Kenya has announced that the new Income Tax Exemption Rules for Charitable Organisations have officially taken effect a year after they were first introduced.
“The government notifies taxpayers of the operation of Legal Notice No.105 of 2024, the Income Tax (Charitable Organisation and Donations Exemption) Rules, 2024, which came into force on June 18, 2024,” a statement read.
“These Rules guide on the requirements for Income Tax exemption under Paragraph 10 of the First Schedule to the Income Tax Act as well as the conditions for deductibility of expenditure on donations under Section 15(2)(w) of the Income Tax Act.”
Through an official statement, authorities urged affected organisations to comply with the new rules or risk repercussions.
“Applications for tax exemption received after the effective date of the Rules should comply with the requirements prescribed in the Rules,” the statement continued.
Furthermore, organisations that had been granted exemptions before the implementation of the rules must comply with the prescribed regulations by June 18 this year.
This aligns with the transition period of one year provided in the rules. Failure to comply by the deadline would result in the revocation of their income tax exemption certificate.
The First Schedule to the Income Tax Act exempts from income tax the income of 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 the advancement of religion or education.
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Key Changes Under the New Rules
The updated regulations introduce several new requirements, including:
- Surplus Funds Restriction – An exempt charitable organisation may accumulate surplus funds but shall not retain more than an average of fifteen per cent of its funds over three consecutive years without applying them to its charitable purposes.
- Separate Tax Personal Identification Number – Charitable organisations that engage in unrelated business activities must obtain a separate tax PIN.
- Clarified Definitions – The rules provide clearer definitions of Exempt Charitable Purposes.
Under the Surplus Funds Restriction, surplus funds are defined as the “excess of income over expenditure in any accounting period.” However, the 2024 Rules clarify that surplus funds do not include gains and profits from:
- A business carried on in the course of or the actual execution of the exempt charitable purposes;
- Work in connection with the business that is mainly carried on by beneficiaries under the exempt charitable purposes;
- Gains or profits consisting of rent (including premiums or similar considerations) received from the leasing or letting of land and chattels.
Unrelated Business Taxation
The 2024 Rules define unrelated business as “any business by way of trade that is regularly carried on by the charitable organisation that is not carried out to support charitable activities provided under Paragraph 10 of Part 1 of the First Schedule to the Income Tax Act.”
Charitable organisations granted income tax exemptions are now required to obtain a separate tax Personal Identification Number (PIN) for any unrelated business.
The gains and profits from such business will not be covered by the income tax exemption granted to the charitable organisation.
