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Payroll In Afghanistan

How to Set Up a Subsidiary in Afghanistan: Step-by-Step Guide

Afghanistan is a suitable location to set up a business due to more market access and easy management. It is strategically located between South Asia and Central Asia. It provides modern infrastructure, low competition, a favorable tax regime, and a vast consumer base. Hence, the country attracts significant foreign investment. Its GDP ranked 113th globally.

Creating a subsidiary in Afghanistan assists companies in expanding their business in the country and exploring the optimum benefits of their developing economy. Moreover, it is one of the cost-effective and easily accessible methods to enter Afghanistan. It also demands comparatively less paperwork and compliance.

The present guide explains all the vital information you should know before setting up a subsidiary in Afghanistan.

What are the Types of Subsidiaries in Afghanistan?

The section below discusses various subsidiaries before setting up a subsidiary system in Afghanistan.

General Partnership

  • This form of subsidiary business in Afghanistan is set up for undertaking business transactions between two or more members with collective responsibility.
  • If the capital of a general partnership is insufficient to pay the liability of the general partnership, each partner is accountable for paying all the debts of the general partnership.
  • The partner(s) who pay such debts can obtain contributions from the other partners (according to Partnership Law, Art. 21).

Special Partnership

  • This type of subsidiary business in Afghanistan refers to a partnership built under a specific title conforming to the provisions of the law for undertaking business transactions.
  • One or more general partners own unlimited liability, and the remaining special partners own limited liability with a fixed capital.
  • The partners’ capital with limited liability can be split into shares (according to Partnership Law, Art. 21).

Work Partnership

  • This form of subsidiary business in Afghanistan indicates an association of two or more persons undertaking a business activity or fulfilling an obligation for another individual.
  • The partnership’s profits shall be divided among them as determined by the partners (according to Partnership Law, Art. 23).

Credit Partnership

  • It refers to a company in which two or more members consent to purchase goods on credit to sell them and subsequently share the profits & losses of the credit partnership.
  • Each partner in this type of subsidiary business in Afghanistan shall be accountable for their part (according to Partnership Law, Act. 24).

Limited Liability Corporation (LLC)

  • LLC is the most common business form for small businesses in Afghanistan.
  • In this type of subsidiary company formation in Afghanistan, the Company’s capital is not split into shares. Hence, each shareholder’s liability is capped at an amount determined by the particular shareholder.
  • Each shareholder is liable for the amount of their capital in the Company.
  • The corresponding company should be at least 100,000 Afghanis.
  • The owners of LLCs possess limited liability for the corporation’s debts.
  • An LLC can have 2-50 owners in this type of subsidiary business in Afghanistan.
  • One cannot trade shares on a public exchange. Moreover, the shareholders are not allowed to exchange, transfer, or sell the Company.

Corporation

  • As per Article 4 of the Corporation Law of Afghanistan, a corporation is a type of Company whose capital is fixed and divided into shares.
  • Each shareholder’s liability and share is restricted to the amount of their share.
  • Incorporating this type of subsidiary system in Afghanistan requires a minimum of five shareholding founders.
  • Corporations consist of two boards, i.e., the board of directors and the supervisory board.
  • A corporate name can include the word “incorporated,” “corporation,” “limited,” or “company,” or an abbreviation like “Inc.”, “Corp.”, “Co.” or “Ltd.” 12.

How to Set Up Subsidiary in Afghanistan?

The steps below will guide you to establish a subsidiary company in Afghanistan:

Step 1: Select a company name

  • Companies must first decide on the company name for registering their subsidiary business in Afghanistan.
  • The Company must prepare multiple names if the first suggested name is not registered.
  • Register the business with the  Afghanistan Central Business Registry (ACBR) within the Ministry of Commerce & Industry (MoCI). Make sure the company name is not identical to the already registered ones in ACBR. 

Step 2: Prepare the necessary documents

  • To register a subsidiary business in Afghanistan, the foreign Company must provide Powers of Attorney (POA) to its local authorized agent.
  • Keep memorandum and articles of association ready. The articles of association must cover include the following details:
    1. Company objectives
    2. Subsidiary’s name and address
    3. Name of the shareholders and beneficiaries 
    4. Shareholders’ contribution to the capital
    5. Internal regulations
    6. Information about the shares and their rights

Step 3: Appoint directors and deposit capital

  • Nominate a minimum of one shareholder and one director for the subsidiary. They can be companies or individuals.
  • Prepare for a lease and a bank account. Pay the initial capital, file for registration, and sign the corporate documents.

Step 4: Register for VAT

Step 5: Company registration

Step 6: Business bank account

  • Open a bank account for your subsidiary in Afghanistan.
  • According to the type of your subsidiary, you should deposit the minimum share capital in the bank account.

Step 7: Register for TIN

  • Obtain a (TIN) Tax Identification Number from the Afghanistan Revenue Department ARD).
  • The applicant must submit specific documents to the Tax Identification Number Office at the Ministry of Finance (MoF):
    1. License from the Ministry of Commerce & Industry (MoCI) or Afghanistan Investment Support Agency (AISA) demonstrating that the investor registered the investment.
    2. Inquiry letter to the TIN Department of the MoF to the Mustofiat (Revenue Department) demonstrating that it should pay a 1% Sukook.
    3. Letter from the Mustofiat to the TIN Department validating that the 1% Sukook is payable. 

