure that all persons have access to justice. It further requires that any fee charged in the quest for justice be reasonable and shall not impede access to justice. Courts are therefore required to reasonably determine the need for security as well as the modalities of the same before hearing an appeal.

In determining the need for and magnitude of security, consideration ought to be taken of various factors such as the taxpayer’s tax compliance history, its financial statements, and the impact the deposit would have on its cashflow. For example, if the proposed deposit would wipe out the taxpayer’s cash and cash equivalents, it would practically render the taxpayer illiquid and would be an impediment to access to justice. In such an instance, the deposit requirement should be significantly reduced. The proposed amendment does not have any qualifications to cater to cases where the fifty percent (50%) deposit would be an impediment. The proposed amendment presents the following impediments to access to justice:

  1. Strict imposition;
  2. Failure to account for existing impediments to access to justice
  3. Unfair treatment;
  4. Excessive requirement;

a. Strict imposition

As stated above, Courts have the power and discretion to determine security payable by an appellant. This discretion enables courts to consider an appellant’s circumstances and protect the vulnerable litigants. The Court, being an independent arbiter, is more likely to provide fairer security requirements, taking into consideration the circumstances of each party. The Court oftentimes directs that the funds, or a portion thereof, be deposited into a joint interest-earning account which is beneficial to both parties when the funds are ultimately released to the successful party. Whereas funds deposited in Court do not attract interest, accessing the funds when the matter is concluded is more straightforward as opposed to the proposal to have the funds refunded by KRA. The proposed amendment seeks to impose a deposit requirement without any regard to taxpayers’ ability to pay the same and divests the Court of its lawful discretion, thereby raising issues as to the constitutionality of the proposed amendment.

b. Failure to account for existing impediments to access to justice

Taxpayers who dispute assessment of taxes already have to contend with the following impediments when challenging the same:

  1. The cost and frustration of lifting agency notices through Court intervention;Cost implications of lodging an appeal to the TAT. When the cost of lodging the appeal (filing fees of KES 20,000 and professional fees) in some instance exceeds the disputed taxes, taxpayers would opt to settle the disputed taxes even when not due and owing. This is an inconvenience that many Kenyans with tax issues have had to bear.
  2. Delays in the hearing and determination of appeals from the TAT to the High Court due to case backlog. As a result of these delays, the Court will generally determine tax appeals within a year or two at best.
  3. KRA’s has poor track record in processing refund applications and remitting the confirmed tax refund.

If the amendment is passed into law and enforced, taxpayers would have to deal with the compounding of these existing impediments with the additionally onerous task of depositing the required amount.

c. Unfair treatment

Article 27 of the Constitution requires that all litigants be treated equally before the Court. Whereas the proposed amendment seeks to require deposits from taxpayers, it does not require the KRA to deposit funds when appealing to the High Court in cases where the taxpayer is seeking refund of overpaid taxes despite its notoriety for failing to adhere to Court orders.

KRA already has the upper hand in tax disputes. When issued with a favourable Judgment, it can recover the taxes adjudged to be due by using various methods such as agency notices, auctioning of the taxpayer’s property, issuance of departure prohibition orders and arrest of taxpayers. Taxpayers, on the other hand have to file an appeal or application in Court, wait for the determination of the same, extract Court orders, issue a demand letter to the relevant KRA Commissioner and follow up with possible judicial review of administrative action seeking to compel payment of the refund.

Recently, KRA publicly displayed its upper hand when it sought to recover taxes from Keroche Breweries by shutting down its factory, issuing agency notices and having the directors arrested despite the business being a going concern engaged in manufacturing.

The proposed amendment seeks to further entrench KRA’s upper hand in tax disputes and is lopsided in KRA’s favour in that it does not offer any remedy to taxpayers in the event that KRA fails to adhere to a Court order.

d. Excessive requirement

The proposed deposit requirement is high and likely to cause many taxpayers to wind up business or file for bankruptcy as, more often than not, the assessed taxes are high. In many instances, taxpayers are likely to face difficulties in complying with the proposed requirement as they are unlikely to be in a position to afford it, and even if they can afford it, they cannot survive operating with large amounts of capital tied up awaiting an appeal process that could take several years. For struggling businesses, the deposit requirement may well be a death knell and the proverbial final nail on the coffin.

Conclusion

The proposed amendment prescribes a punitive deposit requirement and may effectively make the TAT a final Court for taxpayers who are not able to raise the required deposit. If enacted, there is a possibility that a party may petition the High Court to have the provision declared unconstitutional for violating Articles 27 and 48 of the Constitution of Kenya. Presently, the Committee has recommended the removal of the proposed amendment, and we await to see whether the National Assembly shall adopt the Committee’s recommendation in as far as this particular proposal is concerned.

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This alert is for informational purposes only and should not be taken to be or construed as a legal opinion. If you have any queries or need clarifications, please do not hesitate to contact Renee Omondi, Partner, (renee@oraro.co.ke), and Nzioka Wang’ombeAssociate, (nzioka@oraro.co.ke) or your usual contact at our firm, for legal advice.

Operationalisation of the Registration of Digital Credit Providers

Further to our previous alert, the Central Bank of Kenya (CBK) on 17th May 2022 issued a notice that all unregulated Digital Credit Providers (DCPs) are required to apply to CBK for licensing by 17th September 2022, or they will cease operation. Consequently, it is reiterated that DCPs will now be required to apply for registration with the CBK if they intend to continue operating in Kenya.

The registration will be made through an online portal and DCPs will be required to fill and submit the prescribed application forms together with the constitutive documents and organisational policies of the organisation including their data protection policies.  In addition to this, DCPs will also be required to provide descriptions of their IT systems and fund delivery systems, consumer redress mechanisms, terms and conditions of the credit products, credit policies and pricing models among others. The application should be accompanied with an application fee of KES. 5,000 following which CBK will assess the documents for completeness of record.

Once the application has been assessed by CBK, the DCP will be required to test their ‘data submission’ capability using Application Programming Interfaces (APIs) with guidance from CBK. Upon successful testing, the DCP will be required to pay the licensing fee of KES. 20,000 following which a license will be issued to the DCP. Once a license is issued, CBK shall then publish in the Kenya Gazette and CBK’’s website, the name of the licensed DCP.

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This alert is for informational purposes only and should not be taken or be construed as a legal opinion. If you have any queries or need any clarifications as to how any aspect of the amendments might affect you, please do not hesitate to contact John Mbaluto, FCIArb, Deputy Managing Partner (john@oraro.co.ke), Nancy Kisangau, Associate (nancy@oraro.co.ke), Hellen Mwongeli, Associate (hellen@oraro.co.ke).

