International brands entering Kenya rarely franchise the way they might in the United States or the United Kingdom, because Kenya has no dedicated Franchise Act, no franchise disclosure document regime, and no franchise-specific regulator. Instead, a master franchise agreement for the Kenyan market is built on ordinary contract law, the Trade Marks Act (Cap 506), the Income Tax Act, and Central Bank of Kenya foreign exchange rules, each shaping how the deal must be structured if the franchisor wants its trademark protected and its royalties paid without friction. This article sets out how those pieces fit together for a straightforward international franchise licence into Kenya.
Choosing the Entry Structure: Direct Licence, Master Franchisee, or Local Subsidiary
Because there is no franchise statute to prescribe a format, franchisors are free to choose whichever structure suits their risk appetite and the scale of the rollout. Three models dominate in practice. The first is a direct licence, where the foreign franchisor contracts straight with a single Kenyan operator for one or a small number of outlets; simplest to draft, but weak on control once a network grows. The second is the master franchise or area development agreement, under which a Kenyan master franchisee gets the exclusive right to develop and sub-franchise the brand within Kenya, or across the wider East African Community, taking on training, site approval, and quality control locally in exchange for an upfront fee and a share of downstream royalties. The third is a local subsidiary, either operating company-owned outlets directly or holding the master franchise rights on behalf of the foreign group; useful where the franchisor wants tighter operational control or a local contracting party for leases and staff. Whichever route is chosen, the agreement is drafted and enforced as an ordinary commercial contract, so its terms on quality control, termination, non-compete, and territory carry the full weight of what protects the brand, since there is no statutory backstop to fall back on.
Recording the Trademark Licence with KIPI
The single most commonly missed step in Kenyan franchise structuring is trademark recordal. Under section 31 of the Trade Marks Act, a person other than the registered proprietor may be recorded as a registered user of a trademark, and the proprietor and the proposed licensee must apply in writing to the Registrar at the Kenya Industrial Property Institute (KIPI) in the prescribed manner. This recordal is what turns the franchisee’s use of the mark, on shopfronts, packaging, and marketing, into use that the law treats as use by the franchisor itself. Section 31 is explicit that permitted use of a mark is deemed to be use by the proprietor, and deemed not to be use by anyone else, for the provision that allows a mark to be struck off the register for non-use. In practice, this means a Kenyan franchisee’s use of the brand for years without KIPI recordal may not count toward keeping the registration alive, leaving the franchisor exposed to a non-use cancellation by a competitor or a squatter; an unrecorded licensee is also on weaker ground relying on the licence in its own dispute. The fix is straightforward: the master franchise agreement should require KIPI recordal as a condition precedent or an early post-signing obligation, with the franchisor’s cooperation built in, since the application is made jointly by proprietor and licensee.
Withholding Tax on Royalties and Franchise Fees
Royalty and franchise fee payments flowing out of Kenya to a non-resident franchisor are subject to withholding tax under the Income Tax Act. The Kenya Revenue Authority’s own guidance confirms that royalties paid to a resident attract withholding tax at 5%, while royalties paid to a non-resident attract withholding tax at 20%. The Kenyan payer, whether the master franchisee or a local subsidiary, must deduct this tax at source before remitting the balance abroad and account for it to KRA; for a non-resident franchisor, the withholding is generally a final tax on that income. Where the franchisor is resident in a country with a double taxation agreement in force with Kenya, that treaty can reduce the 20% domestic rate, and KRA administers Kenya’s network of such agreements. Because the reduced rate depends on the specific treaty and how it defines royalties, it should be confirmed against the treaty text before pricing the deal, not assumed. Agreements should also state whether the franchise fee is quoted gross or net of Kenyan withholding tax, since this materially affects what the franchisor receives.
Central Bank Reporting on Outward Royalty Payments
Kenya does not require Central Bank approval before a royalty or franchise fee is remitted abroad; the shilling is convertible on current account transactions, and such payments are handled through commercial banks acting as authorised foreign exchange dealers. That said, the Central Bank of Kenya’s foreign exchange guidelines place documentation obligations on those dealers. Before processing a royalty remittance, an authorised dealer is expected to obtain and retain a copy of the licence or franchise agreement, evidence of the relevant industrial property recordal, a demand note from the licensor, and, where the royalty is calculated on profits or sales, supporting management accounts. Separately, the guidelines require dealers to retain appropriate documentation for any foreign exchange transaction above the equivalent of USD 10,000, and royalty and licence fee payments are captured as a distinct line item in the returns dealers file with the Central Bank for balance of payments purposes. A master franchise agreement should be drafted with this paper trail in mind, since a bank that cannot see the underlying agreement, and evidence that the trademark licence has been recorded, may decline the remittance.
Competition Act Considerations
A straightforward international franchise licence can raise questions under the Competition Act 2010 where the agreement imposes restrictions such as exclusive territories, minimum resale prices, or non-compete obligations on the local franchisee; we deal with how those vertical restraint provisions apply to franchise agreements in a separate, dedicated article.
How We Can Help
Clay & Associates Advocates advises international brands on structuring their entry into the Kenyan market, from choosing between a direct licence, a master franchise arrangement, and a local subsidiary, to drafting the master franchise agreement, recording trademark licences with KIPI, and coordinating with tax advisers on withholding tax and treaty positions. If you are planning to franchise a brand into Kenya, or already operate here and want existing arrangements reviewed for these gaps, our corporate and commercial practice can guide the structuring and handle the KIPI and regulatory filings needed to protect the brand from day one.
Sources: Kenya Revenue Authority, Withholding Taxes on Royalties; Kenya Revenue Authority, Withholding Income Tax guide; Kenya Revenue Authority, Double Taxation Agreements; Kenya Industrial Property Institute, Trade Marks Act, Chapter 506; Central Bank of Kenya, Guidelines on Foreign Exchange; Kenya Law, Competition Act, 2010.
Frequently asked questions
Does Kenya have a franchise-specific law we need to comply with?
No. Franchise and master franchise agreements are governed by general contract law, supplemented by the Trade Marks Act, the Income Tax Act, and Central Bank of Kenya foreign exchange rules, so the protections a franchisor gets come from how the contract itself is drafted.
What happens if we never record the trademark licence with KIPI?
The franchisee’s use of the mark will not be treated in law as use by the franchisor, which weakens the franchisor’s position if the registration is later challenged for non-use. Recordal should be built into the agreement as an early, joint obligation.
What withholding tax applies to royalties paid to our overseas head office?
Royalties paid to a non-resident franchisor are subject to withholding tax at 20% under Kenyan tax law, deducted at source, unless a double taxation agreement between Kenya and the franchisor’s home country reduces that rate. Check the treaty text before pricing the fee.
Do we need Central Bank approval to send royalties out of Kenya?
No prior approval is required, since these are current account payments and the shilling is convertible for that purpose. Commercial banks handling the transfer will, however, require the underlying licence agreement and supporting documentation, particularly above the equivalent of USD 10,000.
