Kenya is a Commonwealth country with a common law system. There are four primary types of not-for-profit organizations (NPOs):
Companies;
Societies;
Trusts; and
Non-governmental Organizations (NGOs).
Other not-for-profit legal forms, which are outside the scope of this Note due to their limited interaction with U.S. grantmakers, include churches, political parties, and trade unions.
For its income to be exempt from income tax, an organization must have been established solely to relieve poverty or distress of the public, or to advance religion or education. Kenya also subjects certain sales of goods and services to VAT, with a fairly broad range of exempt activities (VAT Act, Second Schedule, Third Schedule). The tax laws confer only limited tax benefits on corporate donors and on individual donors.
Constitution of Kenya (Supervisory Jurisdiction and Protection of Fundamental Rights and Freedoms of the Individual) High Court Practice and Procedure Rules [2006] (The status of these rules is yet to be determined in the light of the new Constitution)
Kenyan law creates four primary types of NPOs: NGOs, companies, societies, and trusts.
NGOs
The NGO Coordination Act defines an NGO as “a private voluntary grouping of individuals or associations, not operated for profit or for other commercial purposes but which have organised themselves nationally or internationally for the benefit of the public at large and for the promotion of social welfare, development, charity or research in the areas inclusive of, but not restricted to, health, relief, agriculture, education, industry and the supply of amenities and services.[NGO Coordination Act, sec. 2, as amended by legal notice 11 of 1992]" Designation as an NGO confers certain tax benefits and imposes a series of regulations.
In July 2006, the Ministry of National Heritage presented Sessional Paper No. 1 of 2006 to the Kenyan Parliament. The Sessional Paper, which subsequently was passed by the Parliament, [1] seeks to, inter alia: promote interaction between NGOs and the communities where they work in an effort to improve service delivery; integrate government and NGO policies to affect the “social and economic transformation” of Kenya; and involve the individual in NGO and government affairs (Sessional Paper No. 1 of 1996).
Companies
A number of NPOs are registered as companies whose liability is limited by the guarantee of the members. [2] Under the Companies Act, a group or association of persons can incorporate as a private or public company (Companies Act, Section 4(1)). For companies limited by shares a private company requires at least two and no more than 50 shareholders. A public company requires at least seven shareholders.
Societies
Under the Societies Act, a society is "any club, company, partnership or other association of ten or more persons, whatever its nature or object, established in Kenya or having its headquarters or chief place of business in Kenya [Societies Act, sec. 2]." A branch of a society also qualifies as a society. The definition specifically excludes trade unions, cooperatives, corporations, and certain other entities. A society's governing documents are called the Constitution or Rules of the Society [Societies Act, sec. 2]. Societies are registered and regulated by the Registrar of Societies.
Trusts
A trust is an entity created to hold and manage assets for the benefit of others. Trusts can be established under the Trustees (Perpetual Succession) Act only for religious, educational, literary, scientific, social, athletic, or charitable purposes [Trustees (Perpetual Succession) Act, Chap. 164, sec 3(1)]. Charitable purposes may also be affected by forming a trust by way of a trust deed.
B. Public Benefit Status
An NGO is required to benefit the public at large and promote social welfare, development charity, or research in areas including, but not restricted to, health, relief, agriculture, education, industry, and the supply of amenities and services [NGO Coordination Act, sec. 2, as amended by legal notice 11 of 1992]. Other NPOs [3] are not restricted to public benefit purposes.
The regulatory scheme for NPOs in Kenya is complex, combining substantive and procedural statutes, common law rules embodied in case law, and administrative practices [See Sihanya, The Regulatory Regime Governing NGOs in Kenya (1996)]. In addition, Kenyan legislation regulates an organization substantially through enforcement of the organization's founding documents. Within this context, the Note examines issues of local law relevant to equivalency determinations.
The Rules of a Society must stipulate the purpose for which funds can be used, and must prohibit distribution of funds to members [Par. 11, First Schedule, Societies Act]. However, Kenyan law does not specify particular language for these clauses.
Kenyan law does not require trusts or companies to prohibit inurement.
