REVIEW OF THE DRAFT INCOME TAX (DONATIONS AND CHARITABLE ORGANISATIONS EXEMPTION) RULES, 2023

On the 15^th December 2023, the Commissioner General Kenya Revenue Authority on behalf of the Cabinet Secretary for National Treasury and Economic Planning invited members of the public to submit their comments, in compliance with the requirement for public participation, on the draft Income Tax (Donations and Charitable Organizations Exemption) Rules, 2023 which seeks to repeal the Income Tax (Charitable Donations) Regulations, 2007.

The principal object of the draft rules is to provide guidelines for the allowability of donations under section 15(2)(w) of the Income Tax Act (donations to be deducted when ascertaining the total income of a charitable organization for purposes of taxation) and to provide the procedure for the application, processing, granting and retention of income tax exemptions for charitable organization.

The draft rules provide that the income of a charitable organization which accrues in or was derived from Kenya shall be exempted from tax only if the Commissioner is satisfied that the income of such a charitable organization is to be expended either in Kenya or in circumstances in which the expenditure of that income is for the purposes which result in the benefit of the residents of Kenya.

The rules further provides that any income which consists of gains or profits from a business shall not be exempt from tax unless such gains or profits are applied solely to the charitable purposes of the organization. In determining the charitable purpose of an organization, the rules provides that the Commissioner shall consider if a charitable organization is organized and operate exclusively for one or more of the charitable purposes and its charitable purposes are directed towards public benefit. In considering these the commissioner is to apply the following two tests: one, the ORGANIZATIONAL TEST that is if the organization’s governing document limits the objects of the charitable organization to one or more charitable purposes and two, the OPERATIONAL TEST that is the organization engages primarily in activities which accomplish the charitable purpose for which it was founded and it does not take part in illegal activities such as terrorism, fraud or money laundering.

Some examples of the charitable purpose for public benefit provided by the rules include:

• The relief of the poverty; or
• The relief of distress of the public; or
• The advancement of religion; or
• The advancement of education.

The rules further provides that for a charitable organization to qualify for exemption it must not distribute its income, directly or indirectly, to any person except for services rendered such as remuneration amounts payable by way of any salary, fee, bonus, wage, gratuity, pension, leave encashment, emolument, voluntary award, commission, annuity, stipend, overtime, superannuation allowance, retirement allowance, lump sum benefit payment and director’s remuneration.

The rules further provides that a charitable organization shall not qualify for exemption if it is a party to or permit itself to be used for any transaction, operation or scheme, the purpose of which is or was to reduce, postpone, or avoid any tax, duty or levy.

APPLICATION FOR EXEMPTION FROM INCOME TAX

On application for exemption, the rules provide that an application should be submitted to the Commissioner in the prescribed form and must be accompanied by the following:

1. a certified copy of the governing documents of the Organization including rules, constitution, trust deed, memorandum and articles of association.
2. a certified copy of the registration documents of the Organization.
3. audited financial statements of the Organization for a period of three years immediately preceding the lodging of the application.
4. a schedule of assets of the organization including their corresponding values.
5. original bank statements of the Organization for a period of three years immediately preceding the lodging of the application.
6. original introduction letter from the office of the County Commissioner of the County where the principal activities of the organization are carried out.
7. the Organization’s impact report describing in detail (i) the past, present and future activities of the Organization and (ii) how the activities of the Organization are intended or have benefited the residents of Kenya.
8. the Organization’s criteria for defining and selecting its beneficiaries.
9. an itemized summary of the payments made by the Organization showing the payee, amount and purpose of payment.
10. in case the Organization receives donations, the Donations shall be paid out of the income of the donor, the donor must provide proof of the donation and utilization by the recipient to the Commissioner and the proof of the donation and utilization by the recipient to be in form of a receipt issued and certified by the recipient of the donation and there exist an approved project proposals and budgets to be submitted by the charitable organization and approved by the donor.
11. certified copies of identity documents of all the responsible office bearers of the Organization.
12. proof of the Organization’s physical address.
13. a copy of valid tax compliance certificate and in the event of a renewal, a copy of expired tax exemption

certificate of the Organization.

• Letter of authority, power of Attorney or appointment letter for the representative of the
• Organization. and
• any other information the Commissioner may consider relevant to the application.

NOTE: a charitable organization applying for exemption for the first time should have been in operation for a minimum of one year period and an application for a renewal of exemption certificate shall be made at least six months prior to the expiry of the existing certificate.

Where the Commissioner is satisfied with the Organization’s application, he shall within 60 days issue an exemption certificate valid for 5 years and where the application is declined, the Commissioner shall communicate in writing the reason for refusal.

A person who disputes the decision of the Commissioner to decline his application for exemption or to withdraw his exemption status, may, within thirty days of receipt of the decision to decline the application or to revoke the exemption status, and upon giving notice in writing to the Commissioner, appeal to the Tax Appeals Tribunal.

It also important to note that a charitable organization will also be required to submit on an annual basis an Income Tax Return in the prescribed form.

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