Doing Business in Nigeria: Company Tax Obligations, Exemptions and Incentives
Nigeria is an investment paradise when viewed from the perspective of a massive consumer population of over 200 million people with a very low level of manufacturing.
In addition to this huge market, the Nigeria government has regularly implemented a number of incentives to promote investment in Nigeria as a way to strengthen the economy and advance the much-needed development of the country. This article will look at the tax obligations of businesses in Nigeria as well as any applicable exemptions.
Tax Regime for Companies in Nigeria
The taxes payable by companies in Nigeria are:
1. Company Income Tax
Under Company Income Tax Act (CITA) Cap. C 21 LFN 2004, a company resident in Nigeria is mandated to pay Company Income tax on their worldwide income, while non-residents are subject to tax on their income generated from business operations in Nigeria. This tax is assessed at different levels thus:
a. A company with a turnover between N25 Million and N100 Million- 20% of assessable profit.
b. A company with above N100 Million turnover- 30% of assessable profit.
2. Capital Gains Tax
Under the Capital Gains Tax Act, this is tax chargeable on the gains accruing to the company on the disposal of chargeable assets in a year of assessment. It is noteworthy that according to the Finance Act 2023, chargeable assets include Digital.
3. Value Added Tax, under VAT ACT
This is a consumption tax paid when goods are purchased and services rendered. It is paid by the consumer of the goods, and may also be deducted by the company and paid to the government. It is assessed at 7.5%
4. Tertiary Education Tax
This tax is imposed on every Nigerian resident company at the tax rate of 3% of all assessable profit for each year of assessment. It is payable within two months of an assessment notice from FIRS. Some companies pay the education tax with their company income tax.
5. Petroleum Profit Tax (PPT)
This tax is governed by the Petroleum Profit Tax Act. It is levied on the profit of each accounting period of companies engaged in upstream petroleum operations in lieu of company income tax. All companies engaged in petroleum operations are chargeable under the Petroleum Profit Tax Act.
The petroleum profit taxes rate are as follows:
- 50% for petroleum operations under the production sharing contracts (PSC).
- 65.75% for non-production sharing contract operations, paid in the first five years during which the company has not fully paid off all the pre- production capitalized expenditure.
- 85% for non-production sharing contract operations after the first five years.
- 30% for upstream gas profits.
6. Hydrocarbon Tax (HCT)
Following the enactment of the Petroleum Industry Act 2021, the holders of a Petroleum Prospecting Licence and Petroleum Mining Lease will be subject to both CIT at 30%, and Hydrocarbon Tax (HCT). HCT rates are as follows:
- 30% for converted/renewed onshore and shallow offshore Petroleum Mining Leases.
- 15% for onshore and shallow onshore Prospecting Petroleum Licence and Marginal Fields.
- Deep offshore is exempt from HCT.
7. Stamp Duties
Stamp duties are payable under the Stamp Duties Act LFN 2004. This tax is imposed on documents and certain transactions. The stamp duty rate is dependent on the type of document and the value of the transaction.
8. Custom and Excise Duty
The Customs and Excise Management Act LFN 2004 imposes a customs duty on specified imported goods and also restricts the movement of certain goods in and out of Nigeria. Any company involved in importation operations is liable to pay a tax charge ranging from 5% to 30%, depending on the goods to be imported.
9. National Information Technology Development Levy (NITDL)
Companies that are liable to pay NITDL include GSM Service Providers, Telecommunication Companies, Internet Providers, Banks, and other companies with a turnover of N100 million and above. NITDL is governed by National Information Technology Development Agency Act, CAP N156 LFN 2004 (as amended). It is 1% of profit before tax.
Tax Exemptions and Incentives
There are some tax reliefs, incentives, holidays and exemptions made available in Nigeria to encourage foreign direct investment and to boost investment in and foster the rapid growth of some key sectors of the economy. The above has been achieved by the use of various legislations, and agreements and includes but not limited to, the following.
a. An amount allowed by law as a reduction of income or profit that would otherwise be taxed.
b. An amount of taxpayers’ income that is not subject to tax.
c. Immunity from the obligation of paying taxes in whole or in part.
