Not business as usual for charitable organisations under new tax rules

A charitable organisation's primary objectives include philanthropy and social well-being with the aim of serving public interests and the common good. In Kenya, charitable organisations qualify for tax exemption upon meeting certain criteria.

Previously, guidelines on charitable donations were provided for by the Income Tax (Charitable Donations) Regulations, 2007. However, in May 2024, the regulations were repealed and the Income Tax (Charitable Organisations and Donations Exemption) Rules, 2024 published.

To qualify for tax exemption, the charity should be an institution, body of persons or irrevocable trust, of a public character established in Kenya or who’s regional headquarter is situated in Kenya.

The organisation’s charitable purpose should be relief of poverty or distress of the public, advancement of education or religion. Moreover, its income must be expended in Kenya or for purposes which results the benefit of Kenyan residents.

Another requirement is the need for transparency and accountability, without restriction or discrimination regardless of the fees levied for services rendered. The organisation’s assets or income should be applied exclusively for its charitable purpose without conferring private benefit to any individual.

It will, however, no longer be business as usual for charitable organisations seeking tax exemptions under the recently published Charitable Rules 2024. The threshold for tax exemption is stringent with charities required to demonstrate that they have met the following tests: organisational test, operational test and public benefit test.

Under organisational test, the articles of the company should demonstrate how the organisation meets its charitable purpose. Secondly, the organisation should operate activities which it was primarily established for, and it should benefit the public without any limitation and in case of a limitation, it should be for the benefit of a sufficient section of the public. Thirdly, in relation to the public benefit text, the charity should be equitable to the beneficiaries.

The rules cover to a granular extent the criteria for charitable purposes to be fulfilled. For instance, the rules define what it means to ‘experience poverty’ under the relief of poverty charitable purpose. This means ‘inability to acquire the basic necessities of life or simple amenities, which the majority of the population in Kenya would regard as necessary for an adequate, standard of living’.

The rules also provide the measures the charity should undertake for the poverty relief such as training, community-based support and projects, capacity building and skills development.

Interesting to note is the criteria to be fulfilled by charities undertaking advancement of education. An organisation charging school fees should grant full scholarships to 10 percent of its student population from poor and needy backgrounds.

The writer is an advocate of the High Court of Kenya.