Changes have been made to the legal framework and tax rules that govern charitable organisations and donations.
The changes, through the Income Tax (Donations and Charitable Organisations Exemption) Rules, 2024 (2024 Rules) were gazetted on June 18, 2024, with a transition period of 12 months.
This means that charitable organisations holding an income tax exemption certificate have until May 2025 to comply with the new requirements. If they do not, they run the risk of having their income tax exemption certificates revoked by the Kenya Revenue Authority (KRA).
This could happen, for instance, if a charitable organisation fails to obtain a separate personal identification number (PIN) for any business activities where the income is not exclusively used to support its charitable aims, or to amend its governing documents to clearly specify the beneficiary selection criteria.
It is important to note that charitable organisations are not eligible for tax exemption if they exclusively fund, donate to, or support other charitable entities, without themselves undertaking a charitable purpose directly to beneficiaries.
The new rules have implications for Kenyan corporate donors wanting to ensure their donations to charitable entities are allowable expenses. To be clear, foreign corporate donors would be subject to the tax laws of their own jurisdictions.
Kenyan corporate donors will need to check that the charitable organisations to which they donate hold a valid income tax exemption certificate.
In addition, the corporate donors will need to obtain documentation, such as approved project proposals and budgets, from the charitable organisation to which they make donations, and a receipt. Essentially, the insistence on detailed receipts for donations does away with the ability to have anonymous donors.
Obtaining a receipt for a donation was one of the key requirements in the Income Tax (Charitable Donations) Regulations, 2007 (2007 Rules) for a donation to qualify for income tax deduction. This requirement has been maintained in the 2024 rules, which have repealed the 2007 rules.
Furthermore, donations made by a Kenyan donor should not result in a taxable loss to the donor and not more than 50 percent of donations in any year of income by a donor should be to unrelated entities.
The key consequence of failing to adhere to these requirements is that a donation would not be an allowable expense.
Corporate donors should thus take note of the restrictions.
There are other requirements in the 2024 Rules with which corporate donors should familiarise themselves, especially the prohibition on any shareholder, owner, manager or associate deriving any direct or indirect benefit from a charitable donation.
Finally, the new income tax rules for charitable donations are not necessarily ‘new’ after all. The KRA has already, as a matter of practice, been implementing most of them for some time.
The difference is that previously implicit rules have now been formalised and made explicit, providing greater certainty for donors and charitable organisations. That is certainly to be welcomed.
Mathini is Partner, Oduor is Partner, Githanda is Senior Associate and Mbithi is Associate, Bowmans Kenya