Specific exemptions and incentives include:
1. Pioneer Status Incentive (PSI)
This is a profit-based tax incentive governed by the Industrial Development (Income Tax Relief) Act, Cap 17 LFN, 2004. It is a tax holiday that grants qualifying industries and products relief from payment of corporate income tax for an initial period of three years, extendable for one or two additional years.
This is to enable them to make a considerable profit for re-investment into the business. Companies qualified for pioneer status also enjoy the benefits of exemption from a 10% withholding tax on dividends paid out of business profits. The pioneer status is administered by the Nigerian Investment Promotion Commission (NIPC).
2. Exemptions from Capital Gains Tax
Gains arising from takeovers, absorption or merger in Section 32 of Capital Gains Tax Act (CGTA) Cap C1 LFN 2004 are exempted from tax, same are proceeds reinvested provided in Section 33 of CGTA among others as an exception to the rule that all chargeable assets are subject to Capital Gain Tax.
3. Exemptions from Value Added Tax
Under Sections 2 and 3 First Schedule of Value Added Tax Act, Cap. VI LFN 2004 the goods and services listed therein are exempted from VAT. Some include All medical and pharmaceutical products, basic food items, books and educational materials, baby products, all exported and exported services etc.
4. Exemptions from Company Income Tax under the Companies Income Tax Act (CITA):
A. Section 23(1) CITA: exempts the profits of the following companies from tax:
i) A statutory or registered friendly society, in so far as such profits does not derive from a trade or business carried on by such society;
ii) A cooperative society registered under any enactment or law relating to cooperative societies.
iii) A company engaged in ecclesiastical, charitable or educational activities of a public character;
iv) A company formed for the purpose of promoting sporting activities;
v) A trade union registered under the Trade Unions Act.
vi) A body corporate established by or under any Local Government Law or Edict in force in any State in Nigeria;
vii) A body corporate with a purchasing authority established by an enactment and empowered to acquire any commodity for export from Nigeria from the purchase and sale (whether for the purposes of export or otherwise) of that commodity.
viii) A Company or any corporation established by the law of a State for the purpose of fostering the economic development of that State.
ix) A company other than a Nigerian company which, but for this paragraph, would be chargeable to tax by reason solely of their being brought into or received in Nigeria;
x) A dividend, interest, rent, or royalty derived by a company from a country outside Nigeria and brought into Nigeria through Government approved channels.
xi) The interest on deposit accounts of a foreign non-resident company.
xii) Dividends received from small companies in the manufacturing sector in the first five years of their operation.
xiii) Dividends received from investments in wholly export-oriented businesses.
xiv) Any Nigerian company in respect of goods exported from Nigeria.
xv) A company whose supplies are exclusively inputs to the manufacturing of products for export; and
xvi) A company established within an export processing zone or free trade zone.
B. Section 11(2) of the Company Income Tax Act provides an exemption from tax interest on any loan granted by a bank to a company engaged in agricultural trade or business; or the fabrication of any local plant and machinery; or providing working capital for any cottage industry. Some profits are exempted from CIT provided they are not derived from trade or business activities carried out by the company e.g. Cooperative society.
C. Companies with gross turnover of NGN 25 million or less are exempted from paying Company Income Tax under the Company Income Tax Act (CITA).
In conclusion, Nigeria offers a compelling investment environment with its vast consumer base and government incentives aimed at promoting economic growth and development. Companies operating in Nigeria are subject to various taxes, however, to encourage foreign direct investment and foster growth in key sectors, the government provides tax exemptions and incentives.
As Nigeria continues to evolve as an investment destination, businesses can capitalize on these tax benefits and exemptions to optimize their operations and contribute to the country’s economic progress. Nevertheless, companies must stay compliant with tax regulations.
It is therefore advisable for companies to consult with the relevant authorities or tax professionals to ensure they take full advantage of available incentives while fulfilling their tax obligations responsibly. By leveraging the favourable tax regime and incentives, companies can play a vital role in the nation’s growth story while reaping the benefits of doing business in Nigeria.
Unyime Akpaba, Esq., is a Nigerian-based lawyer with an international law practice. He is the managing partner of Lex Kavord LP, an Abuja-based law firm with global reach. He is proficient in international business law, business immigration, intellectual property law, and commercial dispute resolution.