Summary Notes:

• Advantages of establishing a branch office
• Disadvantages of establishing a branch office

When expanding business operations to Tanzania, investors have the option to either set up a branch office or establish a local/subsidiary company. Each approach has its advantages and disadvantages, and careful consideration is essential to make an informed decision. This write up explores the pros and cons of both options, providing valuable insights for prospective investors.

If the prospective investor does not wish to register a local/subsidiary company but he or she or it has an already registered company outside Tanzania but needs do business in Tanzania (to have business existence) it may opt to apply for registration of a foreign company in Tanzania. This registered foreign company can operate as a branch of the foreign company which exists outside Tanzania.

In order to be able to open up that foreign company branch, an application for registration of a foreign company shall be made to the Registrar of Companies at the Business Registration and Licensing Authority (BRELA). If the Registrar approves the application, a Certificate of Compliance will be issued to the foreign company’s branch in Tanzania.

Advantages of establishing a branch office:

1.Administrative simplicity

Setting up a branch is a more straightforward process compared to establishing a subsidiary, which involves multiple steps and legal restructuring. While registrations are still required for overseas branches, the overall administrative burden is usually lower.

2. Cost-effective

Establishing a branch office is often more cost-effective than setting up a subsidiary, which can be expensive and time-consuming as there are no minimum share capital requirements.

3. Managerial control

The branch office is an integral part of the parent company, allowing for direct control and oversight by company leadership over branch managers and staff.

In contrast, subsidiaries operate as separate entities, limiting control over their actions and personnel.

4. Simplicity of closure

If a branch office is not performing well financially, it can be relatively simple to close down.

Employees can be made redundant or transferred, assets can be transferred, and any outstanding debts can be managed by the parent company. In comparison, closing a subsidiary involves a more complex process.

5. Tax advantages

Depending on the tax treaty agreements between the parent company’s jurisdiction and Tanzania, a foreign branch may enjoy certain tax benefits such as reduced withholding taxes on profit repatriation.

Disadvantages of establishing a branch office:

1. Legal liability

The branch office does not have a separate legal personality, making the parent company liable for its actions and omissions. As a result, the parent company assumes unlimited liability for the branch’s debts, obligations, and legal actions, which can potentially expose the parent company’s assets to risks in Tanzania.

If the branch’s employees act negligently or breach contracts, the parent company can be held responsible.

2. Tax uncertainty

A foreign branch may be considered a permanent establishment, subjecting the parent company to corporate income tax in that country. Calculating the tax liability of a branch is subjective and uncertain, as it depends on attributing profits to the branch.

3. Limited local market perception

Operating as a foreign branch may be perceived as having less commitment to the Tanzanian market compared to incorporating a subsidiary company. This perception can affect relationships with local partners, customers, and stakeholders.

4. Compliance obligations

While the compliance requirements for a foreign branch may be less complex compared to a subsidiary company, there are still registration, reporting, and licensing obligations that need to be fulfilled under Tanzanian law.

The compliance matters are not exhaustive. Compliance requirements vary depending on the specific industry or line of business in which the entity or individual is engaged. Additionally, there may be changes in compliance issues due to regulations or rules periodically enacted by government institutions that oversee specific matters or lines of business.

It is important to note that aspiring investors or businesspersons planning to start a business in Tanzania should be aware that there are sector-specific permits and licenses. Some of these permits and licenses may be required prior to obtaining the business license while others may be complementary to the business license. Therefore, it is highly advised that new businesses thoroughly assess the sector/industry in which they intend to operate and have a comprehensive understanding of the permits and licenses required for all aspects of their business to operate smoothly and in full compliance.

In summary, it is crucial for new businesses to prudently analyze the sector/industry in which they wish to conduct their trade, fully comprehend the necessary permits and licenses, and ensure compliance to enable their business to operate seamlessly and successfully.

5. Repatriation limitations

Certain restrictions may apply to the repatriation of profits and capital from the foreign branch to the parent company’s jurisdiction. These restrictions can impact financial flexibility and the ability to access funds generated by the branch.

What are the Pros and Cons of Setting Up a Company in Tanzania?

A limited liability company can either be private or public. A foreign investor has the option to either register a new local limited liability company or establish a foreign company in Tanzania. According to the Tanzanian Companies Act, Act No. 12 of 2002, initiating a new company in Tanzania involves submitting an application to the Registrar of Companies at BRELA to obtain a Certificate of Incorporation. The company that is incorporated through this process will be recognized as a local/subsidiary company, which can be either a company limited by shares or limited by guarantee and having share capital. A limited liability company enjoys many advantages over a sole proprietorship and a partnership, including:

The advantages of setting up a Company include:

Perhaps the greatest advantage of formation of a company in Tanzania is the low business expense, as the country has one of the lowest consumer cost indices in Sub-Saharan Africa.

Tanzania has entered double tax avoidance treaties with over 20 countries, including the UK, Canada, Germany, Norway and India. This leads the businesses incorporated in Tanzania to ward off uncalled-for expenses.

In addition, Tanzania is a member of the regional trade blocs in Africa, providing the companies here the advantage of a vast African market base and skilled/unskilled labor.

A company registered under the laws of Tanzania will acquire an artificial legal capacity with an ability to stand alone on its registered name, acquire and dispose properties in its name, sue and be sued, and have perpetual succession. A certificate of incorporation of a company acts as evidence for the existence of the company.

• Distinct and separate legal personality separate from its shareholders.
• Relatively easy to raise capital.
• The liability of the shareholders is limited.
• The business is not dissolved on the death of one of the shareholders or directors.
• Independent management allows for the appointment of a local board of directors and management team. This provides greater autonomy in decision-making and day-to-day operations, considering the specific needs and market dynamics of Tanzania.
• Local market presence demonstrating a long-term commitment and presence in the Tanzanian market, which can enhance the company’s reputation and build stronger relationships with local customers, suppliers, and partners.
• Transferability of ownership: Shares of a subsidiary company can be easily transferred or sold, providing flexibility for potential future investors or changes in ownership structure.

Disadvantages include:

• Close regulation by statute.
• Profits distributed to shareholders are taxable.
• The reporting requirement is complex.
• There are (limited) circumstances in which the “corporate veil” may be lifted, and the shareholders can be liable for the obligations of the company (but this is rare and only in extreme cases).
• Although generally managed by its directors, bona fide third parties can rely on the ostensible authority of a non-authorized director to bind the company.

It is important for investors to carefully evaluate their specific needs, market dynamics, and long-term goals when deciding between a branch office and a subsidiary company in Tanzania.

By considering the pros and cons outlined in this write up, investors can make informed decisions that align with their business objectives and maximize their chances of success in the Tanzanian market.

Disclaimer: This article is authored by Ruwaida Manji, Associate from Rive & Co, a new and innovating law firm as a result of the partnership between ABC Attorneys, Sepia Attorneys and Stallion Attorneys, built on the foundation of trust, credibility, and novelty, offering expert legal solutions.  This Article is for informational purposes only and should not be construed as legal advice. It is recommended to consult with a qualified legal professional for advice specific to your situation.