All questions


Nigeria's population of over 200 million and its continuously expanding consumer market have made it an investment destination of interest to foreign investors for some time. Nigeria is the largest economy in Africa, with a GDP of US$440 billion in 2021. The establishment of democratic structures during the past 22 years and the efforts of the government towards entrenching the rule of law may have improved the country's political risk profile. Some potential investors may see the country's relatively low corporate tax rates as a good incentive to do business in Nigeria, in spite of tremendous infrastructure deficits and the multiplicity of taxes at the different tiers of government, which can make running a business in Nigeria quite challenging.

The country is a federation of 36 states and 774 local government areas, each with power to impose tax on specified activities. Lagos State, one of the 36 states, is the seventh-largest economy in Africa.

Common forms of business organisation and their tax treatment

i Corporate

The most common form of corporate business organisation is the private limited liability company (LTD). This may not have more than 50 shareholders and must restrict the transfer of its shares. There is also the public limited liability company (PLC), which can have any number of shareholders starting from two. This is the required form for companies listed on the stock market. The unlimited liability company (ULTD) is also an available form but is rarely used.

Most enterprises can only be carried on using a corporate vehicle. For instance, banking, and crude oil exploration and production can only be carried out by registered companies. The company (not its owners) is taxed on its profits.

ii Non-corporate

Many small-scale businesses and petty traders carry on as unincorporated enterprises. Besides sole proprietorships, the most commonly used form of non-corporate business entity is the general partnership, which is often registered as a business name. Partnerships are not liable to tax; their profits are shared among the partners and taxed in the partners' hands.

The regime for taxing limited partnerships (LPs) and limited liability partnerships (LLPs), as introduced under the Companies and Allied Matters Act (CAMA), is unclear. If the view is taken that LPs and LLPs do not fall under the definition of 'company' as defined under the Companies Income Tax Act (CITA), it would mean that their profits will be taxable only when received by the partners as income. The tax authorities are expected to provide guidance on this point pending statutory or judicial clarification.

Direct taxation of businesses

i Tax on profits

There are three corporate income taxes: companies' income tax (CIT) pursuant to the CITA, hydrocarbon tax (HT) pursuant to the Petroleum Industry Act (PIA), and Petroleum Profits Tax (PPT) pursuant to the Petroleum Profits Tax Act (PPTA).

Determination of taxable profit

CIT is chargeable on the profits of all companies including profits from crude oil as well as field condensates and natural gas liquids derived from associated gas and on profits from associated and non-associated natural gas, as well as condensates and natural gas liquids produced from non-associated gas in fields or gas processing plants, regardless of whether the condensates or natural gas liquids are subsequently comingled with crude oil.

Expenses are deductible under the CITA if they are 'wholly, exclusively, necessarily and reasonably' incurred in the making of profits. Donations to charities and educational institutions are deductible up to a prescribed limit. Instead of depreciation, capital allowance is allowed annually at specified rates that can be as high as 95 per cent in the first year.

HT is payable on profits from crude oil as well as field condensates and natural gas liquids derived from associated gas.2 HT is not payable on associated and non-associated natural gas, as well as condensates and natural gas liquids produced from non-associated gas in fields or gas processing plants, regardless of whether the condensates or natural gas liquids are subsequently comingled with crude oil.3 HT is payable by companies who hold a Petroleum Prospecting Licence (PPL) or a Petroleum Mining Licence (PML) issued under the PIA or to companies who convert their Oil Mining Lease (OML) or Oil Prospecting Licence (OPL) to a PML or PPL, respectively.

Under the PIA, all expenses wholly, reasonably, exclusively and necessarily incurred for petroleum operations are deductible for calculating adjusted profit liable to HT. Under the PIA, all expenses wholly, reasonably, exclusively and necessarily incurred for petroleum operations are deductible for calculating adjusted profit liable to HT. The PIA expressly provides that amounts incurred as bad debt, bank charges, cost incurred by affiliates, arbitration or litigation cost, penalties, payments for gas flare, education tax (EDT), CIT, any income tax and profits tax are not deductible for the purpose of ascertaining the adjusted profit liable to HT.

Companies who opt not to convert their OML or OPL will continue to be charged to PPT until their OML or OPL expires. Under the PPTA, expenses are deductible if they are 'wholly, exclusively and necessarily' incurred in the making of the profits. In addition, instead of depreciation, capital allowance is allowed annually at specified rates.

For the purposes of CIT, HT and PPT, taxable profits are arrived at by aggregating all trading income and then deducting exempt income, allowable expenses, capital allowance and carried-forward losses.

