Businessmen are increasingly dissolving companies amid increased scrutiny from the Kenya Revenue Authority (KRA) and stringent regulatory requirements, while others are folding at the end of short-term ventures.
This is according to data from the Business Registration Services (BRS), which shows that some 56 companies were dissolved last month and notices of dissolution have been issued to a further 118 companies expected to be effected by the end of October.
The rising number of dissolutions comes amid the KRA’s stepped-up crackdown on tax compliance and strict requirements on beneficial ownership disclosure, with heavy fines for non-compliance. BRS says other companies were for short-term business.
“Some of the reasons [given for dissolution are] as follows: follow-up by the KRA to pay taxes yet they are dormant and no longer trading; the purpose for which the business was registered has been realised and a resolution by the shareholders of the company to have it struck off the register,” the BRS said in a statement this month.
The data also showed that 2,030 companies were dissolved in the year to June 2023, but this was down slightly from 2,189 the previous year.
The government has stepped up its efforts to enforce strict tax laws in a bid to increase revenue collection and root out tax cheats operating in the country.
Three years ago, businesses with a turnover of at least Sh50 million started paying a minimum tax of one percent of gross sales even if they made losses, a requirement that hit companies already struggling with low sales.
However, while the tax was declared unconstitutional by the courts and revoked in December 2022, firms, especially dormant ones, face hefty penalties for failure to file nil returns.
Dormant companies that have applied to the KRA to have their Personal Identification Numbers (PINs) cancelled are required to file nil returns until they receive notification that their PINs or tax obligations have been cancelled.
Failure to file the nil returns will result in penalties that will increase each year the company fails to comply with this requirement, adding to the woes of businesses in the country.
Companies are also required to disclose details of their beneficial owners, including names and residential addresses, in a bid to combat bribery and conflicts of interest.
The requirement is part of the Beneficial Ownership Information Regulations, 2020, which came into force four years ago. Companies found in breach of the requirement face a Sh500,000 fine.
But only 43.05 percent had complied by June last year, an increase from 36.1 percent a year earlier, signalling that most companies have been hit with the hefty fine.
“This upward trend (spike in applications for dissolution) was occasioned by the Covid-19 pandemic and enforcement of the Beneficial Ownership Information Regulations that was operationalised in October 2020. Most of the business entities preferred to dissolve following increased legal compliance requirements,” BRS added.
However, BRS data shows that the rate of new company registrations far exceeds the number of dissolved entities, as entrepreneurs seek to capitalise on huge business opportunities. In the year that ended June 2024, some 59,625 firms were registered, up from 57,685 the year before and 46,983 in the 2021/22 financial year.
