Mixed-Membership SACCOs Taxation

Introduction and Case Overview

In a landmark double ruling on 7 August 2026, Kenya’s Tax Appeal Tribunal delivered two significant judgments involving Imarika Savings and Credit Cooperative Society Limited, setting a powerful precedent for the taxation of SACCOs with mixed membership. The coordinated judgments in Imarika Savings and Credit Cooperative Society Limited v Commissioner of Domestic Taxes (Tax Appeal 1323 of 2025 [2026] KETAT 291 and Tax Appeal E1138 of 2025 [2026] KETAT 284) address a fundamental question that has troubled Kenya’s cooperative sector for years: How should a SACCO that admits both individual and non-individual members be classified and taxed under Section 19A of the Income Tax Act?

The Tribunal’s rulings established that SACCOs with mixed membership cannot be subjected to a single tax regime but must instead have their income severed and taxed proportionally based on the nature of their membership. This decision has profound implications for over 180,000-member SACCOs and the broader cooperative movement in Kenya.

Factual Background

Corporate Structure: The Appellant, Imarika Savings and Credit Cooperative Society Limited, is a SACCO registered under the Cooperative Societies Act Cap 490 Laws of Kenya and licensed by the Sacco Societies Regulatory Authority (SASRA). It was registered on 14th September 1974 as a primary cooperative society.

Membership Composition: During the relevant period (2020 to 2023), the Appellant’s membership consisted of:

• Individual members (natural persons): 96.68% to 97.06% of total membership
• Non-individual members (CBOs, schools, churches, and other registered entities): 2.94% to 3.32% of total membership

KRA Audit Findings: Following a review of the Appellant’s declared income, the Respondent issued:

• Case 1 (Tax Appeal 1323 of 2025): PAYE additional assessment of Kshs 202,415.31 and corporation tax additional assessment of Kshs 591,982,443 on 4th August 2025, totaling Kshs 876,099,098
• Case 2 (Tax Appeal E1138 of 2025): Assessment dated 28th June 2025

Objection and Appeal: The Appellant objected to the assessments, but the Respondent rendered its objection decisions confirming the assessments. Aggrieved, the Appellant lodged appeals with the Tax Appeals Tribunal.

The Core Legal Dispute

The dispute centered on the interpretation of Section 19A(7) of the Income Tax Act, which defines:

• “Primary society” as a co-operative society registered under the Cooperative Societies Act, the membership of which is restricted to individual persons
• “Designated co-operative society” as a co-operative society registered under the Cooperative Societies Act
• “Individual” under Section 2 of the ITA as “a natural person”

The Appellant’s Position: Imarika argued it should be classified as a primary society because its membership was overwhelmingly individual (over 97%), and the non-individual members were merely formations of individual members (CBOs). It relied on the doctrine of mutuality, the principle that no person can trade with themselves, and argued that income from members should not be taxed.

The Respondent’s Position: The KRA contended that the Appellant’s membership included churches, schools, and community-based organizations that are not natural persons, and therefore the SACCO should be taxed under Section 19A(2) as a designated co-operative society, not under Section 19A(4) as a primary society.

Tribunal Analysis and Findings

1. Classification of the Appellant

The Tribunal found that the Appellant was a “mishmash” of both a designated primary society and a designated co-operative society because of its mixed membership of individual and non-individual members.

Key Finding: A strict reading of the law would impose the position that both Sections 19A(2) and 19A(4) should be applicable to the Appellant. The Tribunal held that:

“It would be unlawful and inequitable to subject individual members of the cooperative society to Section 19A(2) of the ITA, the same way that the corporate members of the Appellant should not be subject to Section 19A(4) of the ITA.”

The Tribunal emphasized that taxation should not be implied, crafted, or imputed based on equity, but must be based on what the law provides.

2. The Severability Principle

The Tribunal established that income from a mixed-membership entity like the Appellant is capable of being severed into two divisible parts, and that the correct interpretation of the law would be to ensure that the respective members of the society are exposed to taxation as required under Section 19A(2) and (4) of the ITA.

This principle means:

• Income from individual members should be taxed under Section 19A(4) (the more favorable primary society regime)
• Income from non-individual members should be taxed under Section 19A(2) (the standard designated society regime)

3. The Doctrine of Mutuality

The Tribunal affirmed the doctrine of mutuality, which recognizes that:

• No person can trade with themselves
• Income earned from mutual operations with members should not be considered taxable income
• The Respondent disregarded this principle by focusing solely on membership classification

The Tribunal relied on Muramati District Tea Growers Sacco Society Ltd (Unaitas Sacco) v Kenya Revenue Authority [2015] KEHC 5055 (KLR) , where the court found that it was not all income generated by a co-operative society that could be deemed to be for the mutual benefit of its members.

