15/02/2025
September 10, 2024
The Cabinet Secretary, National Treasury and Economic Planning gazetted the Kenya Income Tax (Donations and Charitable Organisations Exemption) Rules 2024 (“the Rules”) through Legal Notice No. 105 of 2024 on 18th June 2024.
The Rules repealed the Income Tax (Charitable Donations) Regulations, 2007.
Paragraph 10 of the First Schedule of the Income Tax provides for categories of income that is tax exempt and they include income from any institution, body of persons or irrevocable trust of a public character that is established solely for the relief of poverty, distress of the public or for advancement of religion or education.
The Rules provide the framework under which charitable organizations and donations made to them can qualify for tax exemption in Kenya. Below is a consolidated outline of the key provisions and the procedure for obtaining tax exemption.
Key Provisions
Eligibility for Tax Exemption
Charitable organizations must be legally registered under relevant laws such as the Non-Governmental Organizations (NGOs) Act, the Public Benefits Organisations (PBOs) Act, the Societies Act, or the Trustees (Perpetual Succession) Act.
The organization must exclusively engage in public benefit activities, including education, health, poverty alleviation, and relief of distress.
Income or property of the organization should not benefit its members or employees, except for reasonable compensation.
Approval of Donations
Donations made to approved charitable organizations are tax-deductible. Donors must receive receipts for these donations to claim tax deductions.
Utilization of Income
Income earned or donations received by the organization must be used solely for the registered public benefit activities.
Annual Reporting
Organizations must submit annual reports and audited financial statements to the Kenya Revenue Authority (KRA), demonstrating the proper use of income and donations.
Revocation of Exemption
KRA may revoke the tax-exempt status if the organization fails to comply with the exemption rules.
Transition period of 12 months
Charitable organisations that were exempted from tax before the Rules came into effect (18th June 2024) are required to comply with the provisions of the Rules within 12 months of the effective date.
The Rules introduce new requirements such as the Surplus Funds Restriction, separate tax personal identification number which the exempt charitable organisations must comply with failure to which their certificates may be revoked by the KRA.
Restriction on accumulation of surplus funds
Surplus funds means the excess of income over expenditure in any given accounting period. It however, does not include gains and profits from:
business carried on in the course of or the actual ex*****on of the exempt charitable purposes.
Work in connection with the business mainly carried on by the beneficiaries under the exempt charitable purposes.
Donations and grants received by the exempt charitable organisations.
Rent received from the leasing or letting of land and chattels leased or let.
Charitable organisations are allowed to accumulate surplus funds as desired, but not more than an average of fifteen (15) per cent of its funds in a period of three succeeding years without applying the surplus funds to its charitable purposes.
The restriction seeks to have donations or grants applied to use for charitable purposes in line with the organization’s objectives instead of accumulating the funds.
Taxation of income acquired from business unrelated with the charitable objectives
Tax exempt charitable organisations are required to obtain a separate tax PIN for any unrelated business which they carry out. Gains and profits from such unrelated businesses are taxable.
Unrelated business is defined as any business by way of trade that is regularly carried on by the charitable organisation that sis not carried out to support charitable activities provided under paragraph 10 of Part 1 of the First Schedule to the Income Tax Act.
Requirement to renew tax exemption certificate and file returns
An income tax exemption certificate is only valid for five (5) years.
The exemption certificate must be issued within sixty (60) days of lodging the application where all the requirements are met.
The tax exempt charitable organization is required to file an income tax return at least once every year to the KRA.
KRA to give notice of intention to revoke an income tax exemption certificate
Rule 20 of the Rules gives the Commissioner discretion to revoke an income tax certificate upon being satisfied that the exempt organisation has failed to comply with the requirements under the Rules.
The notice of intention to revoke should state the reasons leading to the intention to revoke and provide a notice of thirty (30) days within which the taxpayer may respond to the Commissioner’s notice.
Where the Commissioner is satisfied with the response on non-compliance, he shall notify the organisation in writing of the withdrawal of the notice.
Where the Commissioner does not receive a response within the notice period or where the response is not satisfactory, the Commissioner shall revoke the exemption certificate and notify the organisation in writing.
Appeals
Any party who is aggrieved by the decision of the Commissioner on the application of the Rules may appeal to the Tribunal within 30 days of the decision of the Commissioner and shall give notice to the Commissioner in writing.
Ineligible Charitable Organisations
The Commissioner is prohibited from issuing a tax exemption certificate to a charitable organization which:
Exclusively funds, donates or supports other charitable organizations without undertaking a charitable purpose; and
Has been exempted from tax under any other law.
Procedure for Tax Exemption
Registration of the Charitable Organization
The organization must first be legally registered and obtain a certificate of registration from the relevant regulatory authority.
Application for Tax Exemption
The organization submits a formal application to the KRA, including the certificate of registration, description of objectives and activities, and the constitution or memorandum of association.
Review and Approval by KRA
KRA assesses the application to ensure the organization’s activities qualify as public benefit activities. If approved, KRA issues a tax exemption certificate.
Issuance of Tax Exemption Certificate
The organization receives a tax exemption certificate from KRA, which officially grants tax-exempt status.
Annual Reporting and Compliance
The organization must submit annual reports and audited financial statements to KRA and continue to comply with all conditions to maintain its tax-exempt status.
Tax Deductibility of Donations
The organization issues receipts for donations, which donors use to claim tax deductions on their taxable income.
Revocation and Re-application
If the organization fails to comply with the rules, KRA can revoke the tax exemption status. The organization may need to reapply to have the status reinstated.
This process ensures that only organizations genuinely engaged in public benefit activities are granted tax exemptions, promoting transparency and accountability in the charitable sector. This is also in line with the provisions of the Public Benefits Organisations (PBO) Act which repealed the NGOs Act 1990.
