Kenya’s 2024 Finance Bill brings significant updates to the regulatory landscape for charitable donations, aimed at enhancing transparency, accountability, and effective use of funds for public benefit. One of the critical changes includes the repeal of the Income Tax (Charitable Donations) Regulations, 2007, which will be replaced by the Draft Income Tax (Donations and Charitable Organisations Exemption) Rules, 2023 (Bowmans Law) (A.O.Wanga Advocates).
Key Changes and Provisions
1. Stringent Tax Exemption Criteria: To qualify for income tax exemptions, charitable organizations must focus on specific purposes such as the relief of poverty, advancement of education, religion, or relief of distress. The governing documents of these organizations must explicitly state these purposes and prohibit the use of funds for non-charitable activities (Bowmans Law) (Cliffe Dekker Hofmeyr).
2. Deductibility of Donations: Donations made to charitable organizations with a valid income tax exemption certificate, or to projects approved by the Cabinet Secretary responsible for finance, will be deductible for the donor. The donations must be in cash, non-refundable, and should not confer any direct or indirect benefit to the donor (Bowmans Law) (A.O.Wanga Advocates).
3. Validity and Renewal of Exemption Certificates: The Kenya Revenue Authority (KRA) is mandated to issue a decision on the grant of an income tax exemption certificate within 60 days of receiving a complete application. These certificates are valid for five years and can be renewed with an application made at least six months before the current certificate’s expiration (Cliffe Dekker Hofmeyr).
4. Limitation on Surplus Funds: Charitable organizations are restricted from retaining more than an average of 15% of their surplus funds over a consecutive three-year period without utilizing these funds for charitable purposes. This measure ensures that the donations are actively deployed towards their intended charitable activities, thereby preventing the accumulation of unused funds (Bowmans Law) (A.O.Wanga Advocates).
5. Enhanced Documentation and Compliance: To qualify for tax deductions, donors must obtain detailed receipts from the recipient organizations. These receipts should include the recipient’s full name, address, tax personal identification number, date of the donation, purpose of the donation, and the donation amount. Additionally, proof of the utilization of the funds must be provided by the charitable organization, which ensures transparency and accountability (Bowmans Law) (Cliffe Dekker Hofmeyr).
Implications for Charitable Organizations and Donors
The proposed rules provide clarity on the key considerations the KRA will use to evaluate applications for tax exemption certificates and the allowability of donations for income tax purposes. This clarity helps charitable organizations and donors prepare their applications with a clear understanding of the required documents and information (Cliffe Dekker Hofmeyr).
However, some requirements, such as the restriction on retaining surplus funds, may pose challenges. For instance, this limitation could potentially discourage long-term fundraising efforts by charitable organizations, which often rely on accumulated funds to support large-scale projects and future initiatives (Bowmans Law) (A.O.Wanga Advocates).
Conclusion
The 2024 Finance Bill represents a significant overhaul of the regulatory framework governing charitable donations in Kenya. By repealing the Income Tax (Charitable Donations) Regulations, 2007, and introducing the Draft Income Tax (Donations and Charitable Organisations Exemption) Rules, 2023, the bill aims to enhance the effective use of charitable funds, ensuring they serve the public benefit. This transformation underscores the government’s commitment to fostering a transparent and accountable charitable sector that can significantly contribute to societal well-being.
These regulatory changes are expected to have a profound impact on how charitable organizations operate and manage their funds, ultimately fostering a more efficient and impactful charitable sector in Kenya
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