IN-DEPTH ANALYSIS OF CHARITABLE ORGANISATIONS AND DONATIONS EXEMPTION RULES, 2024

IN-DEPTH ANALYSIS OF CHARITABLE ORGANISATIONS AND DONATIONS EXEMPTION RULES, 2024

The Income Tax Act (Charitable Organisations and Donations Exemptions) Rules 2024 (the Rules), which were gazetted on 18 June 2024, repeal the Income Tax (Charitable Donations) Regulations, 2007. These Rules are designed to establish the criteria that charitable organizations must fulfill to qualify for tax exemptions on their income and to outline the process for assessing the eligibility of donations made to these organizations for income tax purposes.

This guide digests these rules in a Question- Answer format for easier understanding.

Analysis

A Charitable Organization is an institution, body of persons, or irrevocable trust of a public character established under relevant written law, solely for the purposes of relieving poverty, distress of the public, or advancing religion or education, and which is based in Kenya or has its headquarters situated in Kenya.

What is the organizational test for a charitable organization?

The organizational test for a charitable organization requires that the governing document limits the organization’s objectives to one or more charitable purposes. Specifically, the document must include:

• The primary charitable purpose.
• Details of the charitable activities planned to achieve this purpose.
• The intended beneficiaries.
• An outline of an open and needs-based process for selecting beneficiaries.

What are the requirements for a charitable organization to be tax-exempt in Kenya?

A charitable organization’s income earned in or from Kenya will be tax-exempt if the Commissioner is satisfied that:

• The income will be spent in Kenya; or
• The income will be used for charitable purposes that benefit people living in Kenya.

Under what conditions does the exemption from tax not apply to a charitable organization’s income from business profits in Kenya?

The exemption from tax does not apply to a charitable organization’s income from business profits unless:

• The business is done in the actual execution of charitable activities of the organization; or
• The work in connection with such business is mainly carried on by beneficiaries under the charitable purposes of the charitable organization.
• The income comes from renting out land or property.

What are the rules regarding the expenditure and appropriation of income for a charitable organization?

Under these rules, a charitable organization is prohibited from distributing its income to any individual except for payments made for services rendered. This ensures that the organization’s funds are used primarily for its charitable purposes rather than benefiting individuals inappropriately.

Remuneration for services rendered can include various forms of payment such as:

• Salary
• Fees
• Bonuses
• Wages
• Gratuities
• Pensions
• Other types of compensation like stipends, overtime allowances, and director’s remuneration

What are the rules regarding tax avoidance and the accumulation of surplus funds for a charitable organization?

Rule 15: A charitable organization shall not engage in or permit itself to be used for any transaction, operation, or scheme whose sole or main purpose is to reduce, postpone, or avoid any tax, duty, or levy that would otherwise be payable by any person under the Act or any other tax law.

Rule 16: A charitable organization may accumulate surplus funds as desired. However, it shall not retain more than an average of fifteen percent (15%) of its funds over a period of three succeeding years without applying the surplus funds to its charitable purposes.

What is the process for obtaining and renewing a tax exemption certificate for charitable organizations?

• Issuance: The Commissioner is responsible for issuing tax exemption certificates to charitable organizations that meet all requirements of the rules. Once issued, the exemptions are valid for five years. The Commissioner must issue the certificate within sixty days of receiving a complete application.
• Renewals: For renewals, the exemption applies from the date of the application or the expiry of the previous certificate, whichever is later.
• New Applications: For new applications, the exemption applies from the date of approval.
• Declined Applications: If an application for tax exemption is declined, the Commissioner must notify the applicant in writing, explaining the reasons for the decision, allowing the applicant to address any issues.
• Compliance Requirements: Charitable organizations must submit an income tax return at least once a year using the prescribed form. Amendments to submitted returns must follow section 31 of the Tax Procedures Act. All documents, including returns, applications, and notices, must be submitted in accordance with the Tax Procedures Act to ensure compliance with broader tax regulations.

Under what circumstances can a charitable organization’s tax exemption be revoked, and what is the process involved?