For the purposes of CIT, profits are taxed on an accrual basis. The tax is paid after the tax year (that is, on a preceding-year basis). PPT and HT, however, are paid in advance, in monthly instalments based on forecasts of year-end profits and tax; in other words, PPT and HT are paid on a current-year basis with reconciliation made at the end of the tax year to reflect actual profits made in that year.

Profits of a Nigerian company are deemed to accrue in Nigeria regardless of where they arise. Nigerian companies are therefore subject to CIT on worldwide profits. Profits of a non-Nigerian company are taxable in Nigeria to the extent that they arise (or are deemed to arise) in Nigeria – the CITA prescribes various tests for determining this (see Section IV.v).

The CITA also sets out rules for taxation of a company at commencement of business, on change of accounting date and on cessation. The commencement rules and change of accounting date may lead to double taxation on a company.

Capital and income

Taxable profits consist solely of income or trading profits – these are profits that arise from business or trade. Profits that arise from the disposal of a capital asset are not included in income tax computations but are generally chargeable to tax under the Capital Gains Tax (CGT) Act.


A company that makes trading losses is entitled to treat them as tax-deductible and to carry forward unrecovered losses indefinitely, even if the ownership of the company changes. Losses cannot, however, be carried back or offset against capital gains.


The CIT rate is 30 per cent for large companies,4 20 per cent for medium-sized companies,5 and zero per cent for small companies.6 The tax rate for HT is 15 per cent for onshore and shallow waters pursuant to a PPL and 30 per cent for onshore and shallow waters pursuant to a PML.7 PIA does not provide the rate of HT for licences granted over deep offshore areas. PPT is payable at rates that vary between 50 and 85 per cent depending on the nature of the taxpayer's operations. A special rate of 65.75 per cent applies when a company has not yet started the sale or bulk disposal of chargeable oil under a programme of continuous production, and all pre-production capitalised costs have not been fully amortised. The CGT rate is 10 per cent.


Corporate taxes are administered by a single tax authority, the Federal Inland Revenue Service (FIRS). Every company (including a foreign company) is required to file a self-assessment return with the tax authority at least once a year. The filed return must contain the company's audited accounts, tax and capital allowances computation, and a duly completed self-assessment form. The company may pay the tax due on or before the due date for filing, in one lump sum or in instalments, and forward evidence of payment along with its return. For PPT and HT purposes, at least two returns must be filed. The first is filed early in the tax year and is based on forecasts of profit and tax. The second is filed after the end of the tax year and reflects actual profits and tax. If forecasts change during the year, a company may amend the first return from time to time.

EDT of 2.5 per cent of assessable profits is imposed on all companies incorporated in Nigeria except small companies as defined under the CAMA. Assessment and payment of education tax are done together with the assessment and collection of the CIT or PPT, whichever is applicable.

The Industrial Training Fund Act requires every employer with a staff of five or more, or with an annual turnover of 50 million naira and above, to contribute 1 per cent of its annual payroll to the fund established by the Act. An employer may be refunded up to 50 per cent of the amount contributed if the Industrial Training Fund Governing Council is satisfied that the employer's training programme is in accordance with the fund's reimbursement schemes.

The Employees' Compensation Act directs every employer covered by the Act to make a minimum monthly contribution of 1 per cent of its monthly payroll. The scope of the Act extends to both the public and private sectors with the exception of members of the armed forces; however, staff of the armed forces employed in a civilian capacity are covered by the Act.

The National Agency for Science and Engineering Infrastructure (NASENI) Act imposes a levy of 0.25 per cent on the turnover of companies engaged in banking, mobile telecommunication, ICT, aviation, maritime, and oil and gas with a turnover of 100 million naira and above.

The Nigerian Police Trust Fund (Establishment) (NPTF) Act establishes a Police Trust Fund and mandates companies operating in Nigeria to contribute 0.005 per cent of their net profit to the fund. The FIRS is empowered to administer this levy under the amendments to the NPTF Act. The CITA and the Federal Inland Revenue Service (Establishment) Act will now apply to administration, assessment, collection, accounting and enforcement of the levy.

The Niger Delta Development Commission (Establishment) Act mandates every oil or gas company operating in the Niger Delta area to pay 3 per cent of its annual budget to the Commission for tackling ecological problems in the Niger Delta, where most of Nigeria's oil is produced.

The National Information Technology Development Agency (NITDA) Act mandates telecommunications companies, cyber-related companies, pension-related companies, banks and other financial institutions with an annual turnover of 100 million naira or more to pay a levy of 1 per cent of their profits before tax to the NITDA Fund.

