Understanding the Taxation of Not-for-Profit Organisations in Kenya
Not-for-Profit Organisations (NPOs) are entities established primarily for charitable, social, or research-based purposes, not for personal or corporate gain. They often operate in sectors such as healthcare, education, agriculture, disaster relief, and social services. To operate legally in Kenya, NPOs must be registered with the appropriate regulatory body.
Are NPOs Tax-Exempt?
NPOs generally rely on donations and grants to fund their operations. While donations are not subject to tax, any income-generating activity undertaken by an NPO is taxable unless the NPO has:
- Applied for income tax exemption, and
- Been issued with an exemption certificate by the Kenya Revenue Authority (KRA)
Even with tax exemption status, compliance obligations remain, and all NPOs must obtain a Personal Identification Number (PIN) for filing tax returns and making tax remittances.
Employee Income Tax Obligations
Employees of NPOs are not exempt from paying income tax. If an employee earns Ksh 24,000 or more per month, the organisation must:
- Deduct PAYE (Pay As You Earn) tax at the applicable individual tax rates
- Remit the tax to KRA by the 9th day of the following month
Failure to comply may result in penalties and interest.
Withholding Tax (WHT) Obligations
There are no exemptions from withholding tax for NPOs. They must deduct and remit WHT on payments for specified services, such as:
- Professional or management fees
- Consultancy and training fees
- Agency and commission payments
Withholding tax rates vary depending on:
- The type of service, and
- The residency status of the service provider
Value Added Tax (VAT)
NPOs are not automatically exempt from VAT. They are required to:
- Pay VAT on taxable supplies and services
- Apply for specific transaction-based exemptions if eligible
VAT exemptions must be granted by KRA upon application and are not assumed.
Customs Duty Exemptions
To benefit from Customs Duty exemption, an NPO must:
- Submit a formal application to the Cabinet Secretary, National Treasury
- Route the application through the NGO Coordination Board
Approval is granted on a case-by-case basis, and only after thorough assessment.
Importance of Compliance
It is important to note that not all NPOs are exempt from tax by default. If an organisation engages in income-generating activities, such income is subject to taxation unless an exemption has been granted.
To remain compliant, all NPOs should:
- Register for a PIN
- File all applicable tax returns
- Pay taxes due on time
- Seek exemption status where eligible
Final Thoughts
Taxation of not-for-profit organisations in Kenya requires full awareness of applicable tax obligations. Whether it’s PAYE, VAT, WHT, or Customs Duty, every NPO must ensure it meets compliance standards, especially when involved in revenue-generating operations.