1. TAX APPEALS TRIBUNAL ACT

The Finance Bill, 2022 went through the First Reading on 13th April 2022. We provide below a summary of the proposed amendments the Bill seeks to make to various Tax Laws.

a) Deposit before appealing to the High Court

The Bill proposes an amendment to the Tax Appeals Tribunal Act to require taxpayers dissatisfied with a judgment of the Tribunal to deposit half of the disputed sum in the Commissioner’s account at the Central Bank of Kenya. Upon exhaustion of appeals and issuance of a judgment in favour of a taxpayer, the Commissioner shall refund the monies within thirty days of the judgment date. However, the proposed amendment neither makes any provisions for accrual of interest on the deposited sum nor prohibition on the use of the deposited funds during the pendency of the appeal(s).

2. INCOME TAX ACT

a) Capital gains

The Bill proposed an increment in capital gains tax from five percent to fifteen percent.

b) Deposit before appealing to the High Court

The Bill proposes a definition of the term “financial derivative” and proposes to subject gains from derivatives to income tax by amending Section 3(2) of the ITA. The Bill further proposes to deem a non-resident’s gains from financial derivatives as derived from Kenya if the derivative contracts were with a resident person. If passed, the Bill will empower the Cabinet Secretary to make regulations on the taxation of these derivatives.

Further gains from such transactions in derivatives will be subject to withholding tax at 15%.

c) Foreign exchange losses

Currently, Section 4A of the ITA limits foreign exchange losses claimable by entities to the extent that the loan(s) exceed three times the entity’s capital and retained earnings if the loan(s) are from a person whom(alone or with four or fewer persons) controls the entity.

If passed, the Bill will reduce the income tax deductible foreign exchange losses a business can claim to a maximum of thirty percent of the entity’s earnings before interest, taxes, depreciation and amortization.

d). Employee share ownership plans

The Bill proposes to define the value employee share ownership schemes as the difference between the offer price at the date the benefit is granted and the market value when the employee takes up these shares. Currently, the benefit is calculated as the difference between the market value per share and the offer price per share at the date the employer grants this benefit.

Currently, such benefits are deemed to have accrued to the employee at the end of the vesting period. The Bill proposed to change the date of accrual to the date the employee exercises the stock option.

e) Beneficiaries of registered trusts

If passed the Bill will delete Section 11(3A) of the ITA which limit the benefits accruable to beneficiaries of registered trusts from the current position where education, medical expenses, early adulthood expenses and income paid which is collectively below KES10 million.

f) Digital Service Tax

Digital Service Tax (“DST”) is a tax applicable to income of non-resident persons offering services over the internet derived in Kenya. The Bill proposes to exempt non-resident entities that have a permanent establishment in Kenya from DST. The Bill further proposes to increase the DST rate from the current1.5% to 3%.

g) Allowable deductions

The Bill proposes to allow for deductions of donations to charitable organizations whose income is exempt from income tax as well as donations to projects approved by the Cabinet Secretary responsible for finance. Currently, donations to charitable organizations are only taxable if the charitable organization is a registered Society or Non-Governmental Organization that is exempt from income tax. If passed, donations to charitable causes in any business form shall be allowable.

Currently, telecommunications operators are only allowed to deduct a maximum of 5% of the acquisition costs of the right to use a fibre optic cable per annum. The Bill proposes the deletion of this clause which will resultantly prohibit telecommunications operators from deducting expenses relating to the acquisition of rights to use a fibre optic cable.

h) Thin capitalization

The Bill proposes to exempt Microfinance Institutions licenced under the Microfinance Act from the thin capitalization limitations on claiming interest expense deductions.

i) Base erosion

The Bill proposes to provide more stringent provision son base erosion provisions by widening the scope of transactions from the current position that governs related party transactions only to transactions by any resident entity with a non-resident entity located in a preferential tax regime. This will require more businesses to make tax adjustments on dealings with non-resident entities in preferential tax regimes.

The Bill further proposes a wider definition of preferential tax regime to include:

i. Any Kenyan law that provides for a preferential tax rate or smaller tax base.

ii. A foreign jurisdiction with a tax rate lower than 20%, does not have an information sharing framework, does not allow access to banking information or a jurisdiction that lacks transparency in the structure and ownership of entities in that jurisdiction.

j) Multinational group reporting

Currently, only ultimate parent entities resident in Kenya are subject to the country-by-country reporting requirements. If passed, multinationals will be required to provide significantly more detailed reports to the Commissioner. These reports will include details of all the group’s entities and their respective activities. Entities will also be required to submit a master file that contains the group’s overview, growth engines, supply chain description of all key products, the group’s research and development policy, each constituent’s contribution to the value chain, information on intangible assets and the group’s intercompany agreements on the same, information on the transfers of intangible assets within the group, the group’s financing activities, the group’s consolidated financial statements, tax rulings made in respect of the group and any other information required by the Commissioner.

The Bill also proposes the submission of a local file that contains detailed information of the resident entity’s activities in the group, management structure, business strategies, international transactions and any other information required by the Commissioner.

Where the ultimate parent entity has a turnover of KES 95 billion and above is required to file a master and local file, all other resident related entities will not be required to do the same. Further, resident entities will not be subject to the country-by-country reporting requirements if a non-resident surrogate parent entity is required to and files a similar report in its jurisdiction and that jurisdiction has an information sharing agreement with Kenya.

The Bill proposes to retrospectively apply the reporting provisions from the year of income 2022 onwards.

k) Insurance relief

Currently, the insurance relief provision is biased towards men as it allows claiming of insurance relief on premiums paid on their wives. The proposed amendment introduces gender neutral terms to ensure non-discrimination in the enjoyment of insurance relief.

l) PAYE

It is proposed that the power given to the Commissioner to remit the whole or part of any penalty due from an employer for failing to comply and deduct, account for deducted taxes or supply the  Commissioner with the prescribed certificate is to be revoked If the proposed amendment is passed no waiver will be granted as is currently the case.

m) Income tax exemptions

If passed the income of registered family trusts and capital gains on transfers of immovable property by family trusts will no longer be exempt.

n) Investment deductions

Currently, investment deduction of 100% is allowable on investments outside Nairobi and Mombasa Counties if cumulatively above KES 2 billion for the last three years, at least KES 250 million within the year of income or within a special economic zone. The Bill seeks to limit this benefit to hotel buildings, buildings buildings used for manufacture and machinery used for manufacture. However, businesses which must be located in Nairobi and Mombasa due to their nature will be exempt from the geographical location requirements.

3. VALUE ADDED TAX

a) VAT on transactions in a digital marketplace

The Bill proposes to amend the definition of a digital marketplace to exclude other property. Further the Bill proposes that the services offered in a digital marketplace be exempted from treatment as imported services. As a result, reverse VAT would not be applicable to such services.

