Tax Obligations for Non-Governmental Organizations (NGO’s); Now Public Benefit Organizations (PBO’s)

In Kenya, Non-Governmental Organizations (NGOs) play a crucial role in various sectors such as health, education, human rights, and environmental conservation, among others. NGOs in Kenya are primarily governed by the Non-Governmental Organizations Co-ordination Act, which provides a legal framework for their registration, operation, and regulation. NGOs must register with the Non-Governmental Organizations Coordination Board, which is the statutory body responsible for their regulation.  

In May 2024, the Public Benefits Organisations Act, came into effect. This replaces the Non-Governmental Organizations Co-ordination Act. NGO’s are now required to register under the PBO Act within a year of enactment, being May 2025. 

Registration of NGO’s 

NGO’s typically engage in activities that are charitable, educational, religious, or otherwise beneficial to the community. These organizations can mobilize resources and create significant social impact. Registering as an NGO in Kenya provides several advantages, including legal recognition, the ability to operate bank accounts, apply for grants, and receive donations. Registration becomes prudent when an organization seeks to formalize its operations, expand its reach, and ensure compliance with the regulatory framework governing non-profits in Kenya. 

Registered NGO’s must adhere to periodic reporting requirements, including submitting annual returns and audited financial statements to the NGO Coordination Board. Such organizations are required to establish a structured governance framework, usually involving a Board of Directors or Trustees.  

Tax Obligations for NGO’s 

Navigating the tax landscape is a critical aspect of running an NGO. Understanding the various tax obligations and opportunities for exemptions can significantly impact the organization's financial health. Below are the key tax elements applicable to NGOs in Kenya: 

Income Tax Exemption 

NGOs may be exempt from income tax on their income if they apply for and receive a tax exemption certificate from the Kenya Revenue Authority (KRA). The income should be utilized exclusively for the objectives of the NGO which include charitable, educational, religious, or other purposes beneficial to the community. It is essential that these funds are not diverted for purposes outside the NGO’s mission. Practically, the KRA issues a tax exemption certificate between 2 -3 years after an entity’s operation in Kenya, at which time the KRA can audit the entity’s affairs for compliance. During such an audit, the KRA would particularly want to be satisfied that the entity’s income and expenses are all for charitable purposes and that none of the income is chargeable to tax. It is important to note that this exemption is subject to approval every five years by the KRA, which reserves the right to revoke it for valid reasons. 

Value Added Tax (VAT) 

NGOs may be liable to charge VAT on the supply of goods and services if they engage in taxable activities beyond their non-profit activities. They may apply for VAT exemption on imported goods used specifically for their projects. This requires approval from the National Treasury. 

Withholding Tax 

NGOs are required to deduct and remit withholding tax on various payments such as professional fees, management fees, consultancy fees, and other specified payments as per the Income Tax Act. Compliance with withholding tax obligations is mandatory to avoid penalties. 

Customs Duty 

NGOs can benefit from exemptions on customs duty for goods imported for humanitarian and development work. This exemption helps reduce the financial burden on NGOs importing essential supplies for their operations. 

Employment Taxes 

As Employers, NGOs must comply with the Pay as You Earn (PAYE) requirements for their employees. They must also remit other statutory deductions such as the National Social Security Fund (NSSF), Housing Levy, and the National Hospital Insurance Fund (NHIF) soon to be the Social Health Insurance Fund (SHIF). 

Tax Compliance Certificate 

NGOs must ensure they have a valid tax compliance certificate from the KRA demonstrating tax compliance, which is often necessary for various operational and regulatory purposes. 

In summary  

To maximize the benefits and ensure compliance, it is crucial for NGOs to maintain accurate financial records and adhere to the regulatory requirements. NGOs must maintain accurate and detailed financial records to demonstrate their income sources, expenditures, and compliance with tax regulations. By adhering to tax regulations, NGOs can access valuable tax exemptions that allow them to utilize more resources for their social objectives, maintain a positive reputation as a responsible and transparent organization and avoid penalties and fines for non-compliance.  

How we can help  

At CM-SME Club, we understand the challenges faced by NGO’s in Kenya. Our team of legal professionals is equipped to provide guidance, helping your organization optimize its tax liabilities and remain compliant with evolving laws. For assistance, contact us at law@cmsmeclub.com

Disclaimer: This content is for informational purposes only and should not be construed as legal or financial advice.​ 

 Contributors: 

Tabitha Muchiri  

Waceera Kabando 

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