Also, the Nigerian Maritime Administration and Safety Agency imposes a 3 per cent levy on all inbound and outbound cargo from ships or shipping companies operating in Nigeria.

The FIRS has introduced an integrated tax administration system to enhance tax administration. Thus, taxpayers are now able to file tax returns and pay their taxes electronically. This has significantly reduced the complexity, time and cost of paying taxes.

Tax grouping

Nigerian law makes no provision for the tax treatment of a group of companies as one entity. Each company within a group is therefore taxable in Nigeria on an individual basis. Consequently, losses suffered by one member of a group of companies cannot be utilised to reduce the tax liability of another company within the group, but must be carried forward and set off against the future profits of the company that incurred them.

ii Other relevant taxes

In addition to income taxes, Nigerian businesses are also subject to other taxes such as value added tax (VAT) under the VAT Act, CGT under the CGT Act and stamp duties under the Stamp Duties Act.

VAT is levied on the supply of all goods and services with a few exceptions. The rate of VAT is 7.5 per cent, and it is collected by the supplier and remitted to the FIRS, except where the supply is to a government agency or the supplier is a foreign company, in which case the purchaser withholds the VAT and remits it to the FIRS. A taxpayer is allowed to recover VAT incurred in acquiring stock-in-trade or inventory, but not VAT incurred on overheads and administration or on capital assets. VAT arises on the sale of choses in action (or intangible contractual rights). Lagos State has also introduced a 5 per cent consumption tax on hotels, restaurants and event centres.

CGT is charged on the gains arising on the disposal of an asset at a rate of 10 per cent. Gains that are applied towards replacing business assets are exempted from CGT, as are gains arising from the disposal of stocks and shares. Gains arising from the disposal of shares in a Nigerian company for an aggregate consideration of 100 million naira or more in any 12 consecutive months is subject to CGT at the rate of 10 per cent. However, if in the year of disposal of the shares, the proceeds are utilised to acquire the shares of any Nigerian company, CGT is not payable. On the other hand, gains arising from a demerger or spin-off are not exempted even where assets have been moved to entities under the same control and ownership as the transferor. Also, CGT is not payable upon the sale or transfer of assets during a business reorganisation if:

  1. the sale or transfer is to a Nigerian company for the purpose of better organisation of that trade, or business or the transfer of its management to Nigeria; and
  2. the entities are related (i.e., one company has control over the other, or both companies are controlled by some other person, or both companies are members of a recognised group of companies for a minimum period of 365 days prior to the date of the reorganisation).

However, if the transferee subsequently disposes of the assets within 365 days after the date of the transaction, the tax exemptions will be rescinded.

The Stamp Duties Act provides for stamp duty to be paid on instruments and transactions, including electronic transactions. The rates are as contained in the Act and can be as high as 6 per cent of the value of the underlying transaction.

Tax residence and fiscal domicile

i Residence

A 'tax resident' is not defined in the CITA. However, the law distinguishes between a Nigerian and a foreign company. A Nigerian company is one formed or incorporated under any law in Nigeria, while a foreign company is one established outside Nigeria.8 For the purpose of this chapter, the term 'resident company' will be used to refer to a Nigerian company, while the term 'non-resident' will refer to a foreign company.

Under the CAMA, no company, association or partnership consisting of more than 20 persons can be formed for the purpose of carrying on any business for profit or gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under the Act or is formed in pursuance of some other enactment in force in Nigeria. This requirement does not apply to partnerships of lawyers or accountants.

A foreign company or foreign partnership that intends to carry on business in Nigeria must incorporate a separate entity in Nigeria for that purpose, unless exempted by the Minister of Industry, Trade and Investment.

ii Taxable status

Companies doing business in Nigeria, whether resident or non-resident, are subject to the CIT payable to the FIRS. Companies with a turnover of 25 million naira or less are exempt from paying CIT (see Section III.i). Some companies are subject to HT or PPT on their profits from the exploration and production of crude oil (see Section X.i).

Any company incorporated under the CAMA (and unit trusts) is treated as a corporation for income tax purposes. Individuals, including partners in partnerships and unincorporated trusts, are subject to the personal income tax payable to the State Internal Revenue Service in their state of residency.

iii Legal classification of non-resident entities

Foreign entities doing business in Nigeria are generally treated as companies and are subject to CIT. Partners in a partnership are liable to tax in their individual capacities on the income accruing to them under the partnership agreement.

iv Corporate tax baseResident corporations

A company is taxed on its profits accruing in, derived from, brought into or received in Nigeria. Any income earned by resident companies, regardless of where it arises, is deemed to accrue in Nigeria.

Non-resident corporations

A non-resident company is liable to tax on its income derived from Nigeria; that is, income attributable to its Nigerian operation.