Further, suppliers of imported digital services over the internet will not be required to register for VAT.

b) Input VAT credits

Currently, Section 17(3) sets out a conclusive list of documents a taxpayer must have when claiming input VAT. The Bill proposes to grant the Commissioner discretion to request for additional documentation when validating input VAT.

c) VAT on imports

The Bill seeks to apply the penalty and interest rates asper the Tax Procedures Act to the offence of non-declaration of goods to a customs officer. The Bill further seeks to limit the interest payable to a maximum of the principal tax.

d) Tax paid in error

Refund of taxes paid in error will be governed by the Tax Procedures Act as opposed to the VAT Act.

e) VAT exemptions

If the Bill is passed, the VAT exemption on goods and services for the construction and equipping of specialized hospitals will be repealed. However, any exemptions granted prior to the repealing will apply until supply of the exempted goods is made in full.

By deleting paragraph 108 of Section A of Part I to the First Schedule, the Bill seeks to revoke the VAT exemption on maize flour, wheat or meslin flour and cassava flour.

The Bill seeks to expand the exemption on sustainable fuels to include pellets. Currently, paragraph 137 of Section A of Part I to the First Schedule only provides for briquettes.

The Bill seeks to exempt the following goods from VAT:

i. Plant and machinery for manufacture of pharmaceutical products upon recommendation of the Cabinet Secretary responsible for health matters;

ii. Medical oxygen supplied to registered hospitals;

iii. Urine bags, adult diapers, artificial breasts, colostomy/ileostomy bags;

iv. Inputs used in the manufacture of passenger motor vehicles; and

v. Locally manufactured passenger motor vehicles.

4. EXCISE DUTY

a) Inflation adjustments

The Bill proposes to empower the Commissioner to exempt specific excisable products from the annual inflation adjustment upon the approval of the cabinet secretary depending on the economic circumstances in the relevant year.

b) Goods under customs control

The Bill seeks to apply the penalty and interest rates asper the Tax Procedures Act to customs-related offences. The Bill further seeks to limit the interest payable to a maximum of the principal tax.

c) Excise duty rates changes for select items

Increments in excise duty rates have been on the following items: fruit juices, perfumes, makeup, hair products, aftershave & deodorant ,bottled water, beer &ciders, Powdered beer, Wines, Spirits exceeding 6%alcohol content, Cigars, Cigarettes with filters, Cigarettes without filters, Other manufactured tobacco products and manufactured tobacco substitutes, Motorcycles (except ambulances and locally manufactured one), Imported sugar confectionary, White chocolate, Jewellery made from or coated with precious metals & imported imitation jewellery, Locally manufactured glass bottles; nicotine gum & vaporizers, Plastic for making toothpaste and makeup tubes, Imported potatoes, potato crisps & potato chips, E-cigarettes, Liquid nicotine for e-cigarettes, Ice-cream, Amount wagered/staked in gaming/betting, Prize competition participation fee, Lottery tickets(excluding charitable lotteries), media advertisements of alcoholic beverages, betting, gaming, lottery and prize competitions.

d) Exemptions

The Bill proposes to exempt the following products from excise duty:

i. Eggs imported for hatching upon recommendation by the CS in charge of livestock; and

ii. Neutral spirit imported by pharmaceutical manufacturers upon the relevant CS’s recommendation;

Locally manufactured passenger motor vehicles.

5. TAX PROCEDURES ACT

a) Security for unpaid taxes

Currently, the Commissioner may instruct the Registrar of Lands to place a restriction on a defaulting taxpayer’s land. The Bill proposes to expand the scope of such restrictions to include aircrafts, ships, motor vehicles and any other property with Seven days’ notice to the owner or any other interested party. The Bill further proposes to empower the Commissioner to dispose of the property within two months after notifying the defaulting taxpayer if the taxpayer fails to settle the disputed taxes.

b) Refund or setoff of overpaid taxes

The TPA will provide for refund of overpaid taxes and taxes paid in error.

c) Objections invalidly lodged

Currently, the Commissioner is required to “immediately” notify a taxpayer if their Objection to a tax decision is invalidly lodged. This term is rather ambiguous. The Bill proposes a 14-day window within which the Commissioner will be required to notify a tax payer if their objection is invalidly lodged.

d) No consequence for Commissioner’s late decisions

Currently, if the Commissioner fails to issue a decision on a tax objection within 60 days of receipt of a valid objection, the objection is deemed to be allowed by law. The Bill proposes to do away with this consequence thus creating a sense of ambiguity.

e) PIN requirement for trusts

Persons seeking to register a trust will be required to provide their PINs during registration of a trust.

6. MISCELLANEOUS FEES & LEVIES

a) Export levy annual adjustment

Currently, export levies are adjusted at the beginning of each financial year. The Bill proposes to have the annual adjustment done by 1st October of every financial year.

b) Import Declaration Fees (IDF) and Railway Development Levy (RDL) exemptions

The Bill proposes to exempt raw materials and inputs imported by manufacturers of pharmaceutical products from RDL and IDF.

Please click here to download the alert.


This alert is for informational purposes only and should not be taken to be or construed as a legal opinion. If you have any queries or need clarifications, please do not hesitate to contact Renee Omondi, Partner, (renee@oraro.co.ke), and Nzioka Wang’ombe, Associate, (nzioka@oraro.co.ke) or your usual contact at our firm, for legal advice.

12th April 2022

Oraro & Company Advocates has once again been recognised for its expertise in Dispute Resolution, receiving a Tier 1 ranking from leading international legal directory - Legal 500, in its 2022 EMEA edition.

When commenting on the practice, clients noted that it has “experienced legal experts of many years and in different legal fields of practice, with quick responses to legal needs of clients. They are willing to bend backwards for clients. They have a wide network of experienced legal firms to represent clients where the firm has no offices.”

The directory also ranked the firm in the following practice areas - Employment, Banking, Finance & Capital Markets, Real Estate & Construction and Privatisation and Projects.

Clients commended the firm by stating that “they give efficient legal services. I like the way they handle all legal matters assigned to them with a lot of passion, due diligence, and high standard services. They are exceptional in terms of hiring very competent personnel who ensure all legal matters are handled very well.

Other clients remarked that “relative to other firms in the market, Oraro does an excellent job collaborating across practice disciplines. They seem to have smaller staffing on matters, which seems to allow for greater collaboration among their subject matter experts. This allows them to provide comprehensive expert support in a very expedient manner.”

Owing to their remarkable careers spanning decades, both our Founding Partner, George Oraro SC, and Senior Partner Chacha Odera, have retained their ‘Leading Individual’ rankings in Dispute Resolution. Noella Lubano, a Partner with extensive experience in asset tracing, fraud & banking litigation, insolvency and arbitration matters, also received recognition as a ‘Next Generation Partner’ in Dispute Resolution.

