The Legal Framework for Charitable Organizations and Tax Exemption

On 13th February 2025, the Kenya Revenue Authority (KRA) issued a Public Notice on the implementation of the Income Tax (Charitable Organizations and Donation Exemption) Rules, 2024 (the “Rules”). These Rules introduce significant compliance requirements for charitable organizations seeking tax exemptions. Under the new framework, tax exemption certificates will only be issued or renewed for organizations that meet the stipulated criteria.

One of the key challenges facing charitable organizations has been determining the appropriate recourse when their applications for tax exemption are denied. A recent judicial pronouncement has now provided much-needed clarity on this issue.

Judicial Determination on the Right to Appeal Tax Exemption Rejections

In the case of Saleh Mohammed Trust v Commissioner of Domestic Taxes (Income Tax Appeal E221 of 2023) [2025] KEHC 17214 (KLR) (Commercial and Tax) (14 February 2025), Lady Justice Rhoda Rutto addressed the jurisdictional issue surrounding appeals of tax exemption rejections.

Previously, in Tax Appeal No. 1545 of 2022, the Tribunal had ruled that it lacked jurisdiction to entertain appeals against the rejection of tax exemption applications. The Tribunal reasoned that such decisions did not qualify as "tax decisions" under the Tax Procedures Act, Cap 469A. This position left affected organizations uncertain about their legal options.

The High Court, however, overturned this view, affirming that the rejection of a tax exemption application constitutes an "appealable decision" under Section 3(1) of the Tax Procedures Act. The Court held that such decisions fall within the category of "any other decision made under a tax law," excluding only tax decisions or decisions made in the course of making a tax decision.

Key Arguments and Court Analysis

The appellants argued that the rejection of an exemption application is an appealable decision, independent of the requirement to first lodge a Notice of Objection. They contended that the Commissioner had erroneously categorized it as a "tax decision" and that the Tribunal was the correct forum for appeal.

Conversely, the Commissioner maintained that the appropriate recourse was through judicial review, asserting that the rejection did not meet the statutory definition of an appealable decision under the Tax Procedures Act. The Commissioner further relied on the ejusdem generis rule of statutory interpretation to argue that “any other decision made under a tax law” should be read restrictively.

The Court rejected the Commissioner’s position, emphasizing that administrative decisions made under tax law are subject to appeal mechanisms. It reaffirmed the principle that judicial review is a remedy of last resort, pursuant to Section 9(2) of the Fair Administrative Action Act. The Court directed that all internal mechanisms, including appeal to the Tribunal, must first be exhausted before resorting to judicial review.

Implications of the Decision

The ruling has far-reaching implications for charitable organizations seeking tax exemption:

1. Right to Appeal - The rejection of a tax exemption application is now firmly established as an appealable decision. Affected organizations can directly appeal to the Tribunal without first filing a Notice of Objection.
2. Clarification of Legal Procedure - The decision eliminates previous ambiguities surrounding the appropriate dispute resolution forum, ensuring that applicants have a clear procedural pathway.
3. Tribunal’s Expanded Role - The Tribunal is now recognized as the competent authority to hear and determine appeals on tax exemption applications, strengthening its oversight over administrative decisions by the KRA.

Unless overturned by the Court of Appeal, this judgment establishes a critical precedent for tax-exempt entities, reinforcing their right to a fair administrative process. Organizations seeking tax exemption should take note of this development and ensure compliance with the new Rules while being aware of their appellate rights.

Adapted from: Lilian Renee Omondi; William Ochieng; Melanie Nkirote Mwenda