Step 8: Get a license and permits

Step 9: Organize general meetings

  • Organize general meetings of the supervisory board or the shareholders to set up a board of directors.

Benefits of Setting Up an Afghanistan Subsidiary

Let’s review the benefits of setting up a subsidiary company in Afghanistan.

  • The partnership in Afghanistan benefits from the use of significant multi-donor trust funds. These funds include the Afghanistan Infrastructure Trust Fund and the Afghanistan Reconstruction Trust Fund. They facilitate on-budget support.
  • With the incorporation of a foreign subsidiary in Afghanistan, the parent company can extend its reach and acquire high profits. Moreover, it lets them access more opportunities and varied markets.
  • One of the important benefits of setting up a subsidiary company in Afghanistan is that it allows the parent company to provide shares for their part of the ownership and encourage investments. Accordingly, the parent company can raise the fund without encountering the risk of modifying the parent company’s stock value.
  • After establishing a subsidiary business in Afghanistan, the businesses can hire local employees knowledgeable in the current opportunities and the local market.
  • The procedure of incorporation of a foreign subsidiary in Afghanistan encompasses various incentives. They are tax incentives, free trade zones, special economic zones, and a quick incorporation process.
  • Setting up a subsidiary system in Afghanistan simplifies several business transactions because it decreases the regulatory requirements.
  • Establishing a subsidiary business in Afghanistan assists the parent company by categorizing the big Company into smaller parts, hence improving business efficiency.
  • It brings additional investors and streamlines mergers between two businesses.

Documents to Prepare When Opening a Subsidiary in Afghanistan

Companies must prepare the following documents when applying for incorporation of subsidiary business in Afghanistan:

  • Memorandum and Articles of Association
  • Certificate of incorporation that justifies whether the subsidiary is a legal entity in Afghanistan
  • Certificate of Registration
  • The company name’s consultation certificate
  • Identification documents (ID card or passport) of the directors, shareholders, company secretary, and legal representative
  • Tax Identification Number (TIN)
  • Proof of enrollment in Social Security
  • AISA (Afghanistan Investment Support Agency) application form
  • Measurement Form from the MoCI
  • Application letter from the investor that requests participation in bidding for a license
  • Proof of residence for the company partners
  • A reference letter from a bank mentioning that the directors, shareholders, and company secretary have an account with the bank
  • Bank certificate for evidence of deposit of capital
  • The proposal from the investor includes technical specifications and a business plan.
  • Details on the amount of capital
  • Individual’s Identification Form from the Business Licensing Directorate of MoCI Trading Business License
  • License from the Ministry of Commerce & Industry (MoCI) or the Afghanistan Investment Support Agency (AISA) justifying that the investor has registered the investment
  • Income statement and company balance sheet
  • Confirmation letter about renewing the Company’s Business license from the Afghanistan Investment Support Agency (AISA) or the Ministry of Commerce & Industry (MoCI)
  • A statement disclosing that the partners are not prohibited by law or by opinion from incorporating a company

Note: The Registrar may request more supporting documents to establish your subsidiary business in Afghanistan.

What Business Forms can Afghanistan Subsidiaries Take?

Subsidiaries in Afghanistan can take one of the following standard subsidiary forms:

  • Limited Liability Companies
  • Partnerships

According to the requirements and the business plan, the company can choose the most pertinent subsidiary form for setting up a subsidiary in Afghanistan.

Afghanistan Subsidiary Laws

Companies planning to establish a subsidiary business in Afghanistan should consider the following laws:

  • If the applicant doesn’t qualify as a refugee, they may be entitled to subsidiary protection (according to Article 15 QD).
  • In addition to granting refugee status, the CGRS (Commissioner General for Refugees and Stateless Persons) also evaluates whether they must grant the subsidiary protection status.
  • At least one director and two shareholders must incorporate an LLC in the country. Both the shareholders and directors may not be Afghan residents.
  • There is no minimum capital share capital requirement for establishing an LLC subsidiary business in Afghanistan.
  • A corporation in Afghanistan should have a board of supervisors and a resident company agent.
  • Corporations and LLCs must pay 20% of their income tax.
  • A partnership only pays 10% of its annual income tax (maximum 1.2 million Afghanis).
  • The partners involved in a partnership are independent of having either limited or unlimited liability.
  • The humanitarian and socio-economic circumstances are only entitled to granting subsidiary protection status. The status is available if the circumstances put persons in a very critical situation and the situation is resultant of an intentional act or removal of an actor.
  • According to the type of subsidiary business in Afghanistan, the subsidiary may acquire permits and licenses from the relevant authorities in Afghanistan.