In the Employment category, Chacha Odera equally retained his ‘Leading Individual’ ranking. The Managing Partner, Pamella Ager, commented on the rankings by stating that “we are humbled that our work in various areas has once again been recognised. I congratulate our lawyers on their recognition.

###

About Oraro & Company Advocates

Oraro & Company Advocates is a full-service, market-leading African law firm established in 1977 with a strong focus in dispute resolution and corporate & commercial law. With a dedicated team of partners, associates and support staff, the firm and its lawyers have been consistently ranked by leading legal directories such as Chambers Global, IFLR1000 and Legal 500 as a top-tier firm in Kenya in areas such as Dispute Resolution, Employment & Labour, Corporate & Commercial, Banking & Finance, Capital Markets, Real Estate, and Project Development.

Oraro & Company Advocates prides itself in its deeply rooted client relationships by providing quality legal services through its partner-led approach, drawing from local knowledge and global perspectives.

Additionally, Oraro & Company Advocates is a full Affiliate Member of AB & David Africa, a Pan-African business law network committed to ensuring that businesses and projects succeed in Africa by helping clients minimize the risks associated with doing business on the continent. This enables us to offer cross-jurisdictional legal advice in a seamless manner while maintaining the highest professional standards.

Harvey Ogombe

Head of Business Development

T: +254 709 250 000/734

E: harvey@oraro.co.ke

5th April 2022

We are proud to announce that OurVeryOwn George Oraro, SC and Radhika Arora were part of the team representing the Attorney General of the Republic of Kenya in the recent landmark Judgment touching on the applicability of the Basic Structure Doctrine within the Kenyan jurisdiction.

In setting aside the holding of both the High Court and the Court of Appeal, the Supreme Court agreed with our arguments advanced on behalf of the Attorney General and held that the Constitution of Kenya 2010 is self-governing and incorporates a rigorous, tiered amendment procedure under Chapter 16 of the Constitution, thereby negating the need to impose an extra-constitutional doctrine which limits the amendment powers conferred on the people of Kenya.

 

Business Development Contact

T: +254 709 250 000

E: insights@oraro.co.ke

Data Protection: The Coming Into Force of Various Data Protection Regulations and What you Need to Know

The Data Protection (General) Regulations, 2021 and the Data Protection (Complaints Handling Procedure and Enforcement) Regulations, 2021 have now come into force following the approval of the Regulations by the National Assembly. Also imminently coming into force are the Data Protection (Registration of Data Controllers and Data Processors) Regulations, 2021.

The Regulations are poised to revolutionise the manner in which personal data is processed, by fully operationalising and giving effect to the substantive statue, the Data Protection Act, 2019 (DPA). In this regard, the Regulations set out procedural guidelines that must be adhered to by both data controllers and data processors as they interact with personal data.

We set out an overview of the salient provisions of the Regulations below.

The Data Protection (General) Regulations, 2021 

The Data Protection (General) Regulations, 2021 (the General Regulations) seek to promote the digital rights of persons in Kenya and to encapsulate key provisions of substantive statute, the DPA. Some of the salient provisions of the General Regulations include matters relating to consent, commercial use of personal data, data localisation, dealing with data breaches, cross border transfer of personal data, general exemptions amongst others. We have examined these provisions below.

Consent

Under the General Regulations, data controllers and data processors are required to ensure that a data subject has capacity to consent and voluntarily gives consent. Data controllers and data processors are also required to discharge certain obligations such as notifying the data subject of the purposes of processing as well as the identities of the data controllers and data processors in obtaining consent. Practically, this means that if your institution processes personal data, you will be required to ensure that your contractual terms and conditions meet the information obligations prescribed under the General Regulations.

Commercial Use of Personal Data

Under the General Regulations, data controllers and data processors alike are required to seek specific consent from the data subject if they intend to use personal data for commercial purposes. Practically, this means that if your institution operates cookies on its website for marketing purposes, or a loyalty-based programme, you will be required to ensure that the terms and conditions allow for obtaining specific consent from targeted users as to the use of their personal data for commercial purposes.

Data Localisation

Data controllers and/or data processors are required to ensure that they either process personal data through a data server located in Kenya or store one servicing copy in Kenya, if they process personal data for the purposes of strategic interests of the state. Strategic interests of the state include matters such as the administration of civil registration and legal identity management systems and the facilitation of national elections. If your institution carries out such functions, you will be required to ensure that they either  process personal data through a data server located in Kenya or store one servicing copy in Kenya

Cross Border Transfer of Data

Data controllers and data processors may transfer personal data outside the country if the transfer is made on the account of either (i) the existence of appropriate data protection safeguards (ii) an adequacy decision (iii) transfer as a necessity (iv) the consent of the data subject. Therefore, if your institution transfers personal data to any other country on account of its business structure e.g., where the organisation stored data in data centres located in other countries, you will be required to ensure that the transfer of personal data is made on either of the above bases.

Breach and Notification

Under the General Regulations, data controllers and data processors are required to notify the Office of the Data Protection Commissioner (ODPC) within seventy-two (72) hours if the breach poses a real risk of harm to the data subject. This includes instances where the breach has occasioned the unauthorised disclosure of a data subjects full name, password, security codes, access codes among others.  Therefore, if your institution has suffered a data breach, you will be required to assess the data breach and determine if the breach posses a real risk of harm to the data subject. If the breach poses such risk, you will be required to make such notifications as prescribed by the DPA including the notification to the ODPC set out above.

The Data Protection (Complaints Handling Procedure and Enforcement) Regulations, 2021

The Data Protection (Complaints Handling Procedure and Enforcement) Regulations, 2021 (the Enforcement Regulations) provide for the modes through which data subjects may submit their complaints to the ODPC. These include the submissions of complaints electronically  through emails, web position and complaint management systems or by oral submission. The Enforcement Regulations also provide for the modes through which the ODPC may investigate a complaint including but not limited to issuing summons, oral examinations and requests for documentation.

The Enforcement Regulations also prescribe the manner in which the ODPC may issue enforcement and penalty notices to data controllers or data processors who are found to be in breach of the DPA or any of the Regulations made thereunder.

One of the key aspects of the Enforcement Regulations is the recognition and support of the use of alternative dispute resolution (ADR) mechanisms such as negotiation, mediation and conciliation to resolve complaints, which is derived from Article 159 of the Constitution which enjoins Courts, tribunals and other administrative bodies to promote and support ADR.

The Data Protection (Registration of Data Controllers and Data Processors) Regulations, 2021

The Data Protection (Registration of Data Controllers and Data Processors) Regulations, 2021 (the Registration Regulations) aim to give effect to section 18 of the DPA which requires all data controllers and data processors be registered. Under the Registration Regulations, data processors and data controller who have an annual turnover of below KES. 5,000,000 and have less than ten (10) employees will be exempt from the registration requirements.

