Beyond registration:

By Victoria Mokaya, Senior Associate - Tax

For many years, Kenya's non-profit sector operated under the NGO Coordination Act and in practice, many organizations viewed tax exemption as a status that came with being an NGO, foundation, trust or charitable institution. That mindset is becoming increasingly dangerous. 

The coming into force of the Public Benefit Organisations (PBO) Act, 2013 in May 2024 marked more than a regulatory transition. It signaled a shift in how public benefit organizations are expected to operate, govern themselves and demonstrate accountability. At roughly the same time, the Income Tax (Charitable Organisations and Donations Exemption) Rules, 2024 introduced a more detailed framework governing how organizations obtain and retain income tax exemption. 

One important distinction that is often overlooked is that the term Public Benefit Organization (PBO) is broader than the traditional concept of an NGO. Under the current framework, organizations pursuing public benefit objectives may take different legal forms, including NGOs, charitable trusts, foundations, faith-based organizations and companies limited by guarantee. 

The shift from the NGO regime to the PBO regime therefore represents more than a change in terminology. It reflects a move towards a more comprehensive framework for regulating organizations that serve the public good.

Yet despite these significant developments, many organizations continue to operate based on assumptions that belonged to the old regime.

That registration as a PBO automatically translates into tax exemption

It does not.

In fact, the PBO framework and the tax exemption framework are separate. An organization may be registered by the Public Benefit Organisations Regulatory Authority (PBORA) and still be required to separately apply for and satisfy the conditions necessary to obtain and maintain tax exemption under the Income Tax Act. There is no blanket tax exemption for PBOs.  

This distinction is more important than ever. Historically, many organizations focused heavily on registration. Today, regulators are increasingly focused on substance.

The question is no longer:

"Are you registered?"

The question is:

"Can you demonstrate public benefit?"

The 2024 Exemption Rules have effectively moved the conversation from paperwork to evidence. An organization seeking to obtain or maintain exemption must satisfy three fundamental tests:

The governing documents must clearly define the;

• charitable purpose,
• identify intended beneficiaries,
• prohibit private benefit,
• restrict the use of assets to charitable objectives, and
• provide that assets are transferred to a similar charitable organization upon dissolution.

An organization must primarily undertake activities that achieve the charitable purpose for which it was established. Put simply, what you do should align with why you were established.

Organisations must demonstrate that their activities benefit the public or a sufficient section of the public, that beneficiaries are identifiable and that charitable activities do not provide private benefit to founders, directors, trustees or related persons. 

These tests may sound straightforward. However, they raise difficult questions that every board, CEO, finance team and trustee should be asking.

• Can we clearly identify our beneficiaries?
• Can we demonstrate the impact of our activities?
• Are our programmes still aligned with our founding charitable objectives?
• Are we maintaining sufficient evidence to support our exemption position?
• Could our governance structures withstand regulatory scrutiny?

These questions are becoming increasingly relevant because obtaining an exemption certificate is only the beginning. Maintaining it, is the real challenge.

The Rules require organizations to continue applying their income and assets solely towards their charitable purposes. They also introduce restrictions around the accumulation of surplus funds. A charitable organization should not retain more than an average of fifteen percent (15%) of its funds over three (3) successive years without applying those funds to charitable purposes. 

This requirement alone should prompt many organizations to reassess their financial strategies. Large reserves that once appeared prudent may increasingly attract questions.

Similarly, organizations engaging in commercial or income-generating activities need to understand that not all income automatically qualifies for exemption. While certain business income may qualify where it is applied solely to charitable purposes and meets specific statutory conditions, unrelated business income may remain taxable. 

This is where governance becomes critical.

Many of the risks threatening exemption have very little to do with tax calculations.

They often arise from:

• Weak governance structures;
• Missing board minutes;
• Poor beneficiary documentation;
• Inadequate impact reporting;
• Unsupported expenditure;
• Related-party transactions;
• Failure to file statutory returns; and
• Weak internal controls.

In recent training sessions with leaders across the non-profit sector, one theme consistently emerges:

Many organizations are focused on whether they qualify for exemption. Far fewer are focused on whether they can defend that exemption during a review or audit. Yet this is increasingly where the conversation is headed.

KRA's focus is rarely on charitable intentions alone. The focus is whether the organisation's activities, income, expenditure, governance structures and documentation support the exemption being claimed. 

The transition from the NGO era to the PBO era therefore represents something much deeper than a change in legislation. It represents a change in expectations;

• The sector is moving towards greater accountability;
• Greater transparency;
• Greater emphasis on governance; and
• Greater scrutiny of whether organizations deliver genuine public benefit.

For boards, management teams and finance leaders, now is the time to move beyond compliance as an annual exercise.

• Review your governing documents.
• Assess your activities against your stated objectives.
• Strengthen documentation.
• Evaluate commercial activities.
• Review the utilization of surplus funds

Most importantly, ask yourselves a simple but powerful question:

If KRA reviewed our organization today, could we clearly demonstrate that we still deserve our tax-exempt status?

In the PBO era, tax exemption is no longer something organizations should assume. It is something they must continually earn, protect and substantiate.