A glance at the new corporate forms and compliance obligations under the new Companies Act

On 8 February 2021, a new Companies Act (law n° 007/2021 of 05/02/2021 governing companies) was gazetted, repealing and replacing its predecessor (law n°17/2018 of 13/04/2018). This has resulted in considerable changes and improvements, including those related to new corporate forms, compliance obligations and shareholder decision making arrangements.

NEW CORPORATE FORMS

Prior to the enactment of the new Companies Act, there were various options as to the forms in which a company could be incorporated or registered in Rwanda. In addition to those forms, the new law introduced other forms, namely, protected cell company, community benefit company, and provided clarity on a company limited by guarantee.

Protected cell company

The new Companies Act defines a protected cell company (“PCC”) as “a company in which a single legal entity consists of a core [the protected cell company] linked to several cells, each with separate assets and liabilities”.

In terms of the new law, a PCC has legal personality but a cell set up by it does not create (in respect of that cell) a legal person separate from the PCC itself. However, the assets and liabilities of a cell are separate from those of the core and other cells, and must always be kept separately identifiable, with the implication that in case of insolvency/liquidation of a PCC, its general creditors may not have claim over the assets of a specific cell and vice versa. A PCC may also issue cellular shares in relation to one or more of its cells, and make distributions to the holders of such shares only.

The introduction of PCC structure is a game changer as it now allows a company to attract investors (debt and/or equity investors) who may be interested in just one of its business lines without needing to effect a spin-off as it allows to carve-out assets and liabilities of specific business lines of a company from its general assets and liabilities. However, it also leaves a number of issues unattended to, particularly the issue as to how a PCC would be treated for taxes purposes, as it is yet to be seen whether cells of a PCC would be taxable persons on their own or a PCC would be taxable for its income as single entity notwithstanding the existence of several cells.

Community benefit company and company limited by guarantee

A community benefit company (“CBC”) is, under the new Companies Act, defined as “a company with primary social objectives whose surpluses are reinvested, for that purpose, in the business or in the community rather than being driven by the need to maximise profit for its shareholders or owners.”

Equally important and unlike the repealed Companies Act, the new law has now clarified that companies limited by guarantee are primarily used for not for profit organisations.

The introduction of CBCs and clarification that companies limited by guarantee are primarily for not-for-profit entities will certainly be hailed by those undertaking charitable activities as they offer alternatives to classic structures for undertaking charitable activities in Rwanda mainly non-governmental organisations or international non-governmental organisations as the case may be.

CORPORATE COMPLIANCE OBLIGATIONS

The new Companies Act has brought many changes pertaining to corporate compliance.

For instance, under the new Companies Act, all companies are required to maintain a register containing the beneficial ownership information as to the shares and other rights in the company, at the registered office of the company.

However, the new Companies Act does not provide for the definition of a beneficial owner, and it is not clear whether it should be understood in the sense of natural persons who ultimately control or own a legal entity as per the OECD Beneficial Ownership Implementation Toolkit or of a person who can enjoy the rights attaching to the shares in the company unconstrained by any legal or contractual obligation (see trust, agent, conduit companies, etc), and the Office of the Registrar General should provide guidance to clarify this issue.

Another corporate compliance related change under the new companies act relates to the timelines applicable for filing annual accounts of private companies where it has been changed from four months of the end of the company financial year to seven months. The new Companies Act also gives the Registrar General the power to remove a company from the register if he or she is satisfied that the company has not filed its annual return as required under the law.

The new Companies Act has also introduced some leeway in relation to the obligation to hold an annual general meeting for private companies by providing that it is not necessary for a private company to hold an annual general meeting of shareholders where everything required to be done at that meeting, by resolution or otherwise, is done via a written resolution.

The new Companies Act has also decreased the majority of shareholders required to validly approve a written resolution from unanimity to the shareholders holding at least 75% of the votes entitled to be cast on that resolution.

The changes brought about by the new Companies Act are generally commendable as they are in line with how Rwanda is positioning itself as a hub for various companies including charitable and philanthropic corporations. Nevertheless, further actions such as clarification of the concept of beneficial ownership for the purpose of application of the new law, and tax treatment of CBCs and protected cell companies need to be taken.

Dieudonné Nzafashwanayo

ENSafrica Rwanda | Senior Associate

dnzafashwanayo@ENSafrica.com

+250 788 309 880

Elie Nshimiyimana

ENSafrica Rwanda | Trainee Associate

enshimiyimana@ENSafrica.com

+250 785 938 269