Notwithstanding the foregoing, if your institution processes personal data for the purposes set out under the third schedule of the Registration Regulations, including business that operate CCTV systems, engage in direct marketing, provide financial services, property management and telecommunications network etc., you will still be required to register as a data controller, data processor or both as the case may be.

The Registration Regulations come into force six (6) months after the date of publication, which is on 14th July 2022. As such if your institution processes personal data, the institution will be required to register as either a data controller or data processor or both, as the case may be.

Please click here to download the alert.


This alert is for informational purposes only and should not be taken to be or construed as a legal opinion. If you have any queries or need clarification as to how the Data Protection Regulations might affect you and/or your business, please do not hesitate to contact John Mbaluto, FCIArb, Deputy Managing Partner (john@oraro.co.ke), Jacob Ochieng, Partner, (jacob@oraro.co.ke), Daniel Okoth, Partner, (daniel@oraro.co.ke), Milly Mbedi, Senior Associate, (milly@oraro.co.ke), Nancy Kisangau, Associate (nancy@oraro.co.ke) or your usual contact at our firm.

Proposed Provision for Amendment Proposed Amendment Our Comments
Preamble Long Title The Bill proposes a law to provide for the framework to encourage growth and sustainable technological development and new entrepreneurship; employment; to create a more favourable environment for innovation; to attract Kenyan talents and capital; and for connected purposes. The proposed law seeks to govern the interactions and relationships between the government, incubators, startups, investors, and the ultimate consumers of innovative products.
Clause 2 Interpretation Credit Guarantee Means the guarantee of monetary liabilities, excluding technology guarantee borne by an enterprise.
Innovation
(Defined as is in the Science, Technology and Innovation Act, 2013)
Includes:

  1. a technovation model, utility model or industrial design within the meaning of Industrial Property Act, 2001;
  2. a product, process or idea which is novel;
  3. an improved use of new product, service, or method in industry, business or society;
  4. indigenous or traditional knowledge by community of beneficial properties of land, natural resources, including plant and animal resources and the environment; or
  5. any other non-patentable creations or improvements which may be deemed as deserving promotion or protection or sui generis intellectual property rights and innovator shall be construed accordingly.
Startup Includes technology-based innovative entity, legally recognised by the laws of Kenya, with strong growth potential and a disruptive economic model.
Startup incubator or Incubator Means a company, partnership, non-governmental organisation or limited liability partnership, whose principal object is the support of the birth and development of start-ups, innovation, and activities related to the transfer of technological and research, development, and innovation process, through the offer of dedicated physical spaces and services advice.
Clause 3 Object of the Bill The Bill proposes the following object:

  • Fosters a culture of innovative thinking and entrepreneurship;
  • Registration of startups;
  • Linkage of start-ups with private investors, financial institutions, the private sector, research institutions and such other institutions at the county, national and international level;
  • Facilitate investments in startups;
  • Facilitate the provision of fiscal and non-fiscal support to startups in Kenya;
  • Promotes an enabling environment for the establishment, development, conduct of business, and registration of startups;
  • Establishment of incubation facilities at the National and county levels of government;
  • Establish an environment that promotes the establishment of startups; and
  • Monitoring and evaluation of the legal and regulatory framework to encourage the development of startups.
The overarching role of the Bill is to set up an ecosystem where startups may be created, supported, and to enhance them spill over into the various sectors of the economy.

The National economic blueprint is heavily reliant on the technology and innovation which so far remains unregulated. The proposed regulation of disruptive startups is a means to an end. It is meant to support the digital economy and the knowledge economy.

Clause 4

Role of National and County Governments

The Bill proposes that the County and National Governments shall:

  1. Promote innovation;
  2. facilitate the transfer of technology innovation;
  3. create and develop a sustainable, globally competitive technology innovation sector that contributes towards the accelerated growth of the economy;
  4. promote the creation of employment and wealth creation; and
  5. promote the linkages between universities and research institutions and the business community.

Further, the Agency and the county executive committee members shall:

  1. put in place a national and county incubation policy framework for the development of the business incubation sector and startup system;
  2. enter into partnerships with local and international business incubators in order to promote the establishment and growth of startups in Kenya;
  3. establish programmes for the certification and admission of incubators into the incubation programmes;
  4. put in place mechanisms that promote the development of business incubation programmes;
  5. create an enabling environment for the promotion of business incubators including fiscal and non- fiscal incentives to incubators and startups;
  6. establish public online and other platforms for access to information including the establishment and development of startups, existing incubation programmes, access to fiscal and non-fiscal support;
  7. keep and maintain a directory of startups and incubators;
  8. support any research and development activities undertaken by startups;
  9. put in place mechanisms for preincubation of entities and for this purcpose, provide training and capacity building programmes for registered startups;
  10. put in place mechanisms to enable access to entities from marginalized groups through the use of quotas or mechanisms that match them to unused capacity in existing programmes; and
  11. put in place facilitative structures that ensure the protection of the innovations of startups at the national and international level for the protection of the intellectual property.
Innovative entrepreneurial activities do not happen randomly or in a vacuum but requires enabling conditions hence, the Bill proposes to mandate the National and County Governments to provide economic conditions such as incentives, opportunities, and to remove barriers to innovative businesses, thinking and ideas.
Clause 5 Establishment of the Incubation Programmes The Bill proposes the establishment of incubation programmes and empowers the agency and the members of the county executive committee to:

  1. develop standards and guidelines to regulate the relationship between an incubator and a startup;
  2. establish an online platform setting out information on existing incubator programmes, incubators and startups and the process of registration and admission into the programmes; and
  3. prescribe a criteria for the evaluation of entities, programmes and structures set up for the purposes of implementing the Act.
As the country moves away from resource driven economy to a knowledge driven economy, there is a huge incentive in setting up incubation programmes that will assist startups to grow. These programmes will provide an enabling environment for infant technologies, ideas, and industries to grow.
Clause 6 Appointment and functions of Registrar and other officers The Bill proposes to task the Agency with the registration of startups and establishes the Registrar of Startups who shall be:

  1. Competitively recruited by the Public Service Commission;
  2. Appointed by the Agency on such terms and conditions as the Agency may, in consultation with the Salaries and Remuneration Commission, determine;
  3. The Agency in consultation with the Public Service Commission appoint a Deputy Registrar and such number of County Registrars in the counties as shall be necessary for performance of the functions of the Registrar and who shall be subject to the directions of the Registrar.
The Science and Technology Innovation Agency (“the Agency”) is well suited to register innovative startups due to its immense expertise in innovative and technological programmes.

Registration helps in monitoring startups with various compliance requirements such as maintaining a certain level of growth objective and other business laws.