In the event of dissolution, whether voluntary or involuntary, the NGO must use its assets to pay creditors. Any surplus remaining must be transferred to an organization pursuing similar objectives [NGO Coordination Regulations 1992, 2nd schedule, point 12].
Companies
When a company dissolves, its assets are applied first to statutory preferential payments, such as any outstanding taxes; second, to liabilities; and third, to members according to their rights and interests in the company, unless the Articles of Association provide otherwise [Companies Act, sec. 296].
Societies
Under the Societies Act, a receiver is appointed to handle the dissolution of a Society [Societies Act, Section 33]. According to the Society's constitution, the receiver proposes a scheme for distributing the assets, which must be approved by the Minister [Societies Act, ss. 33-34]. The Act does not explicitly prohibit distribution of assets to members upon the Society's dissolution. Section 309-317 of the Companies Act applies to the dissolution of a society and Section 35 (2) of the Societies Act states that the priority in which debts are to be paid is the same as priority of payment of debts for companies being dissolved. The priority is provided under Section 311 of the Companies Act.
Trusts
The Minister can order an incorporated trust to be dissolved if it has ceased to exist or if its objectives have become incapable of fulfillment. Upon dissolution, the trust's land shall be transferred to the county council in the jurisdiction where the land is situated; if the land is not the trust’s land, it shall be transferred to the government. The law does not provide for distribution of other assets [Trustees (Perpetual Succession) Act, sec. 16(2)].
Generally, a legal entity, upon its establishment and (where required) registration, can undertake any legal activity.
2. Economic Activities
NGOs by definition are “not operated for profit or other commercial purposes" [NGOs Coordination Act, sec 2].However, the regulations do not bar an NGO from undertaking substantial economic activities in pursuit of its purposes.
Other NPOs can engage in economic activities consistent with their governing documents.
An NGO cannot become a branch of, affiliated with, or connected with any organization or group of a political nature established outside Kenya and shall not dissolve itself except with the prior consent in writing of the Board obtained upon written application addressed to the Director and signed by three of the officers of the Organization [NGOs Coordination Regulations, par. 21(1)(b) and (c)]. An NGO can affiliate with a political organization inside Kenya, though the Government discourages this practice.
Companies
According to Kenyan common law, companies are free to engage in political or legislative activities if their governing documents permit it.
Societies
Most political parties are registered as societies. Other types of societies can engage in political activities if their governing documents permit it.However, a society cannot function as a political party until it is registered in accordance with the provisions of the Political Parties Act and meets the requirements set out under Article 91 of the Constitution [Sec. 4 of the Political Parties Act, 2011]. [4]
Trusts
The trust deed stipulates the activities in which a trust can engage.
Kenya in general guarantees freedom of expression, association, assembly, and movement and bars discrimination on the grounds of gender, race, sex, pregnancy, marital status, ethnic or social origin, color, age, disability, religion, conscience, belief, culture, dress, language or birth [The Constitution of Kenya, Articles 26-51]. Furthermore, an NGO's activities must "ensure equality of opportunity for all regardless of nationality, ethnic background, gender, religion or creed" [NGO Council Code of Conduct, sec. 10(c)]. [5]
In February 2006, the Constitution of Kenya (Supervisory Jurisdiction and Protection of Fundamental Rights and Freedoms of the Individual) High Court Practice and Procedure Rules, 2006 were enacted by the Chief Justice. Where contravention of any fundamental rights and freedoms of an individual under Articles 26-51 of the Constitution is alleged or is apprehended, an application may now be made directly to the High Court. These rules strengthen the ability of individuals to enforce fundamental rights and freedoms by clarifying the procedure to apply to the High Court under Article 22 of the Constitution [Constitution of Kenya (Supervisory Jurisdiction and Protection of Fundamental Rights and Freedoms of the Individual) High Court Practice and Procedure Rules, 2006]. [6] However, under the Constitution it is noted that the absence of rules does not limit the right of any person to commence court proceedings to enforce the Bill of Rights and to have the matter heard and determined [Article 22(4) of the Constitution of Kenya, 2010].