Similarly, in Nyeri Teachers Sacco v Commissioners of Domestic Taxes [2016] (Income Tax Appeal No. 6 of 2013) , the court held that a mutual society may have commercial activities, and that income from those commercial activities is taxable.

4. Principles of Tax Interpretation

The Tribunal applied established principles of tax interpretation, including:

Keroche Industries Limited v Kenya Revenue Authority & 5 others [2007] 2 KLR 240:

“Taxation can only be done on clear words and cannot be on intendment. Linked to this is that a penalty must be imposed in clear terms. Finally, even where the inclination of the legislature is not clear or where there are two or more possible meanings, the inclination of the court should be against a construction or interpretation that imposes a burden, tax, or duty on the subject.”

Republic v Kenya Revenue Authority Ex parte Bata Shoe Company (Kenya) Limited [2014] eKLR:

“Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than is due to the taxman. The taxman, on the other hand, is entitled to collect up to the last coin that is due from a taxpayer.”

5. The Respondent’s Error

The Tribunal found that the path taken by the Respondent to subject the Appellant, irrespective of its mixed membership, to taxation under Section 19A(2) of the ITA was erroneous and unlawful, as it subjected the Appellant to payment of tax that was not due or payable by it.

Implications of the Ruling

For SACCOs with Mixed Membership

1. Severed Taxation: SACCOs with both individual and non-individual members must now have their income severed and taxed proportionally based on the nature of the membership generating that income.
2. Membership Composition Matters: The definition of a “primary society” under Section 19A(7) requires membership to be “restricted to individual persons.” The inclusion of any non-individual members triggers Section 19A(2) treatment for income derived from those members.
3. Doctrine of Mutuality: The principle that income from members should be treated differently from commercial income remains valid in Kenyan tax law.
4. Documentation Requirements: SACCOs should maintain clear records of:

For the Kenya Revenue Authority

1. Proper Classification: KRA cannot apply a blanket Section 19A(2) treatment to SACCOs with mixed membership. It must conduct a proper analysis of membership composition.
2. Severability of Income: KRA must sever income between member and non-member activities when assessing mixed-membership SACCOs.
3. Administrative Fairness: The Authority must consider all applicable laws and constitutional principles, respect the doctrine of legitimate expectation, and provide clear reasoning for classification decisions.

For the Broader Cooperative Sector

The ruling reinforces that:

• Taxation must be based on clear statutory provisions
• Administrative fairness requires proper classification based on the actual circumstances of each taxpayer
• Constitutional principles of non-discrimination and fair administrative action apply to tax administration

The Invest & Grow Sacco Precedent

The Imarika rulings build upon the earlier Tribunal decision in Invest & Grow Sacco v Commissioner of Domestic Taxes (Tax Appeal E024 of 2025) [2025] KETAT 316 (KLR) , which held that:

“Flowing from the Tribunal’s finding is that the Appellant’s income derived from primary members should be taxed at the rates provided under Section 19A(4) of the ITA.”

This precedent established that mixed-membership cooperative societies cannot be taxed strictly under Section 19A(2), and the Imarika rulings now solidify this position.

Key Takeaways

1. The “Mishmash” Principle: Mixed-membership SACCOs are neither purely primary nor purely designated societies. Their income must be severed and taxed proportionally.
2. The Mutuality Doctrine: Income earned from members through mutual operations should not be taxed as commercial income.
3. Proportional Taxation: Income from individual members is taxed under Section 19A(4); income from non-individual members is taxed under Section 19A(2).
4. Taxpayer Protection: Tax authorities cannot collect more than what is legally due. Ambiguities in tax laws must be resolved in favor of the taxpayer.
5. Constitutional Compliance: Tax administration must comply with Articles 10, 27, 36, 40, and 47 of the Constitution of Kenya, 2010.

Conclusion

The Imarika SACCO rulings represent a critical development in Kenyan tax jurisprudence. The Tax Appeals Tribunal has firmly established that SACCOs with mixed membership cannot be subjected to a blanket tax regime. Instead, their income must be severed and taxed proportionally based on the nature of their membership.

For SACCOs across Kenya, this ruling provides much-needed clarity on their tax obligations. For the Kenya Revenue Authority, it serves as a reminder that tax assessments must be based on a proper analysis of the taxpayer’s actual circumstances, not on simplistic classifications that ignore the complex realities of cooperative societies.

The judgment reinforces the enduring principle that taxation must be based on clear statutory provisions, and that administrative fairness requires proper classification and application of tax laws based on the actual circumstances of each taxpayer. As Kenya’s cooperative sector continues to evolve, these rulings will serve as a foundational precedent for years to come.