Clause 7 Functions of the Registrars The Bill mandates the Registrars of startups to:

  1. Keep an updated database of all registered startups and startups under review indicating;
    1. Business development stage;
    2. Ownership;
    3. Description of the innovative aspects of the company, including intellectual property rights;
    4. Products and services offered;
    5. Investment support received;
    6. Financial needs; and
    7. Target market.
  2. Register and supervise startups registered under the Act to ensure compliance with its provisions;
  3. Maintain the Register of all the startups in the country;
  4. Keep all document and records of registered startups;
  5. Enforce the decisions of the Board of the Agency with respect to the registration, regulation, and supervision of startups under this Act;
  6. Coordinate the functions of the County Registrars;
  7. Perform such other functions as may be necessary for the implementation of the Act or as may be specified under any other law.

Further, the County Registrars and Assistant Registrars shall—

  1. facilitate the registration and development of startups;
  2. receive applications for registration of startups;
  3. monitor and evaluate startup projects; and
  4. carry out such duties as may be delegated from time to time
This proposal is in line with the Companies (Beneficial Ownership Information) Regulations, 2020 which required all companies whether public or private to provide sufficient company details to the registrar including the details of its beneficial owners.
Clause 8 Eligibility for admission into the incubation programme An entity shall be eligible to be registered as a startup and for admission into an incubation programme if the entity;

  1. is registered company under the Companies Act; or partnership firm under the Partnership Act; or limited liability partnership under the Limited Liability Partnership Act; or non-governmental organization under the Non-Governmental Organizations Co- ordination Act;
  2. is newly registered or has been in existence prior to the coming into force of the Act; for a period of not more than seven years from the date of its incorporation or registration; and in the case of startups in the biotechnology sector, the period shall be up to ten years from the date of its incorporation or registration;
  3. has as its objects; the innovation, development, production or improvement and commercialization of innovative products, processes or services or if it is a scalable business model;
  4. has its headquarters or a branch in Kenya;
  5. is at least one third owned by one or more citizens of Kenya; and
  6. at least fifteen percent the entity's expenses can be attributed to research and development activities.

The Agency may develop alternative criteria for startups that do not satisfy the requirements of subsection (1) for registration as startups and for admission into incubation programme

The Act shall not apply to an entity which is established or formed as a result of the split, reconstruction, merger or reconstitution of an existing business; or a holding company or subsidiary of an existing entity which is not registered as a startup.

Incubation is meant to support nascent ideas, innovations, and technologies financially. Not all startups necessarily have the potential or ability to disrupt any sector of the economy, there must be a means of identifying qualifying startups that are innovative, researched based and with technological components.

Although the proposed qualifying criteria are good, there is need to narrow the scope to reduce the number of startups that may qualify for admission into the incubation programme. As it stands, the floodgate for admission is wide open and may thus be misused and ultimately defeat the purpose. For example:

  • there should be a cap on the amount of turnover for an entity to qualify for admission into the incubation programme.
  • there should be a cap on permissible sectors of the economy which may be determined through exclusion method; and
  • Research and development with a technological edge should be a major factor.
Clause 9 Application for admission into an incubation programme An entity that qualifies for admission into an incubation programme under section 8 may submit an application, in the prescribed form:

  1. in the case of an incubation programme managed by the Agency, Ministry or any other entity on behalf of the National Government, to the Agency; or
  2. in the case of an incubation programme managed by a county government, to the county registrar.

An applicant for admission shall be accompanied by:

  1. a statement setting out the following information: the name of the entity; the general nature of the proposed business of the entity; a declaration form stating whether an entity has complied with eligibility requirements; the proposed registered address of the entity; the entity's place of incorporation or registration; the entity's registration number; and the registered address of the entity to which all communications may be addressed;
  2. a letter of recommendation or support which may include a letter: a patent or trademark registered in Kenya; statement on information regarding the elements inherent in the economic model of said entity including-
    1. innovation aspects;
    2. factors differentiating the factors of realization of the strong potential of economic development;
    3. scientific and technical qualifications and the experience of the project team;
    4. a prize or reward obtained and any patent for invention filed;
  3. the certificate of incorporation or registration of the entity; and
  4. a brief description of the innovative nature of the product or service.

The Agency and the county executive committee members shall put in place mechanisms to ensure that the admission process of an entity under this section is simple, efficient, accurate and transparent and shall, for this purpose —

  1. establish an online platform for the submission of the documents and information specified under subsection (1); and
  2. devolve and decentralize the registration process to the lowest devolved unit and may establish such registration desks as may be necessary to enable access to registration
This means that admission into the incubation program will not be automatic for all startups. Startups requiring incubation support must, as pointed out above, demonstrate;

  • innovation aspects;
  • factors differentiating the factors of realization of the strong potential of economic development;
  • scientific and technical qualifications and the experience of the project team;
  • a prize or reward obtained and any patent for invention filed;

This way, the Agency is able to sieve startups that are innovative, disruptive and have the potential to create massive employment upon fruition.

Clause 10 Consideration of Application and Registration The Registrar or the County Registrar, as the case may be shall, within thirty (30) days upon receipt of an application for admission into the incubation programme:

  1. examine the application together with the documents;
  2. if the Registrar or the County Registrar considers it necessary, call for such further information or carry out such inspections as he or she may consider necessary for the determination of the application.

Where the Registrar or the County Registrar is satisfied that an applicant meets the requirements for registration, the Registrar or County Registrar shall, subject to the provisions of the Act, enter the name and particulars of the applicant in the register of startups kept for that purpose.

The registration process is fast-tracked to facilitate ease of starting the business and doing business. Reducing legal formalities and bureaucracy is itself an incentive.
Clause 11 & 12

Certificate of Registration

And

Effect of Admission into the Incubation Programme

The Registrar or County Registrar, as the case may be, shall, upon entering the name of the applicant in the register, issue to the entity, a certificate in the prescribed form and certificate of admission into an incubation programme shall be conclusive evidence that the startup—

  1. has met all the requirements for registration specified under the Act;
  2. has been duly registered in accordance with the Act unless it is proved that the registration of the startup has been cancelled.
This is in line with business operation policies and consumer protection imperatives, all businesses must have certification certificates of operation or licenses.

It also helps the startup to benefit from the exemptions afforded to the startups admitted into the incubation program.

Clause 13

Refusal to Admit an Entity into the Incubation Programme

The Registrar or county registrar may reject an application for the admission of an entity where—

  1. the entity has submitted false or misleading information in its application;
  2. the application does not comply with the provisions of the Act;
  3. the entity does not meet the criteria specified under the Act for the registration of a startup; or
  4. the objects of the entity are likely to be pursued for an unlawful purpose or used for a purpose incompatible with public interest.

The Registrar or county registrar, as the case may be, shall notify the applicant, in writing, of the decision to reject an application for admission within fourteen days of such rejection.

Since admission into the incubation programme is not automatic, fairness and natural justice requires prompt feedback that is clear and unambiguous.