With regard to institutions of higher education, there are seven public universities established by Acts of Parliament and 19 private chartered universities. Discrimination on the grounds of ethnicity, sect, or creed is barred under the various public universities Acts. [7] Discrimination on the basis of religion when admitting students is also prohibited [Article 32 (3) of the Constitution].
Private universities are authorized to offer degrees, post graduate diplomas and certificates under the Universities Act [Cap 210B of 1986] and the Universities Rules of 1989. Neither the Act nor the Rules expressly bar acts of discrimination in private universities and any public universities that may be established otherwise than by an Act of Parliament.
Likewise, the Education Act [Cap 211 Laws of Kenya] does not expressly prohibit discriminatory practices in primary and secondary educational institutions.
The Employment Act of 2007 also seeks to address the concept of discrimination in employment by espousing (i) the promotion of equality of opportunity in employment (ii) the elimination of discrimination in any employment policy or practice – (including against prospective employees: race, color, sex, ethnic origin, HIV status, disability, pregnancy) and (iii) the payment of equal remuneration for work of equal value [Employment Act 2007, sec. 5].
The HIV and AIDS Prevention and Control Act prohibits discrimination on the grounds of actual, perceived or suspected HIV status of a person in the workplace or in schools or accessibility to loans and credit facilities [HIV and AIDS Prevention and Control Act, sec. 31-32].
Kenyan law does not restrict other organizations or persons from controlling a Kenyan not-for-profit organization beyond stating that an NGO must be private and voluntary. Accordingly, a for-profit entity might establish an NPO and continue to control it. Likewise, a Kenyan NPO could be controlled or owned by an American grantor charity, which would have to be disclosed in the affidavit.
For its income to be exempt from income tax, an organization must have been established solely to relieve poverty or distress of the public, or to advance religion or education. In addition, the Commissioner of Income Tax must conclude that the income is expended either wholly within Kenya or in ways that benefit the residents of KenyaKenya [Income Tax Act, First Schedule, Cap 470, par.10 as amended by legal notice No. 6 of 2001].
Income consisting of profits from a business is subject to an additional restriction. Such income is exempt from tax only if it meets the criteria in the previous paragraph and if one of the following is true:
(a) the business is carried on in the course of advancing the organization's stipulated purposes; or
(b) the business is conducted mainly by beneficiaries of those purposes; or
(c) the gains or profits consist of rents (including premiums or similar consideration in the nature of rent) received from leasing land and attendant chattels.
As of January 2007, individuals and corporations generally can deduct any cash donations from their income tax to a charitable organization, provided the charitable organization:
a. is registered or exempt from registration under the Societies Act or the Non-Governmental Coordination Act, 1990; and
b.its income is exempt from tax under the provisions above [Income Tax Act, sec. 15(2)(w)].
The same applies to any project approved by the Minister of Finance [Income Tax Act, sec. 15(2)(w)]. Expenditures of a capital nature by a person on the construction of a public school, hospital, road or any similar kind of social infrastructure can be deducted as well with prior approval of the Minister [Income Tax Act, sec. 15(2)(x)].
Furthermore, deductibility is permitted for expenditures on scientific research to advance the donor's business, including sums paid to approved scientific research institutes or universities, provided certain conditions are satisfied [Income Tax Act, sec. 15(2)(n)].
C. Value Added Taxes
Under regulatoin 30 of the NGO Co-ordination Regulations 1992, if an organization requires exemption from VAT on goods and services required to meet its objectives and on income-generating activities (or income for expatriate employees), an application must be made through the NGO's Board to the Minister of Finance.
“Social welfare services" provided by a charitable organization are VAT exempted, provided the organization satisfies two criteria:
(a) It must be registered under the Societies Act or NGO Act, or exempted from registration by the Registrar of Societies or the NGO Co-ordination Board; and
(b) Its income must be exempt from tax under the Income Tax Act and approved by the Commissioner of Social Services.
Such services are not treated as taxable supplies, and no VAT is charged on them. [VAT Act, Third Schedule, par. 7].
The VAT Act also exempts services to members performed by trade, professional, and labor associations, as well as educational, political, religious, welfare, and other philanthropic associations, provided that this shall not apply where any such services are rendered by way of business [VAT Act, Third Schedule, par 16]. Certain foods are also VAT exempt [VAT Act, Second Schedule].
