Introduction
Income tax in Kenya is charged in accordance with the provisions of the Income Tax Act Cap. 470 of the Laws of Kenya (the Act) and subsidiary legislation enacted under it. While all income accrued or derived from Kenya is subject to taxation, the Act provides for certain income accrued in or derived from Kenya to be exempt from income tax. One such exemption, allowed under Paragraph 10 of the First Schedule to the Act, is donations to a charitable organization, and the Act empowers the Cabinet Secretary for the National Treasury and Economic Planning (the Cabinet Secretary) to provide, by gazettement, rules on exemption of certain income from income tax.
Against this background, the Cabinet Secretary, in June 2024, gazetted the Income Tax (Charitable Organizations and Donations) Rules 2024 (the Rules). The Rules, which repeal the Income Tax (Charitable Donations) Regulations 2007, prescribe the requirements to be met by a charitable organization to qualify for exemption from income tax and provide for the procedure to be followed by a charitable organization in an application and grant of an exemption from income tax.
The key highlights of the Rules are set out below.
Prescribed Charitable Purposes
Not all charitable organizations qualify for an exemption from income tax deductions under the Act and the Rules. To be eligible for an exemption, a charitable organization must be established for one or more of the following charitable purposes provided for in the Rules (the prescribed charitable purposes):
a) The relief of poverty: in this, an organization must be organized solely to relieve poverty, restrict its beneficiaries to persons experiencing poverty and provide a public benefit resulting in the relief of poverty through its charitable activities. Additionally, the organization must have a criterion for defining and selecting its beneficiaries. The Rules further provide that an organization providing training, support, assistance, education, healthcare, and any other community-based support aimed at enabling the poor to generate a sustainable income and be self-sufficient will be considered as being established for the relief of poverty.
b) Advancement of religion for public benefit: in this, Rule 11 provides that the organization must be operated exclusively for the advancement of religion and must comply with all other aspects of the Rules. Such an organization’s activities may include seeking new followers or adherents, encouraging the practice of religion by providing places of worship, raising awareness and understanding of religious beliefs and missionary or outreach work.
c) Advancement of education for public benefit: in this, the organization’s objects must align with the provisions of Rule 12, which objects include the provision of basic education, the provision of university education by a university or technical university, the provision of technical and vocational training and the provision of school buildings, libraries or equipment for educational institutions. Additionally, an organization organized for this purpose must demonstrate that it is organized and operated exclusively for the advancement of education, it is compliant with the public benefit requirements in the rules, its educational services are accessible to the poor and needy, persons with disability and abandoned children and that in the case of fee-charging educational institutions, full scholarships are granted to at least ten per cent of its student population from poor and needy backgrounds.
d) Relief of distress for public benefit: the organisation must be established for the purposes laid out under Rule 13, including the provision of disaster relief to victims of natural disasters, prevention of deterioration of society through activities such as environmental conservation, the provision of education programs to abandoned, abused, neglected, orphaned or homeless children and the provision of housing assistance for the elderly and persons with disability.
Requirements for Exemption
For an organisation to be exempt from income tax deductions under the Act and the Rules, it must fulfil certain eligibility criteria under the Act and the Rules. In the first instance, the organization must be established solely for one or more of the prescribed charitable purposes. Accordingly, the organization must:
a) be organised exclusively for one or more of the prescribed charitable purposes in that the organization's constitution must provide for the matters provided for under Rule 6, including but not limited to the organisation's primary charitable purposes, the charitable activities it will carry out to achieve its objectives, the organisations' targeted beneficiaries and its criteria for identifying beneficiaries.
b) be operated exclusively for one or more of the prescribed charitable purposes in that the organization must primarily engage in activities geared towards achieving its founding purpose and not engage in unlawful activities as per the provisions of Rule 7; and
c) engage in activities beneficial to the public as provided for under Rule 8.
In addition, the organization must be established in Kenya or have its regional headquarters in Kenya and either expend its income in Kenya or otherwise use its income for charitable purposes beneficial to residents of Kenya.
Application for Exemption
Charitable organizations may apply for an exemption from income tax through an application made to the Commissioner under Rule 17. The application must be accompanied by the prescribed documents, including the organization’s governing and registration documents, audited financial statements for three years preceding the date of the application, a schedule of the organization’s assets and the organization’s impact statement describing its past and present activities and how the activities are intended to or have benefited the residents of Kenya. Following a successful application, the Commissioner shall issue the organization a tax exemption certificate, granting the organization an exemption for a renewable period of five years.
An exemption granted under by the Commissioner may be revoked for non-compliance with the Rules. However, the Commissioner is required to serve the organization with a notice of intention to revoke the exemption, stating the reasons for the intended revocation and providing the organization with at least thirty days to respond to the stated reasons. The Commissioner may only revoke the exemption if unsatisfied with the organization’s response or where the organization fails to respond.
Donations to Charitable Organizations
As per the provisions of Rule 26, a donation only qualifies for tax deduction under section 15(2)(w) of the Act upon the donor furnishing evidence of receipt of the donation by the exempt organization, approved project proposals and budgets submitted by the charitable organization and approved by the donor, a copy of the exemption certificate issued under the Rules, an approval from the Cabinet Secretary where such is required and a declaration from the donee that the donation shall be used exclusively for charitable purposes. Additionally, the donation must be in cash or in kind, should not be refundable or returnable to the donor, and should not confer direct or indirect benefit to the donor or any associated person.
Additional Compliance Requirements for Exempted Organizations
Exempted organizations must also comply with the following additional matters:
a) Expenditure and Application of Income: a charitable organization is prohibited from distributing its income, directly or indirectly, to any person except for services rendered;
b) Filing of tax returns: charitable organizations shall at least once each year submit an income tax return in the prescribed form; and
c) Tax Avoidance Schemes: charitable organizations shall ensure that they are not used as a front for transactions, operations or schemes, whose main purpose is to reduce, postpone or avoid any tax, duty or levy payable by any person under the Act.
Conclusion
In conclusion, the enactment of the Rules provides much required clarity on the criteria for deductible donations to charitable organizations as well as the requirements charitable organizations in Kenya must meet for exemption from income tax deductions.
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