Where an application is refused for not meeting the criterion, the registrar must give reasoned decision so as to enable the applicant to gauge their case and determine if they should resort to a higher authority or court process. This prevents discrimination.

Clause 14

Application from an order of refusal or de-registration

A person who is aggrieved by the decision of the Registrar or county registrar under this Part may, within thirty (30)  days of being notified of the decision, apply to the Cabinet Secretary for a review of the decision.

An application for review shall be in such form as the Cabinet Secretary shall prescribe.

The Cabinet Secretary shall determine an application under subsection (1) within sixty (60) days of receipt of the application under subsection (1) and may confirm, vary or reverse the decision under review.

Although this proposal may be deemed fair and just in an open democratic society, it is not enough. There should be recourse to a judicial authority to examine the actions of these administrative offices. For instance, if the Cabinet Secretary confirms the decision of the Registrar and the Applicant does not agree with both decisions, there should be a right of Appeal to the High Court, or any tribunal established for that purpose.
Clause 15

Register of Startups

The Registrar shall keep and maintain a register of —

  1. all startups registered under the Act specifying; the name of the startup; the members of the startup; the address of the startup; and such other particulars as the Registrar may from time to time determine; and
  2. all de-registered startups; and all startups which have voluntarily deregistered under the Act.

Any person may inspect the register and obtain a copy of, or an extract from the Registrar upon payment of such fee as the registrar shall determine.

The office of the registrar of startups just as the registrar of companies plays an essential role in fostering business culture and monitors compliance with laws and government directives. It serves as a true record of the activities of the company which help investors and consumers to make their decisions.
Clause 16

Alteration of Register

The Registrar or County Registrar, as the case may be, may, from time to time, make changes or corrections in the register relating to any entry.

Any change or correction in relation to an entry made pursuant to a notice issued by a startup shall be made to the Registrar as soon as it is practicable after receipt of an authenticated notification thereof.

This is good law as it protects consumers and the investors who deal with the startups in official capacity. The records of the startup must reflect what is in the office of the registrar.
Clause 17

Change of Particulars

A startup that makes a change to any of its particulars shall, within thirty (30) days of such change submit to the Registrar information regarding the change.

Upon receipt of the information under subsection (1) and where the Registrar is satisfied that the change does not affect its status of registration as a startup, enter the changes in the register kept by the registrar under this Act.

This proposed law is in harmony with the various laws which requires companies, partnerships, NGOs, societies and saccos to regularly update the registrar either where there are changes or yearly as required by law.

Further, beneficial owners must always be registered with the office of the registrars of companies, hence it is important for startups to abide by the law.

Clause 18

Obligations of Registered Startups

A startup registered under the Act shall—

a) be encouraged to achieve growth goals related to the number of human resources, total assets and the annual turnover set by a regulations;

b) maintain accounting in accordance with the legislation and arrangements in place for the work and submit its annual financial budgets to the Agency no later than thirty first day of March in each financial year; and

c) inform the Agency of a change in its structure, composition or object within a period of one month from the date of the change

These obligations are important to ensure the startups are monitored in terms of development, and growth. It also helps the Agency to ascertain or determine if a startup should be admitted into the incubation programme or removed.
Clause 19

Eligibility for Admission into an incubation programme

An entity may be certified as an incubator, if the entity—

a) is registered as a public limited company, a non- governmental organization, a private limited company, a limited liability partnership or a partnership;

b) has its principal object the delivery of services to support establishment and development of innovative startups;

c) has in place: facilities, suitable to accommodate innovative startups; and adequate equipment for startup activities innovation;

d) is administered or directed by persons of recognised competence on business and innovation and has a structure at its disposal for technical and managerial consulting;

e) has established collaborative relationships with universities, centres of research, public institutions and financial partners that carry out activities and projects related to innovative startups.

The set criteria ensures that there is a threshold of supportive infrastructure that can help startups access skillset talents, finances, and technological capacity.
Clause 20

Certification of

Incubators

An entity that meets the criteria specified under Clause 19 may apply for admission as an incubator by submitting an

application together with a statement. setting out information under subsection (2) —

a) in the case of an incubator programme managed by the Agency, to the Registrar; and

b) in the case of a programme managed by the County government, to the County Registrar.

A statement complies with this subsection if it contains the following information relating to the incubator—

a) address of the incubator;

b) principal object;

c) brief description of the projects carried out;

d) expenditure on research and development;

e) list of shareholders;

f) list of investor companies;

g) educational qualifications and professional experiences of members and staff;

h) the existence of professional relationships, of collaboration or commercial with other incubators, investors institutional and professional, universities and research centers;

i) last financial statements filed;

j) list of industrial property rights and intellectual property rights.

Incubators’ certification is a prerequisite since it ensures that incubators meet all the technical capacity, technological knowhow, and the right conditions or environment to support startups.
Clause 21

Withdrawal from an Incubation Programme

The Agency shall, in consultation with the county executive committee members, prescribe standards and guidelines to be adhered to by a startup or an incubator that intends to withdraw from an incubation programme established pursuant to the Act.

The Agency or a county executive committee member may, where an incubator fails to adhere to or meet the requirements under the Act, revoke the admission of the incubator in accordance with the guidelines prescribed by the Agency.

An entity cannot remain in incubation forever, thus, there must be compulsory means of expulsion from incubation. Either by attaining a certain capital threshold or specified number of years.

The baseline, however, should be if joining an incubation program is voluntary through application, then withdrawal should equally be voluntary. This ought to be done in a systematic manner to avoid wastage of resources and that a startup is able to sustain itself once out of incubation.

Clause 22

Obligations of an Incubator

An incubator registered under the Act shall:

a) support novice technological entrepreneurs at the earliest stage of technological entrepreneurship;

b) have a defined minimum and maximum technological innovation projects it can handle simultaneously;

c) facilitate technological innovators to implement their ideas and form new business ventures;

d) determine the technological and marketing applicability of a technological innovation idea;

e) have a viable research and development plan and expertise;

f) provide secretarial and administrative services to startups;

g) create investment opportunities for the private sector, including for venture capitalists; and

h) transfer technologies from research institutions and into the technological startups' industry.

An incubator must have the capacity, technological knowhow, and the favourable conditions to enable it to support startups.
Clause 23

Incentives for Incubation

The National and County governments shall support incubators through capital grants, fiscal and non fiscal support. Innovative entrepreneurial activities do not happen randomly or in a vacuum hence, the bill proposes to mandate the National and County Governments to provide economic conditions such as incentives in form of grants in addition to removing barriers.
Clause 24

Support to Startups

The Agency and the county executive committee members shall put in place measures to support the establishment and development of startups and shall, for this purpose

a) subsidise the formalisation of startups;

b) facilitate the protection of the intellectual property of innovations by startups in Kenya and with international organisations;

c) provide fiscal and non-fiscal support to startups admitted into incubation programmes under the Act;

d) provide support in the form of research and development activities; and

e) provide such other support to enable the development and growth of startups registered under this Act

The easier the creation of startups the better for the investors in startups. The ease of doing business determines the startups spill over.
Clause 25

Credit Guarantee Scheme

The Cabinet Secretary may, in consultation with Board of Trustees of the Fund and where necessary for the development and growth of startups under the Act, establish a credit guarantee scheme.

