The Zanzibar Ministry of Trade and Industrial Development (the Ministry) recently issued a Public Notice dated 21 September 2021 on the amendment of the Zanzibar Companies Act No 5 of 2013 (the Companies Act), which regulates companies registered in Tanzania Zanzibar. The effect of this amendment is significant as it now requires companies incorporated in Mainland Tanzania that operate as a branch in Zanzibar to register a separate legal entity in the form of a subsidiary in Zanzibar within 90 days (i.e., by 21 December 2021). The notice can be found here.
Position Before the Amendment
Prior to the coming into force of this amendment, a company incorporated in Mainland Tanzania had the following options for setting up a place of business in Zanzibar, through the Zanzibar Business and Property Registration Agency (BPRA): Either,
- register itself as a branch of a foreign company, by obtaining a “Certificate of Compliance” from BPRA; or
- incorporate a subsidiary which could take the form of a limited liability company, by obtaining a “Certificate of Incorporation” from BPRA.
Position After the Amendment
As a result of the recent amendment to the Companies Act, companies incorporated in Tanzania Mainland that wish to operate in Zanzibar can only do so by registering a subsidiary under the BPRA. The amendment does not affect foreign companies incorporated elsewhere in the world (other than Mainland Tanzania), who still have the option of registering a branch.
Of key significance to Tanzanian Mainland companies, is the amendment’s retrospective effect. As a result, Tanzania Mainland companies that have existing branches in Zanzibar now have until 21 December 2021 to:
- de-register the Zanzibar branch; and
- register a subsidiary in Zanzibar and obtain a Certificate of Incorporation from BPRA.
Practical Implications of Converting from a Branch to a Subsidiary
The amendment does not prescribe how assets and liabilities of the branch will move across to a newly established subsidiary. There is no automatic transfer process and in the absence of enabling laws that can provide for the automatic transfer of assets and liabilities, the conversion is likely to pose certain challenges including:
Transfer of Land
In the event the branch holds land (for example through a lease from the Zanzibar Investment Promotion Authority (ZIPA) or a third party), a formal transfer of the lease will be necessary along with the attendant costs that will include taxes and government fees. Furthermore, given that it can typically take three to six months to obtain approval and to effect the transfer of a lease under ZIPA, this may not be possible before 21 December 2021.
Moving employees from a branch to a new entity will require the branch to either obtain the consent of its employees to enter into a tripartite novation agreement, under which the employees’ employment and all rights and benefits are transferred to the subsidiary or to terminate and rehire. The latter option is more cumbersome and costly as it requires an employer to make all its employees redundant and pay them their severance entitlement before they can be re-employed by the subsidiary. Depending on the circumstances, employees may demand that they receive their severance entitlement before they agree to enter into employment contracts with the subsidiary as their new employer.
It is likely that the branch will have other liabilities such as borrowings, pending court cases and contingent liabilities under guarantees (for example, to landlords of premises where the branch is conducting business). It will be necessary to move these across to the new entity and this can be a painstaking process for most businesses as each contract or arrangement needs to be considered individually.
Where such liabilities are not capable of being moved, then potentially the company might be required to maintain the branch until such point as the liabilities are fully satisfied. This in turn raises the question as to whether the branch will be allowed to continue to operate or whether it will be automatically de-registered by BPRA at the end of the 90-day period.
Regulatory Approval or Notification
Depending on the sector that the branch operates in and the type of licences it holds, the conversion from operating through a branch to a subsidiary may necessitate approval from or notification to the relevant regulatory authorities in Zanzibar, particularly for those sectors falling in the category of Union Matters (i.e., those matters that have been designated as “union” matters of state involving both Mainland Tanzania and Zanzibar under the Constitution of the United Republic of Tanzania) such as the banking, telecommunications insurance sectors.
Where an existing licence cannot be transferred, the subsidiary will have to apply for the licence afresh. This will have cost and time implications and can potentially prevent the company from operating if there are delays in procuring the relevant licences.
Consequences Of Non-Compliance
Any Mainland Tanzania company operating through a branch in Zanzibar that fails to establish a subsidiary on or before 21 December 2021, faces the risk of the branch being struck off by the BPRA, which could result in significant financial losses and operational disruption. In addition, such companies and every officer or agent of the company are subject to a fine of TZS 15,000 (approx. USD 7) plus a daily default fine of 2 percent for each day of continued default.
The Ministry has the discretion to extend the period for the registration of the subsidiaries if the time frame allocated for the process is not sufficient. It is hoped that further guidance will be provided by the Ministry on the practical steps to effect the conversion for existing businesses before expiry of the timeline and how the costs and processes involved can be best be handled to avoid disruption to businesses operating in Zanzibar.
Read the original publication at A&K Tanzania