• Grounds for Revocation: The Commissioner may revoke a charitable organization’s tax exemption if it fails to comply materially or repeatedly with the rules or its governing document.
• Notice of Intention: Upon identifying non-compliance, the Commissioner will issue a notice of intention to revoke the exemption, stating the reasons and providing the organization 30 days to respond.
• Response and Corrective Actions: The organization must explain the reasons for non-compliance and the actions taken to address the issues. If the Commissioner is satisfied with the response and corrective actions, the intention to revoke the exemption will be withdrawn.
• Revocation Process: If the organization fails to respond within the stipulated period or if the response is unsatisfactory, the exemption certificate will be revoked, effective from the beginning of the year in which the non-compliance occurred or a later date determined by the Commissioner.
• Tax Implications: Revocation results in the accumulated funds being subject to income tax for the year in which the exemption is withdrawn.
• Reapplication: Despite the revocation, the organization can reapply for tax exemption in the following year if it has addressed the non-compliance issues to the Commissioner’s satisfaction.

What is the process and requirements for applying for income tax exemption for a charitable organization in Kenya?

1. Application Submission: Charitable organizations must apply to the Commissioner of the Kenya Revenue Authority (KRA) using the prescribed form.
2. Required Documents:

• A certified copy of the organization’s governing documents
• A certified copy of the registration documents
• Audited financial statements for the three years preceding the application
• A schedule of the organization’s assets with their values
• Certified bank statements for the three years preceding the application
• An introduction letter from the county commissioner where the organization’s head office is located
• An impact report detailing past, present, and future activities and their benefits to Kenyan residents
• Criteria for defining and selecting beneficiaries
• An itemized summary of payments made, including payee, amount, and purpose
• Certified identity documents of all relevant office bearers
• Proof of the organization’s physical address
• A valid tax compliance certificate and, if renewing, a copy of the previous tax exemption certificate
• A letter of authority, power of attorney, or appointment letter for the organization’s representative

3. Eligibility:

• Organizations applying for the first time must have been operational for at least one year.
• Renewal applications should be submitted at least six months before the current exemption expires.

4. Processing and Issuance:

• The Commissioner will issue a tax exemption certificate within 60 days if all requirements are met.
• The certificate is valid for five years from the date of approval for new applications or from the date of application or expiry of the previous certificate, whichever is later.

5. Rejection: If the application is rejected, the Commissioner will provide written reasons.
6. Exemption Limitation: Exemption will not be granted to organizations that only fund or support other charitable organizations without conducting their own charitable activities or those exempted under other tax laws.

What are the rules regarding donations made to charitable organizations and their tax implications?

1. Donation Limits and Requirements:

• Donations must be paid out of the donor’s taxable income without causing a taxable loss.
• No more than 50% of the donations in any given year can be directed to unrelated entities.

2. Proof for Tax Deduction:

To qualify for a tax deduction under section 15(2)(w) of the Income Tax Act, donors must provide:

• Evidence of receipt of the donation by the exempt person.
• Approved project proposals and budgets from the charitable organization.
• A copy of the exemption certificate.
• Necessary approvals from the Cabinet Secretary for certain projects.
• A declaration from the recipient that the donation will be used exclusively for charitable purposes.

3. Proof of Donation:

• All donations, whether from local or foreign sources and in cash or in kind, must have proof of receipt.
• Donations must be non-repayable, non-refundable, and non-returnable under any circumstances.
• They should not provide any direct or indirect benefit to the donor or anyone associated with the donor.
• Donations cannot be revoked unless approved by the Commissioner. If revoked, the tax arising from such donations becomes due and payable.

4. Transparency and Accountability:

• These regulations ensure that donations are used strictly for charitable purposes and prevent misuse or undue benefit to the donors.

N/B- Charitable organizations that were granted income tax exemption before the implementation of these new rules must comply with the new regulations within twelve months from the date these rules take effect.

This update is for general information and does not amount to legal advice. For legal consultations, contact us through info@knjenga.co.ke

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