Where the Cabinet Secretary establishes a credit guarantee scheme under subsection (1), it shall have as its objectives—

a) the provision of accessible financial support to startups;

b) a framework for credit guarantee for startups;

c) guarantee for investors in startups;

d) availing of financial and credit information to startups;

e) capacity building on financial and risk management to startups.

Where a credit guarantee scheme is established pursuant to subsection (1), the Cabinet Secretary shall ensure that there is in place—

a) a strategy and operational goals that are aligned to the objectives under subsection (2);

b) a criteria for eligibility and qualification for recipients of funding under the Scheme;

c) a criteria for the monitoring and evaluation of projects undertaken under the Scheme and the efficiency of the operations of the Scheme;

d) mechanism for transparency, accountability and reporting on the activities of the Scheme

This is a good initiative to attract talent and investors in the startups ecosystem in the country.
Clause 26

Training and Capacity Building

The Agency shall put in place a programme for the training and capacity building of startups under the Act and shall, for this purpose establish a platform setting out information at the National and County level of government, on—

a) existing incubators;

b) available training programmes;

c) mentors and resource persons;

d) projects under existing incubation programmes;

e) available fiscal and non-fiscal support services;

f) business information necessary for the management and development of startups;

g) such other information as the agency shall, in consultation with the county executive committee member consider necessary.

Startups are part of the move to knowledge economy from resource driven economy. As such, it is very important to ensure continuous training and facilitate acquisition of skills that are innovative and novel.
Clause 27

Application for Grant or Revocation of Patents

The Agency shall facilitate startups in the —

a) application for registration, grant, revocation and institution of legal action for infringement of intellectual property rights; and

b) filing and registration of intellectual property at the international level.

This is a good initiative because startups are business organizations that must comply with the patents rights and equally benefit from the protection of brand or patents infringements.
Clause 28

Fiscal Incentives

The Cabinet Secretary shall, in consultation with the Cabinet Secretary responsible for matters relating to finance, put in place measures for the granting of fiscal incentives including tax incentives as shall be considered necessary for the development of startups in the country Incentivization is crucial for startups since most of the time they lack capital and tax burdens make them dwindle instead of growing especially in the early stages.
Clause 29

Growth Objective

A startup shall be encouraged to cumulatively achieve growth objectives as set out by the Cabinet Secretary by regulation. So far, it is unclear how the law will regulate the growth objectives for the startups. Nonetheless, startups need to have projections on the expected yearly turnover, employment creation, and expansion.
Clause 30

Regulations

The Cabinet Secretary may make regulations generally for the better carrying out of the provisions of the Act and may make regulations—

a) on the conditions and process for the exemption of startups from registration fees;

b) on workplace and labour issues with employees, independent contractors, and service providers;

c) on commercial transactions, including product development, production, corporate partnering, advertising, marketing, and sales;

d) on employee benefits and compensation;

e) on protection of intellectual property rights;

f) on the relationship between founders and employees;

g) on the exemption of startups from competition laws;

h) on the intergovernmental support for startups;

i) for the reporting and accountability by startups, under the Act, of the funds utilised by them;

j) for the de-registration of startups;

k) for the grounds and process on refusal to admit an entity into an incubation programme;

l) for th eadvertising and impact assessment of the measures of startups; and

m) for incentives to invest in innovative startups

It is unclear who shall be responsible for the making of the regulations between the Agency and the Cabinet Secretary since the Bill contradicts itself by mandating both the Agency and the CS to make regulations.

It is our view that the Agency owing to its expertise should draft the regulations in consultation with Cabinet Secretary.

Clause 31

Amendment of the Science, Technology, and Innovation Act, 2013

The Science, Technology and Innovation Act is amended—

a) in subsection (1) of section 29 by inserting the following new paragraph immediately after paragraph (p)— (pa) provide financial support to technological innovations registered under the Startups Act;

b) in section 32 by deleting subsection (4) and substituting therefor the following new subsection—

(4) The Fund shall be managed by a Board of Trustees which shall consist of eleven members to be appointed by the Cabinet Secretary as follows:

1. a chairperson, being a person with knowledge and experience in matters related to finance, investment and fundraising related to science, innovation and technology;

2. the Principal Secretary in the Ministry responsible for finance;

3. the Principal Secretary in the Ministry responsible for science and technology;

4. one person nominated by the Kenya Private Sector Alliance;

5. one person with knowledge and experience in finance and investment nominated by the Capital Markets Authority;

6. two persons with knowledge and experience in the fields of innovation, technology and entrepreneurship;

7. two persons representing startups in the country nominated by the most representative organisations representing startups;

8. the Director of the Kenya Innovation Agency, who shall be an ex officio member; and

9. the Secretary to the Commission, who shall be an ex-officio member.

10. by deleting the words "subsections (4)(a), (d), (e) and (f)" appearing immediately after the words "Trustees referred to under" in subsection (5) and substituting therefor the words "subsection (4) (a), (d), (e), (0 and (g)".

11. in subsection (2) of section 33 by inserting the following new paragraph immediately after paragraph (b)— (ba) financial support to technological innovations;

12. in subsection (1) of section 36 by inserting the following new paragraph immediately after paragraph (g)— (ga) provide financial support to technological innovations;

The proposed amendments seek to include innovative startups to benefit from the Fund created under the Science, Technology, and Innovation Act and to increase the member of the Board of the Fund.

We know that poverty, a lack of access to education and resources, are critical impediments to the operation of many Children’s Centres. That is why, in line with our commitment to supporting and connecting with the communities in which we operate, we were glad to donate various items to the Watu wa Maana Children’s Centre in Ruiru, through the Oraro & Company Advocates CSR Committee.

Founded in 2002 by Wanjiru Kanyoni, Watu wa Maana Children’s Centre was established with a desire to rehabilitate and reintegrate vulnerable children in Ruiru. The Centre hosts children who are vulnerable, abused, orphaned, or disadvantaged in the community and have ended up on the streets or under the care of abusive and neglectful family members.

The Centre rescues disadvantaged children from vulnerable conditions such as the streets and abusive home set-ups. Thereafter, the Centre shelters the rescued children and facilitates their education, health services and ultimate rehabilitation and reintegration back with responsible members of their families and into the society. Our people showed their willingness to give back to the community not just by virtue of a sense of responsibility, but because of their willingness to give their time, presence and other material gifts.

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