Investing in emerging markets can present lucrative opportunities, but understanding and navigating the regulatory landscape is essential for success. Doing business in both Kenya and Tanzania, I am often asked which country is better to do business in. Kenya and Tanzania, two countries in East Africa and part of the East Africa Community, have been attracting significant foreign investment in recent years. Well, my answer is that both countries have different offerings and I think that when it comes to East Africa, the more markets you can be in the better. With the East Africa Community for example, Tanzania market alone offers 65 million people while Tanzania and Kenya the market size goes up to about 120 million. In making the decision of which market to invest in, or to invest in first, let us explore the key differences in investment regulations between Kenya and Tanzania, shedding light on the unique features and considerations for potential investors.
1. Ease of Doing Business
According to the World Bank’s Ease of Doing Business Index, Kenya and Tanzania have made notable progress in improving their business environments. As of 2021, Kenya ranks 56th, while Tanzania ranks 141st out of 190 countries surveyed. Kenya generally has a more favorable regulatory framework, offering streamlined processes and reforms aimed at attracting foreign direct investment. This is due to the fact that Kenya has embraced foreign investment and its policies have been pro-business since Kenya got its independence in 1963. Tanzania on the other hand opted for more socialist policies and liberalisation and embrace of private sector development and foreign investment did not really happen until the 90s. Therefore, Tanzania lags behind in this respect.
2. Investment Promotion Agencies
Both Kenya and Tanzania have dedicated investment promotion agencies responsible for attracting and facilitating investment. In Kenya, the Kenya Investment Authority (KenInvest) plays a crucial role in promoting investment and providing support to investors. Tanzania has the Tanzania Investment Centre (TIC) responsible for providing similar services, including the issuance of investment certificates and assisting with project implementation. Both KenInvest and TIC protect foreign investment and through legislation offer guarantees against expropriation and dispute resolution mechanisms allow for international arbitration. All these things are positive assurances to foreign investors.
3. Foreign Ownership and Investment Restrictions
Kenya and Tanzania have different regulations regarding foreign ownership and investment restrictions. In Kenya, there are generally no restrictions on foreign ownership across most sectors, allowing full foreign ownership. However, certain sectors, such as telecommunications and banking, have limitations on the level of foreign ownership, often requiring local partnerships or specified local shareholding. In particular, when it comes to land and real estate assets, Kenya does not restrict ownership for foreigners and foreigners can own this asset class relatively easily and the same protections and guarantees offered to Kenyans when it comes to owning this asset class are extended to foreigners too.
In Tanzania, the government has implemented regulations to encourage local participation in certain sectors, including mining, oil and gas, transportation, tourism, gaming and media. These regulations require foreign companies to have a minimum percentage of local shareholding, typically ranging from 5% to 51%, depending on the sector. When it comes to land and real estate, there are restrictions on ownership for foreigners. Foreigners can only own land or real estate for investment purposes thus requiring them to register their investment project to the TIC and they must demonstrate at least a minimum investment capital of USD 500,000. The ownership process through the TIC is bureaucratic and cumbersome where at the end of it the TIC owns the right of occupancy to the property and the investor owns a derivative right. Should the investor not be investing in Tanzania anymore, they disqualify from owning the land.
4. Taxation and Incentives
Taxation policies and incentives also differ between Kenya and Tanzania. Kenya offers tax incentives for investments in various sectors, such as manufacturing, agriculture, and information technology. These incentives include reduced corporate tax rates, tax holidays, and accelerated depreciation allowances for qualifying investments. Tanzania, on the other hand, has a simpler tax regime with a flat corporate tax rate of 30%, but it also has a variety of tax incentives such as a tax exemption on import duty which is capped at 70% where investors must pay the difference.
- The tax rates vary between Kenya and Tanzania. In Kenya, there is a progressive tax rate system where individuals are taxed at different rates depending on their income levels. The rates range from 10% to 30%. On the other hand, Tanzania operates a flat tax rate for individuals at 30%.
- In Kenya, the standard corporate tax rate is 30% for resident companies and branches of foreign companies. However, there is a reduced rate of 25% for companies listed on the Nairobi Securities Exchange and engaged in manufacturing. In Tanzania, the corporate tax rate is 30% and 25% for the companies listed on the Dar es Salam Stock Exchange (DSE). Also, there is an additional tax rate of 10% on repatriated income of branches of foreign companies.
- Kenya and Tanzania have different VAT rates. In Kenya, the standard VAT rate is 16%. However, certain essential goods such as unprocessed foodstuff, agricultural inputs, and pharmaceutical products are exempted from VAT. In Tanzania, the standard VAT rate is 18%, and there are limited exemptions. Tanzania Zanzibar VAT rate is 16%.
- The rates of withholding tax differ between Kenya and Tanzania. In Kenya, the withholding tax rates range from 0% to 30%, depending on the nature of the payment. In Tanzania, withholding tax rates are generally higher and range from 5% to 15%.
- Special Economic Zones (SEZs):Kenya has established SEZs to attract foreign investment and promote industrialization. These SEZs enjoy tax incentives such as a reduced corporate tax rate of 10% for the first ten years of operation and exemption from VAT and customs duty on inputs. Tanzania also has SEZs, but they have slightly different tax incentives, including a reduced corporate tax rate of 25% and exemption from VAT on inputs.
5. Repatriation of Profits and Investor Protection
Both countries have provisions in place to protect investors’ rights and facilitate the repatriation of profits. Kenya allows for the free transfer of profits and repatriation of capital without restrictions. It also provides legal guarantees on the protection of investments and has established dispute settlement mechanisms, including international arbitration.
Tanzania also allows the repatriation of profits and capital without restrictions. However, some recent policy changes have raised concerns about investor protection, especially regarding changes in mining regulations and disputes over contracts. This has highlighted the importance of thoroughly understanding the legal framework and potential risks associated with investing in Tanzania.
6. Bilateral Investment Treaties (BITs) and Double Taxation Treaties (DTTs)
- Kenya has signed numerous BITs with various countries to encourage and protect foreign investments. These treaties provide legal protections and standards for foreign investors, including provisions on expropriation, dispute resolution, and repatriation of funds.
- Tanzania has also signed a number of BITs to promote foreign investment. However, in recent years, the Tanzanian government has taken measures to review and potentially terminate certain BITs due to concerns over sovereignty and unfavorable investor-state dispute settlement provisions.
- Kenya has an extensive network of DTTs with several countries, designed to eliminate or minimize the double taxation of income earned by residents of one country in the other country. These agreements typically provide clarity on tax residency status, allocation of taxing rights, and mechanisms for resolving disputes.
- Tanzania has a relatively smaller number of DTTs compared to Kenya. However, the country has been actively seeking to expand its treaty network to encourage investment and facilitate cross-border trade. Tanzania’s DTTs generally follow international taxation norms, addressing issues related to double taxation and tax evasion.
While both Kenya and Tanzania present attractive investment opportunities, there are significant differences in their investment regulations. Kenya generally offers a more open and investor-friendly environment, with fewer restrictions on foreign ownership and comprehensive incentives for specific industries. Tanzania, on the other hand, has regulations that aim to encourage local participation, but they can introduce additional complexities for foreign investors.
Before making any investment decisions, it is crucial for investors to conduct thorough due diligence and seek professional advice from local experts who can provide insights into the specific regulatory. If you need more information, DM or send me an email at amnesuedi@shikanagroup.com frameworks and evolving investment environments in Kenya and Tanzania.