Taxation of Charitable and Not-For-Profit Organisations
As their name suggests, charities and not- for- profit organizations (NPOs) are established for charitable objects or research in areas of altruistic value to the society such as relief of the poverty or distress of the public, or for the advancement of religion, health or education among others.
On the basis of their charitable objects and the benefits they portend to the general public or a marginalized sector thereof, NPOs are eligible for certain tax benefits and reliefs. In this article, we highlight the requirements and qualification of NPOs for income tax exemption.
Legal Regimes on Charitable Organizations in Kenya
To accrue any tax benefits, charitable entities must be duly registered under the relevant law. In Kenya, charities and NPOs are registered under various laws depending on the nature and the type of entity/charitable vehicle. The popular models include charitable trusts, public benefit organizations (NGOs) and companies limited by guarantees as highlighted below
Charitable Trusts – these are registered under the Trustees (Perpetual Succession) Act, Cap 164 and the Trustees (Perpetual Succession) Amendment Act, 2021. Section 3B of the Amendment Act provides that entities which have been constituted for charitable purposes may apply to the Principal Registrar of Documents for a certificate
- of incorporation of the trust.
- Public Benefit Organizations (PBO)- despite the enactment of the Public Benefits Organizations Act (PBO Act),2013, registration of PBOs is still primarily done under the Non-Governmental Organizations Co-Ordination Act (Act Number 19 of 1990) (repealed). Once registered, an NGO becomes a body corporate with perpetual succession.
- Companies Limited by Guarantee- under the Companies Act (No. 17 of 2015), one can register a company with its liability limited to the amount the members guarantee or undertake to contribute towards meeting the obligations of the company in the event of its winding up or liquidation.
- As a branch office of a foreign not-for-profit organization registrable under Part XXXVI of the Kenyan Companies Act, 2015.
Taxation of Charities and NPOs
Application for Personal Identification Number
All charitable organizations are required to apply for a Personal Identification Number (PIN) for purposes of filing applicable tax returns and remit taxes to the Commissioner as appropriate.
It is important to note that a charitable organization is not expected to file nil income tax returns but rather, it is expected to submit income tax returns that reflect the revenue (donations) and expenses for the year.
Donations received by charitable organizations do not to qualify as income chargeable to tax in Kenya. However, where a charitable organization engages in an income generating activity, such incomes are subject to tax unless the organization has applied for income tax exemption and has been granted an exemption certificate.
Paragraph 10 of the First Schedule to the Income Tax Act (ITA), exempts from tax the income of an ‘institution, body of persons, or irrevocable trust, of a public
character established solely for the purposes of the relief of the poverty or distress of the public, or for the advancement of religion or education.’
A charitable organization is required to apply for the exemption from income tax through the itax platform and this is only possible if the organization has a valid Tax Compliance Certificate (TCC). The Kenya Revenue Authority (KRA) requires supporting information such as:
- A resolution of the applicant resolving to apply for an income tax exemption;
- Certified copies of Returns of income and audited accounts for the three years preceding the application;
- Copies of the bank statements for the three years preceding the application;
- Certified copy of Constitution, Article of Association or Trust Deed;
- A letter from the County Government stating the activities carried out by the organization;
- Certified Copy of Registration Certificate;
- Certified Copy of PIN Certificate;
- Evidence of the projects carried out for the last 3 years or for whatever period of operation;
- Testimonials from the beneficiaries of the applicant’s charitable projects; and
- Any other useful information in support of the application
KRA reviews the information provided, conducts client interviews and carries out field visits in order to determine whether the organization meets the criteria set out in Paragraph 10 – First Schedule to the Income Tax Act (ITA). Further, KRA seeks to satisfy itself that the organization seeking exemption from tax, must be established or have its regional headquarters in Kenya and that its income is expended in Kenya for the benefit of the residents of Kenya.
If the commissioner is satisfied that the application for exemption from income tax is properly supported, he will grant the exemption for a period of five (5) years and this is renewable upon application.
A person or corporate making a donation to a charity is also allowed to deduct such donations made to entities granted income tax exemption when computing the gains or profits chargeable to tax in a year so long as the donations meet the provisions of Income Tax (Charitable Donations) Regulations, 2007.
Tax on Employees
The employees of a charitable organization are not exempt from paying tax on their salaries and any other taxable employment benefits.
Section 37(1) of the ITA provides that an employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon. The charitable organization is required to compute PAYE at the graduated rates and deduct it prior to paying its employees.
The charitable organization will be required to submit a monthly PAYE return and remit the PAYE withheld to the KRA by the 9th day of the following month. The late payment of PAYE attracts a one-off penalty of 5% of the tax due and accrues interest at the rate of 1% per month outstanding. The penalty for late submission of the PAYE return is the higher of 25% of the tax due or KES 10,000.
- i) National Hospital Insurance Fund (NHIF)
The charitable organization is required to deduct contributions to the national insurance scheme and remit the employee’s contribution by the 9th day of the subsequent month.
The contributions are based on a graduated scale and are in the range of a KES 150 for as the minimum and a maximum of KES 1,700.
The penalty for late payment of NHIF is 2 times the monthly contributions.
- ii) National Social Security Fund (NSSF)
The charitable organization is required to deduct the employee contributions to NSSF which is a national social security scheme that is contributory for both the employer and the employee. Therefore, the charitable organization is required to match up employee’s contribution to NSSF.
The due date for remitting NSSF contributions is the 9th day of the subsequent month. The contributions are categorized as Tier I and Tier II contributions with the maximum contribution being KES 1,080 per month.
Late payments of NSSF attracts a penalty at the rate of 5% of the total contributions for each month or part of the month that is remitted late.
The charitable organization is required to deduct withholding tax (WHT) when making certain payments to resident and non-resident persons as per the provisions of Section 35(3)(f) and Section 35(1)(a) of the ITA respectively.
The charitable organization would be required to remit WHT to KRA by the 20th day of the subsequent month. The late payment of WHT attracts a one-off penalty of 5% of the tax due and interest at the rate of 1% per month outstanding.
As underscored in this article, registration of a charitable organization under the relevant legal regime is vital as a precursor for qualification for income tax exemption from KRA. At CM Advocates LLP, we have a vibrant team of experienced lawyers who are eager to guide you in the process of registering the appropriate vehicle to undertake the charitable activities, compliance requirements, as well as advising on attaching tax obligations and how to procure an exemption from KRA. Please do not hesitate to contact the undersigned if you need any assistance regarding these listed items and any other legal or tax issue surrounding charities and NPOs.