Zero-rated supplies include gifts to registered societies or NGOs (or societies or NGOs exempt from registration) whose income is exempt from income tax if they meet certain criteria [VAT Act, Fifth and Eighth Schedules]. If the tax exceeds 500,000 Kenyan Shillings (Kshs.) (approximately US $6,250), written approval must also be obtained from the Treasury [VAT Act, Eighth Schedule, Part A, par. 9]. If the goods are imported, purchased by, or consigned to an organization other than a charitable institution, the VAT Commissioner must be satisfied that they will be donated to a charitable organization [8] [VAT Act, Eighth Schedule, Part A, par. 9] (1)(a)(b)(c) and 9 (3)(b)].
D. Import Duties
Gifts to charitable institutions are exempt from customs duties under the following circumstances:
(a) Goods donated or purchased for donation to a non-profit organization or government-approved institution for: their official use; free distribution to the poor and needy; use in medical treatment, education, religious or rehabilitation work; or other purposes approved by the government [Customs and Excise Act, Sec. 138(1)(c)].
(b) Certain goods, including some passenger motor vehicles, and office, audio and visual electronic equipment are excluded from the custom duties exemptions. Textiles, new and used clothing, footwear, and certain foods also are excluded from the customs duties exemption. However, a remission of the duty may be granted if the goods are donated or purchased for donation to registered homes for poor and needy persons. The remission is subject to ministerial approval. Remissions also may be granted when the goods are imported during periods of civil strife, national calamity or disaster as declared by law or where intended for use in officially recognized refugee camps in Kenya (The Customs and Excise (Remission) (Charitable Organisations) Order 1999 as amended by Legal Notice 46 of 2004).
(c) The Treasury must approve any duty exemption that exceeds Kshs. 500,000 [Customs and Excise Act, Third Schedule, sec. 12].
E. Double Tax Treaties
There are no double tax treaties between the United States and Kenya.
[1] The Sessional Paper was developed by the Ministry in consultation with various stakeholders in the NGO sector. The intention is that the Sessional Paper contents will be reflected in a bill to be presented to Parliament for formal enactment. Although its contents currently may not be binding, the Sessional Paper serves as a useful indication of the government’s future policy in relation to the NGO sector. A summary of the contents of the Paper is briefly outlined in Appendix A.
[2] It is also possible in Kenya to establish a company limited by shares, however this is typically established to carry out for-profit trading activities.
[3] For purposes of this Note, the term “other NPOs” refers to those not-for-profit organizations that do not qualify as NGOs.
[4] However, no society in Kenya can affiliate with any political organization or group outside Kenya (Societies Act, sec. 11(1)(a)).
[5] This code is written and enforced by a statutorily-established council of voluntary agencies (NGO Coordination Act, secs. 23-24). The council can recommend the suspension or cancellation of an NGO's registration certificate (Code of Conduct, sec. 20(4)(b); NGO Coordination Act, sec. 16).
[6] The constitution now provides under Article 22 (1) that every person has the right to institute court proceedings claiming that a right or fundamental freedom in the Bill of Rights has been denied, violated or infringed or is threatened. As of March 2012, the status of the above rules has yet to be established; however that Article further provides that the Chief Justice shall make rules providing for the above court proceedings-Article 22(3).
[7] The following section is repeated verbatim in the various public university Acts:
Admission to the university as candidates for degrees, diplomas, certificates or other awards of the University shall be open to all persons accepted as being qualified by the Senate without distinction of ethnic origin, sect or creed and no barrier based on such distinction shall be imposed upon any person as a condition of his becoming or continuing to be, a professor, lecturer, graduate or student of the university or of his holding any office therein, nor shall any preference be given to, or advantage be withheld from, any person on the basis of ethnic origin, sect or creed.
[8]If the Minister of Finance concludes that it is in the public interest to do so, the Minister also has the discretion to remit, in whole or in part, VAT payable in respect of any taxable goods or services, if he is satisfied that it is in the public interest to do so [VAT Act, sec. 23(1)]. In practice, such rebates are very difficult to obtain.
