Introduction
On 18th June 2024, the Cabinet Secretary for the National Treasury and Economic Planning issued Legal Notice No. 105 of 2024, officially gazetting the Income Tax (Charitable Organizations and the Donations Exemption) Rules, 2024 (the “2024 Rules”). The Legal Notice took effect on 18th June 2024, replacing the Income Tax (Charitable Donations) Regulations, 2007 (now repealed).
Additionally, on 13th February 2025, the Kenya Revenue Authority (KRA) released a public notice, reminding all charitable organisations to comply with the new rules and submit the required documentation for tax exemption.
The salient features of the rules
New Applications
Any new application for Income Tax exemption must comply with the updated requirements outlined in the new rules.
Existing Exemptions
Organizations that were granted the tax exemption before these new rules took place, must comply with the new rules/requirements before/on 18th June 2025.
Entities with an existing Income Tax Exemption are required to update their data/information to align with the rules by scanning and submitting a duly completed information update form provided by the commissioner to Exemptions&DonationsRulesSupportTeam@kra.go.ke
Transition Period
The government established a one-year compliance window, requiring entities that have yet to comply with the said rules to do so. The period runs from 18 June 2024 to 18 June 2025. (please note: Any previous guidelines that conflict with these rules are now invalid.
Operational Test
A charitable organization is not deemed to be run solely for one or more charitable purposes unless it works primarily to achieve the charitable goal for which it was established and as per the founding documents and refrains from engaging in any illegal activity.
Accumulation of Surplus Funds
Entities are now limited to the amount of surplus funds they can retain.
Entities shall not retain more than an average of 15% of its surplus funds over a period of three consecutive years without applying the excess for furtherance of its charitable purposes and seek approval from the Authority.
This prevents excessive accumulation of the said funds and promotes reinvestment into charitable activities.
Separate KRA PIN for Unrelated Business Activities
Entities that conduct business that are unrelated to their philanthropic endeavors must have a separate KRA PIN for that purpose.
Income from such income-generating activities will not be exempt from income tax.
This aims at stopping businesses that are not supportive to the entity’s philanthropic goals from achieving/being granted the tax-exempt status.
Expenditure and Appropriation of Income
Charitable expenses must have a clear connection to the entity’s goals. Entities stand to lose tax-exempt status if monies are diverted to other non-charitable uses. For remuneration expenses, the said expenses under this category must be reasonable and align with PBO Act, rules, set standards and industry/best practices.
The rule aims to ensure that the majority of funds are used solely for charitable activities, not for administrative overheads.
Donations
Rule 26 on deductibility of expenditure on donations aligns with the Section 15(2)(w) of the Income Tax Act.
Where donations are paid out of taxable income (specifically for taxable entities), for the expense to qualify as a tax allowable expenditure, the donation shall not result to a taxable loss, and not more than 50% of the donations in any year of income shall be to unrelated entities.
Implications for Non-compliance
Entities are called upon to review their compliance status, especially where an organization was exempted from income tax prior to coming into operation of these Rules.
Further, non-compliance with the provisions of these Rules or the governing document under which the rules were established may lead to revocation of the exemption status or rejection of the exemption application / re-application.
Entities are required to comply with these rules by 18th June 2025.
Conclusion
It is our considered opinion that PBO should safeguard their tax-exempt status and remain compliant to the Act, regulations and rules thereto. It is therefore crucial for the PBOs to act promptly by reviewing the new rules and making the necessary adjustments.
Further, early preparation will help entities avoid last-minute rush, legal issue and potential penalties. We further advise that PBOs should navigate these changes effectively and ensure full compliance before the 18th June 2025 deadline.
For further inquiries and guidance on compliance with the new rule, please contact tax.advisory@kkcoeastafrica.com.