What are the key tax considerations for private clients in Nigeria?

All questions

Tax

The administration of estate laws throughout Nigeria are identical. Tax liabilities attached to different assets and incomes belonging to a person's estate would be determined by the particular tax laws to which the person is subject. Nigeria adopts the residency principle in imposing taxes on the estate of deceased persons; the tax base is rooted in their assets and income, which does not necessarily terminate with the demise of such a person. Where such assets pass on to the estate of the deceased, the estate becomes liable to pay taxes arising therefrom and to pay outstanding tax obligations. Where a person dies (intestate or testate), an application is made to the Probate Registry under which the Registry approves probate or letters of administration. An estate fee of 10 per cent of the assessed estate's value must be paid to the state government where probate is granted. This has become the practice despite the repeal of the Capital Transfer Tax Act 1979. It would appear that the estate fee charged by the probate registries of the various states in Nigeria are calculated pursuant to probate rules in the Civil Procedure Rules of High Courts.

In addition to this, the Personal Income Tax Act (PITA)¹³ imposes personal income tax on individuals, communities, families and the trustees of an estate.¹⁴ There are, however, some provisions of PITA that seek to tax a deceased person. For example, Section 31 provides that in the operation of the pay-as-you-earn scheme, if emoluments are paid by the employer to a deceased's next-of-kin, the employer is to deduct the applicable tax. The Finance Act 2020 has introduced the concept of significant economic presence to the taxation of non-resident individuals, executors and trustees. The effect of this is that profit or income generated from the supply of services to a person resident in Nigeria by an individual who is not resident in Nigeria would be deemed subject to tax in Nigeria to the extent of the non-resident individual's significant economic presence in Nigeria.¹⁵

Finally, the federal legislation on taxation of capital transfer is the Capital Gains Tax Act (CGTA).¹⁶ This is taxed at a rate of 10 per cent on the gains realised from the disposal of real property. Section 8 (1) of the CGTA states that a deceased person's assets that he or she was competent to dispose of at the time of his or her death are deemed disposed of by him or her on the date of his or her death and acquired by the personal representatives for a consideration equal to the last transfer value or market value of that asset at the time of his or her death. The gains accrued as a result of this deemed transfer is exempt from capital gains tax, and as such the personal representatives or executors on whom the deceased's assets devolve take the asset tax-free for the purpose of capital gains tax. The CGTA further provides that when a legatee or beneficiary acquires the deceased's assets from the personal representatives, there will be no chargeable gain accruing to the personal representatives. This means that the transfer of assets or wealth from the deceased person to beneficiaries under a will or by intestacy is not subject to capital gains tax.¹⁷

Tax treaties between countries help to mitigate double taxation problems where the resident country has domesticated its laws such that foreign income is liable to tax in the source country. Nigeria has tax treaties with 14 countries: Belgium, Canada, China, the Czech Republic, France, Italy, the Netherlands, the United Kingdom, Pakistan, the Philippines, Romania, Singapore, Slovakia and South Africa.

Such treaty then further defines who qualifies as a resident of a contracting state to the treaty to include any person who, under the laws of Nigeria, is liable to tax because of his or her domicile, residence, place of management or place of incorporation, or any other criterion of a similar nature, but this definition does not include any person who is liable to pay tax in Nigeria in respect of income or capital gains from sources in Nigeria. What this implies is that for such agreement to apply to a person, the person must be affiliated to Nigeria by way of residence, domicile, place of management or place of incorporation, and not merely by owing property in Nigeria.

Thus, the income on an immovable property may be taxed in the other state. Furthermore, income derived by a resident of a contracting state from immovable property may be taxed in the other state where such income is derived from direct use or letting of the immovable property. It also applies to the income of immovable property of an enterprise. In addition, the business profit from the enterprise of a resident contracting state will not be taxable in both states where such was structured to avoid taxation. Further, gains from the alienation of immovable property in a contracting state may be taxed in the other state.

Finally, double taxation in Nigeria is eliminated where the contracting states in accordance with such agreement, whether directly or by deductions, on profits, income or chargeable gains from sources within the states, shall be allowed as a credit against any Nigerian tax computed regarding the same profits, income or chargeable gains by reference to which contracting tax is computed.

A conflict of the laws of various jurisdictions would be challenging to resolve, bearing in mind the possibility of the deceased acquiring assets in different jurisdictions. A concurrent jurisdiction is thus created for the courts of the states where the deceased has real properties.¹⁸ The rule that has been applied over time in law is that the courts of states where the real assets of the deceased is located will apply in the administration of the estate of the deceased while the courts of the states where the last known domicile of the deceased possess the requisite jurisdiction to administer the personal properties of the deceased. Therefore, it is important to identify not just the laws that apply to the administration of the estate of a person who died intestate but also to its distribution, as this would form the basis for taxation and what taxes will be payable on the estate.

The philosophy that guides the application of this principle is that since the administration of estates typically concerns the appointment of personal representatives for payment of estate taxes and settlement of debts, the real assets of the deceased can be easily taxed in the state where the property is located. Creditors of the deceased can be most easily traced to his or her last domicile.