Tax Benefits For Non-profit Organizations In Kenya

The Kenyan government provides a range of tax incentives in an effort to encourage investments in certain projects however, this article restrains itself to focus on the tax incentives merited to non-profit organizations.

Taxable Exemptions Under the Public Benefits Organizations Act

Under the Second Schedule of the PBO Act, PBOs receive government support in the form of—

1. Exemptions from–

• income tax on income received from membership subscriptions and any donations or grants;
• income tax on income acquired from the active conduct of income producing activities if the income is wholly used to support the public benefit purposes for which the organization was established;
• tax on interest and dividends on investments and gains earned on assets or the sale of assets;
• stamp duty; and
• court fees
  1. Preferential treatment under value added tax (VAT), and customs duties in relation to imported goods or services that are used to further their public benefit purposes;
  2. Incentives for donations by legal and natural persons;
  3. Employment tax preferences; and
  4. Special tax incentives for donations to form endowments, prudent investment policies, among others.

Taxable Exemptions under the Income Tax Act 

Charitable Organizations/Foundations/Societies

Section 13 of the Income Tax Act as read together with section 10 in Part I of the First Schedule, provides that the income of an institution, body of persons or irrevocable trust, of a public character, established solely for the purposes of poverty alleviation or distress of the public, or the advancement of religion or education, all for public benefit, shall be tax exempt. The conditions to grant of tax exemption for these organizations include:

• The organization must be established in Kenya; or have its regional headquarters situated in Kenya.
• The Commissioner is satisfied that the income is to be expended either in Kenya or in the expenditure of that income is for purposes which result in the benefit of the residents of Kenya.
• The organization’s income, which consists of gains or profits, shall not be exempt from tax unless those gains or profits are applied solely to those purposes (poverty alleviation or distress of the public, or the advancement of religion or education) and either -
• the business is carried on in the course of the actual execution of those purposes; or
• the work in connection with the business is mainly carried on by beneficiaries under those purposes; or
• the gains or profits consist of rents (including premiums or similar consideration in the nature of rent) received from the leasing or letting of land and chattels leased or let therewith.

Registered Trusts

In reiteration to the above, section 13 of the Act provides that the income of a registered trust is exempt from income tax.

Applications for Exemption from Income Tax

Whosesoever the aforementioned organizations seek to commence business, having satisfied that they are eligible for tax exemptions allowed to charitable organizations under paragraph 10 of the First schedule of the Income Tax Act, they shall apply to the Kenya Revenue Authority (KRA) which will culminate in the issuance of a Tax Exemption Certificate by the KRA. This is issued for a renewable term of five (5) years.

Charitable Donations

According to section 15(2)(w) of the Income Tax Act, donations to charitable organizations which hold a tax exemption certificate or to charitable projects approved by the Finance Minister, are tax deductible.

Asset Shifting

This is achieved by shifting the asset producing income to another person or entity that is taxed preferentially, i.e. taxed less that the person or entity shifting the asset. You could transfer the asset to a charitable trust which enjoys preferential tax treatment.

Taxable Exemptions on Value Added Taxes

As evident above, the PBO Act provides for preferential treatment under VAT and customs duties for imported goods or services that are used to further an organization’s public benefit purposes. The VAT Act, in its First Schedule, Part 2 Para. 11(a), also exempts the supply of services rendered by educational, political, religious, welfare, and other philanthropic associations to their members, provided that this shall not apply where any such services are rendered by way of business.

Conclusion

Navigating around tax exemptions requires experienced legal knowledge and expertise. It also requires a vast understanding of the various changes in the law relating to non-profit organizations alongside incomes derived in, accrued from or received in Kenya. We at CM Advocates LLP, have an experienced team of tax practitioners who offer tax law advisory services on existing and emerging tax laws to ensure our clients are compliant. We would be more than delighted to offer trainings on the DST as well as undertake an audit of your business venture for purposes of advising on the applicability or otherwise, of the DST. For more information, visit our website law@cmadvocates.com or contact us at taxteam@cmadvocates.com.Please click here to download the article

Contact Persons & Contribuors

Jane Mugo- Partner & Head of Unit Angela Ndolo-  Associate

Disclaimer

This article is for informational purposes only and should not be construed as legal advice.