Introduction
The international franchise market in Kenya has grown extensively. Have you ever wondered how Kenyan businesses can scale their operations without reinventing the wheel? Franchise agreements offer a powerful path to expansion, allowing businesses to leverage established brands and proven business models while navigating a maze of legal complexities. From protecting intellectual property to ensuring compliance with competition laws, the franchise model comes with a range of legal considerations that can make or break its success. For Kenyan businesses looking to venture into franchising, understanding the legal framework that governs these agreements is critical to avoid pitfalls and unlocking the full potential of this growth strategy.
A franchise agreement in Kenya involves a legal relationship where the franchisor – the owner of either the brand, system or business model grants the franchisee – the person or entity buying into the business, the right to operate under the franchisor’s name, using its established systems, trademarks and products.
There are currently a considerable number of international franchisors with established operations in the Kenyan market, for example Mr. Price, Kentucky Fried Chicken (KFC), Domino’s Pizza, McDonald’s, Ace Hardware and Baby Shop. It is important to also take note that the Kenyan Franchise industry is not formally organized into a national body but there is a Kenya Franchise Association (KEFRA).
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Franchise Legislation
Currently, Kenya lacks specific franchise laws, but franchise agreements are governed by general contract law under the Law of Contract Act, Competition Act, Consumer Protection Act, the Central Bank, Copyright Act and Intellectual Property law principles.
Some of the most used franchise agreements or arrangements fall under the confines of section 21(1) of the Competition Act. This will be if they are determined to involve restrictive trade practices, that is:
“agreements between undertakings, decisions by association of undertakings, decisions by undertakings or concerned practices by undertakings which have as their object or effects the prevention, distortion or lessening of competition in trade in goods or services in Kenya, or a part of Kenya.”
The Trade Marks Act, Cap 506, under section 31, make a provision for the “recognition of license user agreements”. Here, the registered user (licensee) would be the franchisee while the franchisor is the legal owner or proprietor of the trademark.
Franchise Taxation
Taxation in the context of franchising might arise in the context of the payment of fee such as management fee, commissions, consultancy or agency fee and contractual fees, among may others, that arise under the franchising agreement.
In Kenya, dividends, interest, royalties, and payments for technical services are all subject to withholding tax. If a resident receives royalties from the franchisee, a withholding tax of 5% is applied; however, if a non-resident receives royalties, a withholding tax of 20% is applied. Since the majority of foreign franchisors won’t be residents, a 20% withholding tax is paid. Further, if no grossing is agreed upon, this may have a substantial effect on royalty income.
A 10% withholding tax applies to payments for technical services, as well as professional and management fees, when provided by a resident. For non – resident service providers, the rate increases to 20%. Under the current VAT Act, a 16% VAT is imposed, irrespective of whether the franchisor has a place of business in Kenya. If the franchisor is not based in Kenya and the franchisee is registered Kenyan business, the franchise will be classified as an imported taxable service, with VAT payable by the franchisee.
In addition to the above, the Central Bank Act, Cap 491, under section 33H(1) makes it compulsory for every of the following transactions to be made through a bank. Every payment made:
- in Kenya, to or for the credit of a person outside Kenya; or
- outside Kenya, to or for the credit of a person in Keya; or
- in Kenya (other than a payment for a current transaction) between a resident and non-resident; shall be effected through an authorized bank or an authorized microfinance bank.
Intellectual Property protection
Intellectual property protection entails four major elements; brand search, brand protection and enforcement and data protection.
· Brand search
The Kenya Industrial Property Institute (KIPI) is the body responsible for providing to the public industrial property information and promote inventive and innovative activities and facilitate the acquisition of technology through registration and regulation of patents, utility models, technovations, industrial designs and trademarks.
Trademark searches are conducted at KIPI and can be conducted by any person or by a trademark agent authorized by such person, or by a trademark examiner at KIPI who will issue a search report on the trademark and whether there is any conflict.
· Brand protection
Brand protection is essential to maintain the reputation and consistency of the franchisor’s business. The franchisor’s intellectual property, such as trade secrets and confidential information, is licensed to franchisees under strict conditions. A key aspect of brand protection is ensuring that franchisees adhere to quality control standards, maintaining uniformity in products, services and overall customer experience across all locations.
The franchise agreement typically includes clauses governing the use of trademarks, IP, non-compete obligations, and confidentiality, as well as outlining the franchisee’s responsibilities for brand protection. Franchisors also have the right to enforce compliance through audits and inspections.
· Enforcement
Once a trademark is registered, the owner of it will have exclusive rights to use it for ten (10) years. It is s criminal offence to forge and use a forged trademark or falsely apply for a registered trademark and upon conviction, a person is liable to the prescribed fines, imprisonment and forfeiture of goods.
For unregistered marks and infringement cases, the Trademarks Act also provides for proceedings before the High Court. In the case of unregistered marks, the marks will be passed off, while in the case of infringement, the owner of the trademark will be entitled to the following remedies: damages, injunctive relief and an account for profit. Infringement of a copyright is also actionable in the High Court. The remedies, just as is for trademark infringement, are; damages, injunctive relief and account for profits.
To franchisors, these provisions are useful since they can use them to claim ongoing payment of franchise fees and an account of profits if a franchise continues to use their trademarks and copyright materials after termination or expiry of the franchise agreement.
Data protection
Data protection in franchise law is essential to safeguarding sensitive information shared between franchisors and franchisees. Both parties must comply with national data protection regulations, like Kenya’s Data Protection Act, ensuring the secure handling of customer and business data. Franchise agreements should clearly define data usage, security measures, and protocols for managing data breaches. Additionally, compliance with cross-border data transfer regulations is crucial for international franchises. Effective data protection not only ensures legal compliance but also helps maintain the brand’s integrity and customer trust.
Conclusion
Despite the lack of a comprehensive legal framework governing franchising in Kenya, the sector has seen impressive growth. Historically, it was slow and primarily driven by foreign firms, partly due to weak intellectual property enforcement, which hindered effective branding—a critical component for successful franchising. However, with increasing awareness and improvements in IP protection, franchising is now expanding rapidly. As the business environment in Kenya becomes more favorable, this growth is expected to accelerate, opening up new opportunities for both local and international franchises in the country.
“Please note that the information provided in this newsletter is for general informational purposes only and does not constitute legal advice or a legal opinion. For a formal legal opinion tailored to your specific situation, please contact us through the details provided on our website.