Times Tower, the Kenya Revenue Authority's head office in Nairobi.
The Tax Appeals Tribunal has struck down a tax demand by the Kenya Revenue Authority (KRA) against a charity group, Premchandbhi Foundation, in a ruling that redraws how Kenya taxes charities’ investment income and limits enforcement by the authority.
In the decision, the tribunal allowed the foundation’s appeal and set aside assessments of Sh24.3 million in withholding tax and Sh72.6 million in capital gains tax.
KRA had accused the charity organisation of failing to pay taxes on Sh335 million in dividend income and gains from the sale of shares worth nearly Sh989 million between 2021 and 2023.
The authority argued that the income did not qualify for tax exemption because most of it was reinvested, instead of being spent directly on charitable activities.
But the tribunal ruled that a valid tax exemption certificate protects a charity’s income, provided it is ultimately used to support its mandate.
It drew a clear distinction between spending and investing, saying charities can reinvest funds to sustain their operations.
“It is prudent for a charity or entity to invest part of its gain, and this should not be discouraged. Charities need not solely depend on donations for survival,” said the tribunal.
The judges added that investment should not be treated as a misuse of funds, noting that it is “long-term and of a capital nature,” aimed at future income.
They noted that according to the KRA Act, Paragraph 10 of the First schedule, does not prohibit investment of income or even doing business.
The ruling delivers a major setback to KRA’s enforcement approach against charities and foundations with significant investment portfolios.
It also clarified that tax exemption is not lost simply because income is not immediately spent.
KRA had maintained that at least half of the income should have gone directly to charitable activities, arguing that only about two per cent was used for that purpose.
However, the tribunal faulted the tax authority for failing to prove that the funds were used outside the foundation’s objectives.
“Focusing on investment of the income alone was not enough,” the bench said, adding that KRA needed to demonstrate misuse beyond the charity’s mandate.
The tribunal further criticised the authority for relying on 2024 regulations to justify assessments for earlier years, stressing that tax laws cannot be applied retrospectively unless expressly stated.
Premchandbhi Foundation, established in 1959, operates charitable programmes in education, healthcare, poverty relief, and community welfare.
It argued that its investment income, including dividends and capital gains, was used to fund its activities and ensure long-term sustainability.
The foundation also told the tribunal it held a valid income tax exemption certificate covering the period under review, which had not been revoked.
The judges agreed, saying the certificate created a legitimate expectation that the organisation’s income would remain tax-exempt.
“Issuance of the tax exemption certificate and the same having not been revoked actually created a legitimate expectation that the appellant’s activities were allowed,” said the tribunal.
The tribunal noted that there was nothing before it to indicate that the appellant’s activities of investing the funds went against the provisions of the Income Tax Act.
It warned that forcing charities to spend all their income immediately would undermine their survival.
“If the entire income were to go to charity at once, the entity would close its doors soon thereafter,” the ruling stated.
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