INCOME TAX EXEMPTION – The incomes generated by not-for-profit organizations (NPOs) are exempted from taxation in Kenya. The income of an institution, body of persons or irrevocable trust is exempted from taxation provided the body is of a public character is established solely for the purposes of the relief of the poverty or distress of the public, or for the advancement of religion or education— such a body is established in Kenya; or whose regional headquarters is situated in Kenya,
The income is exempted from tax provided it is expended in Kenya or for the benefit of residents of Kenya
(refer to Paragraph 10, First schedule, income tax act CAP 470)
Gains and profits arising from business activities carried on by the NPOS (and such other bodies covered in this section like churches) are not exempted from tax unless such gains or profits are applied solely to such purposes (purposes or relief of distress, or advancement of religion or education) and either—
- such business is carried on in the course of the actual execution of such purposes;
- the work in connection with such business is mainly carried on by beneficiaries under such purposes; or
- such gains or profits consist of rents received from the leasing or letting of land and any chattels leased or let therewith;
Tax exemption Certificate
The tax exemption shall be valid for a period of five years but may be revoked by the Commissioner for any just cause; and
An exemption shall be issued within sixty days of the lodging of the application.
Taxation of NPO Employees
The salaries and emoluments payable to employees working to Not for profit organizations are subject taxation. Therefore, NPOs are required to operate PAYE system just like any other employer and bring all the chargeable benefits of their employees’ tax.
However, on case by case basis particularly where a bilateral agreement exists, emoluments payable to expatriate staff out of foreign sources may be exempted from taxation.
(Refer paragraph 27, of the first schedule of the Income tax act CAP 470.)
WITHHOLDING TAX ON SERVICES– NPOs are required to withhold tax at the appropriate rates and remit them on the due dates on services they receive provided such services are subject to withholding taxes. Therefore, when NPOs engage contactors or consultants for instance, they must withhold that tax just like any other recipient of such services.
VAT on supplies to NPOs
Generally, to purchase of supplies by NPOs is subject to VAT just like any other supply, in other words NPOs are not exempted from VAT.
However, paragraph 100, first schedule of the VAT act 2013- (exempt goods) exempts taxable goods for emergency relief purposes. This applies to supplies acquired by relief agencies and Nongovernmental organizations for use during disaster periods or in refugee camps.
Zero rating of VAT applies to supply of goods to privileged persons and institutions. These institutions include the united Nations, its specialized agencies and foreign missions. Supplies for their projects are covered in this zero rating. It also covers importation of household effects by employees of Diplomatic missions and specialized agencies, the supply of goods and equipment for official use by donor agencies or the Red-cross or St Johns ambulance.
VAT exemption on services offered by NPOs
Paragraph 11, of the First Schedule PART II of the VAT act 2013 (exempt services) – exempts the supply of services rendered by educational, political, religious, welfare and other philanthropic associations to their members, or social welfare services provided by charitable organizations registered as such provided they are approved by the Commissioner of Social Services.
Please note: This exemption shall not apply where any such services are rendered by way of business.
Conclusion- For more details, the provisions of tax laws above should be read together with the Non-governmental coordination act 1990 and the Privileges and immunities Act CAP 179, laws of Kenya.