Implications of the PBO Act on NGOs in Kenya

Implications of the PBO Act on NGOs in Kenya

Overview of the Public Benefit Organization Act (PBO Act);

On May 14, 2024, the Cabinet Secretary for Interior and National Administration officially operationalized the Public Benefits Organizations (PBO) Act, 2013. This Act replaces the NGO Coordination Act, 1990, providing a more comprehensive framework for regulating non-profit organizations engaged in public benefit activities in Kenya with the aim of enhancing transparency, accountability, and operational efficiency.

By definition, a Public Benefit Organization (PBO) is a grouping of individuals or organizations, that is autonomous, non-partisan, non-profit-making, engaged in public benefit activities and is registered as a PBO by the Public Benefit Organizations Regulatory Authority (PBORA).

Benefits of the PBO Act

Organizations registering under the PBO Act will gain benefits such as:

Access to tax exemptions on income from donations, grants, interest, dividends and asset gains
Access to incentives for donations
Access to government financing for PBOs that partner with the government, through budget subsidies, grants for specific purposes, and contracts to perform certain work.
Preferential treatment in public procurement.
Access to training courses offered by government institutions.
Eligibility for membership of National Federation of PBOs.
Access to exemption on stamp duty and court fees.

Transition to PBO status

Entities that were previously registered under the NGO Coordination Act must register as a Public Benefit Organization under the new PBO Act by May 13, 2025 (one year from the operation date).
NGOs that were exempted from registration under the repealed Act are required to apply for registration under the PBOs Act within 3 months of the commencement date . I.e., August 2024.
International NGOs are also required to register with Public Benefits Organizations Regulatory Authority (PBORA) to operate in Kenya.

Organizations that fail to make this transition within the specified timeline risk losing their legal status and operational privileges.

Registration Requirements
To transition to PBO status, organizations must submit their application to the Public Benefits Organizations Regulatory Authority (PBORA). This includes providing:

The organization’s constitution.
Details of the founder(s).
A description of public benefit activities.
Financial reports and a prescribed fee.

New Tax Rules for Charitable Organizations
The Income Tax (Charitable Organizations and Donations Exemption) Rules, 2024, gazetted on June 18, 2024, set updated criteria for taxation of charitable organizations and donations. The rules etablishes clear criteria that charitable organizations must meet to qualify for income tax exemptions and also specify the procedures for determining which charitable donations are eligible for tax deductions.

Key provisions in the Rules

Tests for tax exemption

Charitable purpose test:Organizations should be established in Kenya for a charitable purpose being relief of the poverty or distress of the public, or for the advancement of religion or education. The rule further stipulates that charitable organizations may charge fees for their services and still meet the charitable purpose test but must ensure that portion of services is provided for free, e.g., scholarships for 10% of students from needy backgrounds.
Organizational test:Governing documents must define charitable purposes, restrict private benefits, and ensure assets transfer to similar charities upon dissolution.
Operational test:Activities must align with the stated charitable purpose, avoiding unlawful practices or unrelated uses of resources.
Public benefit test:Beneficiaries must be identifiable, and can confirm the benefits received. Charities must also define beneficiary selection criteria openly and based on need. While benefits may be restricted to specific groups or areas, such restrictions must be reasonable, justifiable, and not serve the members or their families.

Rules on donations

Donations that qualify for tax exemption are capped. i.e. Donations exceeding 50% of total donations from one donor in a financial year do not qualify for tax deduction. Donations must also be supported by documentation, including receipts, budgets, and compliance certificates.

Surplus funds

Charitable organizations are now restricted on the much surplus (or unspent) funds they can hold. Specifically, the surplus must not exceed 15% of the organization’s total income from donations and grants over a three-year period.

Exemption application process

Applications require comprehensive documentation, including registration details, financial statements, impact reports, and tax compliance certificates. Exemption certificates are valid for five years, during which organizations must file annual returns.

Revocation of exemption

Exemption certificates may be revoked if organizations fail to comply with the rules after which organizations can appeal such decisions to the Tax Appeals Tribunal.

Possible Future Link to PBO Act

It is likely that exemptions envisaged by these rules may be restricted only to those organizations registered as PBOs under the PBO Act. Such a change can be affected through an amendment to the Income Tax Act in the annual finance bill. This would solidify the tax benefits expected to accrue to the regulated PBOs.