Are Grant Funds Taxable by KRA in Kenya?

Whether running an NGO, a CBO, or a research project, successfully securing grant funding can completely transform your cause. But a stressful question often comes up: Are grant funds taxable by KRA in Kenya? Navigating Kenya’s tax laws can be challenging, and a single mistake can cause penalties that may interfere with your project’s progress. So, before you start spending that grant, it’s important to understand how the tax law works for nonprofits. Read on to find out what the KRA expects from donor funding.

The Legal Framework: Tax Exemption for Nonprofits in Kenya

Before we dive into whether grants are taxable, let’s first understand how tax exemption works in the nonprofit sector. Registering as a CBO, an NGO, or a charitable organisation doesn’t mean all the entity’s income is tax-exempt.

The Kenyan law offers a tax exemption for qualifying charitable organisations under Paragraph 10 of Part I of the First Schedule to the Income Tax Act. The qualifications for this exemption are outlined in the Income Tax (Charitable Organisations and Donations Exemption) Rules, 2024.

Under this law, you must be established strictly for recognised charitable purposes, which are listed as:

• The relief of poverty
• The relief of distress of the public
• The advancement of religion
• The advancement of education

If you qualify for this exemption, your organisation won’t pay income tax on the money accrued or derived from Kenya, but you must meet other requirements, which include spending that money within the country or on charitable purposes that directly support Kenyan citizens. Please note that there are different rules if the organisation has certain business income or is running unrelated business activities.

So, if you are trying to find international grant funding for your CBO or NGO, just receiving donor funding to run a community project doesn’t, by itself, automatically make the donation tax-exempt. Your nonprofit’s exemption status and compliance with the legal requirements are key to keeping that money tax-free and enjoying seamless operations.

When Can a Nonprofit Qualify for Income Tax Exemption?

Meeting the basic legal compliance is only the beginning. To qualify for and successfully secure the KRA’s tax exemption certificate, your organisation must meet these requirements:

• The governing documents and day-to-day activities must be aligned with the organisation’s charitable mission.
• Your nonprofit must have been in operation for at least a year. This means newly registered organisations aren’t eligible to apply for the income tax exemption because they haven’t built a solid track record that the KRA can assess.
• You must not be hoarding donor funds. Your financial records must show that you are spending the money for the good of the public. Under the donations exemption rules, a nonprofit can’t keep surplus funds exceeding an average of 15% of the total donation over three succeeding years without applying the extra money towards its charitable mission.
• Your organisation must meet the KRA’s requirements on how donor funds should be spent, including being expended within the country or for charitable purposes that directly benefit Kenyan residents.
• Your organisational charter must explicitly state that none of the founders, members, or directors privately benefits from the profits, assets, or surpluses.
• You must have a valid Tax Compliance Certificate (TCC), which proves that the organisation has fully paid and is up to date with the peripheral payroll taxes, such as PAYE, the Housing Levy, and Withholding Taxes (WHT).

What About Grants Used for Salaries, Administration, and Project Costs?

Many nonprofits are often confused about how KRA deals with the actual spending of donations. Although the grant receipt is income tax exempt, how the funds are disbursed triggers separate statutory laws, depending on what they are spent on. Here’s how the KRA treats the different operational sending categories:

• Project costs. Money used directly on community interventions, whether it’s supplying relief food or drilling water boreholes, might be income-tax-exempt, provided it meets the conditions for exemption.
• Staff salaries & stipends. Although the donor funds you use to pay salaries are tax-exempt, the organisation’s employees must pay the income tax, and you are expected to deduct the PAYE, the Affordable Housing Levy, SHIF, and NSSF. If you fail to meet these statutory obligations, your organisation faces a penalty when KRA conducts its regular compliance audits.
• Administrative overhead & professional fees. The grant money you use to settle utility bills and fund general administration is counted as operational costs, and therefore is tax-exempt. However, if you use administrative funds to acquire professional services, like hiring an IT consultant or legal advisors, you must deduct a Withholding Tax (WHT) from their invoice, and remit it to the KRA.

Also Read: Why Your CBO Isn’t Winning Grants (& How to Fix It)

Tax Compliance Tips for Nonprofits

To avoid causing administrative errors that can disrupt the smooth running of your organisational operations, implement these practices:

• Maintain proper record keeping. Keep track of all your earnings and expenditures. Maintain a clean paper trail of everything, from payroll schedules to invoices and project impact reports. This proves to the KRA auditors that you are spending the donor funds on your charitable mission.
• Ensure you file annual returns. Even with the tax exemption status, you still have to file your annual iTax returns by June 30 every year. Failing to do so will cost your nonprofit a KES 20,000 fine or 5% of the tax payable, and have your Tax Compliance certificate renewal blocked.
• Automate the statutory deadline reminders. Add the 9^th for payroll deductions (PAYE, Housing Levy, SHIF, NSSF) and the 20^th for Withholding Tax (WHT) to your calendar to minimise chances of automatic system penalties.
• Consider getting expert help. Understanding Kenya’s tax rules can be challenging, so seeking support from an expert is essential to ensure your nonprofit is fully compliant.

So, are Grant Funds Taxable by KRA in Kenya?

The short answer is: not automatically. The donor funding your nonprofit receives can be exempted from corporate tax if the organisation uses the money for its charitable mission and complies with the KRA’s income tax exemption conditions.

However, how you spend the funds attracts different deductions. Understanding the tax rules can be challenging, but it’s essential because a single mistake can bring about penalties that will interfere with your organisational operations. Ensure you track your earnings and expenditure, keep clean financial records, and stick to the monthly statutory deadlines. Ultimately, staying audit-proof is your best friend if you want your project to run seamlessly.

Looking for more guidance. Visit our resources page for valuable tools that can improve your organisation’s operations and help you prepare for donor funding.