Post Incorporation Compliance

The following aspects are important to consider under the compliance checklist for the incorporation of foreign subsidiaries in Afghanistan :

  • Acquire the business certificate of commencement on or before 180 days of starting its business activity.
  • You should set up the Company’s registered office within 30 days of incorporation of foreign subsidiary in Afghanistan. The applicable office address would enable all official communication from various authorities.
  • Acquire the unique company number.
  • Acquire the incorporation certificate as provided by the ACBR.
  • After establishing your subsidiary business in Afghanistan, you should handle banking principles, payroll withholdings, employment requirements, and local tax laws.
  • The board of directors (BOD) will appoint the first auditor of the Company after the incorporation of foreign subsidiary business in Afghanistan. The first auditor will oversee the office administration until the first AGM (Annual General Meeting) continues.
  • Each private limited Company should file its Annual Return after completing a tax year. However, companies must submit the tax return within three months of year ending. 
  • Companies must submit the tax return to the Afghanistan Revenue Department. 

Taxes on Subsidiaries in Afghanistan

A subsidiary in Afghanistan is subject to the following taxes:

Taxes

Rates

Capital gains

20%

Personal income tax

0% – 20% (based on income)

Corporate income tax

20%

Consumption tax

10%

Withholding tax

20% for rental income over AFS 15,000 per month

20% each for dividends, interests, and royalties: for countries with whom a double taxation treaty applies

Property transfer tax

1%

Social security contribution

3%

Sales tax rate

10%

Business receipt tax (BRT)

2%-10% (depends on the type and size of the company)

VAT

10% 

Cellphone top-up cards fee

10%

Main Allowable Deductions and Tax Credits

20%

Tax Incentives for Businesses Setting Up a Subsidiary in Afghanistan

While working on the incorporation of a foreign subsidiary in Afghanistan, you should consider tax incentives. Irrespective of the business sector, here are the benefits of incentives for taxation of foreign subsidiaries in Afghanistan:

  • Specific incentives are available to provide benefits to entering the formal sector. Such incentives include tax (simplified tax regimes), facilities (industrial parks that offer land, security, infrastructure, etc. To big companies and their SMEs), skills (subsidized training courses), fundamental government services, and specific programs supporting finance.
  • Tax incentives can facilitate investment in startups.
  • The ‘front-end’ tax incentives benefit from deductions for investment in startup ventures. The ‘back-end’ tax incentives (such as the compliance or extension of capital gains or losses.
  • Tax incentives are available for extractive industries.
  • The taxation of the governmental organizations and their subsidiaries (including the municipalities) is exempt from tax. The state-owned enterprises are exempt from this provision.
  • Under Afghanistan’s system of agreements, the double taxation relief avoids double taxation. It also prevents financial evasion within the country.
  • There is avoidance of double taxation of income of enterprises dealing with aircraft.

Other Important Considerations

Along with the compliance checklist for incorporation of foreign subsidiaries in Afghanistan, you should consider the following considerations.

  • The subsidiary protection under the Article 15(a) QD shall be provided if there is a considerable possibility of execution or the death penalty. It is not valid if the applicant is to be exempted as per Article 17 QD.
  • Make sure to be acquainted with your business activities and the purposes of registering before commencing the process of subsidiary company formation in Afghanistan.
  • Every company member must know Afghanistan’s subsidiary rules. If not, you must appoint an attorney or another staff member well-versed with these rules.
  • The procedure of incorporation of foreign subsidiaries in Afghanistan should be accurate and authentic. Otherwise, the errors can lead to penalties, fines, and a prolonged setup process.
  • You should consider insurance, residence permits, registration with the federal tax administration, and registration for any necessary licenses to establish a subsidiary system in Afghanistan.
  • You must plan for expenses and travel before establishing a subsidiary system in Afghanistan.
  • According to the business segment, the Government may demand additional investment to establish your subsidiary system in Afghanistan. 

How Multiplier’s Employer of Record Can Help You Hire & Expand in Afghanistan

Time and investment are two critical requirements for expanding a business in a foreign country. You can use services from a third-party service company like Multiplier that provide infrastructure to employ talent. You must also dedicate considerable time and effort to conform to a country’s labor laws and industry standards, which Multiplier helps you save for a fraction of the cost.

Multiplier oversees all the regulations, from onboarding proficient employees to payroll processing, while growing the business in a foreign country. It excludes the need to set up a subsidiary. Furthermore, Multiplier assists you in recruiting local and global talent while maintaining compliance for a foreign subsidiary in Afghanistan per its regulations and labor laws.

Frequently Asked Questions

Usually, it takes time to incorporate a subsidiary system in Afghanistan, depending on the company type you aim to register. If you submit all required documents to the Registrar and other concerned legal authorities, it takes around 7-8 weeks to open a subsidiary business in Afghanistan.

As per the Afghanistan Corporations and Limited Liability Companies Law, all companies must submit their financial statements to shareholders within 15 days before the regular/annual meeting of the shareholders.

You must prepare vital financial documents to open a subsidiary business in Afghanistan. The list includes:

  • The balance sheet.
  • The statements of all-inclusive income (profit and loss statement).
  • Alteration in equity and cash flows.
  • Notes (containing a summary of essential accounting policies and other required information).

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