The profits of a non-resident company are deemed to be derived from Nigeria (and therefore be taxable in Nigeria) in the following instances:

  1. the company has a fixed base of business in Nigeria and the profit is attributable to the fixed base;
  2. the company does not have this fixed base in Nigeria but habitually operates a trade or business through a person authorised to conclude contracts on its behalf;
  3. the company's trade or business activity involves a single contract for surveys, deliveries, construction or installation (turnkey project), and the profit is attributable to that contract;
  4. the trade, business or activity is between the company and another person controlled by it or that has a controlling interest in it, and conditions are made or imposed between the company and that other person in their commercial or financial relations, which the tax authority deems artificial or fictitious, so much of the profits is adjusted by the tax authority to reflect an arm's-length transaction;
  5. the company transmits, emits or receives signals, messages and data of any kind in Nigeria by cable, radio, electromagnetic systems, or any other electronic or wireless apparatus, in respect of any activity including electronic commerce, online payment platforms, electronic data storage, and online advertisements, to the extent that the company has a significant economic presence (SEP) in Nigeria and profit can be attributed to such activity; pursuant to the Companies Income Tax (Significant Economic Presence) Order 2020 (the SEP Order) a non-resident company would be deemed to have a SEP in Nigeria where it:
    • derives gross turnover or income of more than 25 million naira or its equivalent in other currencies from any or a combination of the following activities: (1) streaming or downloading services of digital contents to persons in Nigeria; (2) transmitting data collected on Nigerian users that has been generated from the users' activities on a digital interface (including website or mobile applications); or (3) providing goods or services, directly or indirectly, through a digital platform to Nigeria; or
    • provides intermediation services through a digital platform linking suppliers and customers in Nigeria;
    • uses a Nigerian domain name or registers a website address in Nigeria; or
    • has a purposeful and sustained interaction with persons in Nigeria through a digital page or platform customised to target persons in Nigeria, including pricing the products in naira or providing billing or payment options in naira; or9
  6. the company receives payments from a person resident in Nigeria, or from a fixed base or an agent of a non-resident company, as compensation for the provision of technical, professional, management or consultancy services, excluding:
    • payments by a company to an employee under a contract of employment;
    • payments for teaching in, or by, an educational institution; and
    • payments by a foreign fixed base of a Nigerian company.10
v Non-corporate business entities Recognition

A non-corporate business entity is any business entity not incorporated as a company under the CAMA. Such an entity can register as a business name or limited partnership under the CAMA.

Tax status

Non-corporate business entities are not taxable in the names of such business entities because they are not recognised as persons in law. Instead, the profits made by these entities are attributed to their individual owners in proportion to their ownership of the business entity and taxed in the hands of the individual owners using the graduated personal income tax rates.

vi Permanent establishments Domestic law definition

The term 'permanent establishment' (or 'fixed base') is not defined in the CITA. However, both concepts are defined under case law.

In Addax v. Federal Inland Revenue Service (2013) 9TLRN 126, the court held that 'a fixed base is a definite address . . . To establish a fixed base within the meaning of the statutory provisions, any significant territorial connection to Nigeria will suffice if the Nigerian location is a place of regular resort for the foreign company for business purposes'.

Tax incentives, special regimes and relief that may encourage inward investment

The drive to encourage foreign direct investments in Nigeria has led to the enactment of various pieces of legislation, including the Industrial Development (Income Tax Relief) Act (IDITRA). The IDITRA seeks to encourage investment in sectors of the economy that are necessary for the economic development of the country by granting tax relief to businesses. For a business to enjoy relief from corporate income tax under this Act, it must be engaged in one of the industries listed in the Act or would have to apply and obtain a designation of its activity as a pioneer industry. Relief under this Act is for an initial period of four years extendable up to a maximum period of two years. Dividends are not subject to tax in the hands of the shareholders of the company enjoying the relief. Capital allowances can be carried forward and utilised at the end of the tax relief period. This incentive regime was reviewed in 2017 by the Application Guidelines for Pioneer Status Incentive. The Guidelines have replaced the erstwhile 'service charge' of 2 per cent of estimated tax savings with a new annual service charge of 1 per cent of actual pioneer profits.

The Venture Capital (Incentives) Act provides tax incentives to venture capital companies that invest in venture capital projects and provide at least 25 per cent of the total project cost. The incentives include a 50 per cent reduction of the withholding tax payable on dividends distributed by project companies, allowing equity investments in venture project companies to be treated as qualifying capital expenditure, and exempting capital gains on the disposal of such equity from tax.

The Nigeria Export Processing Zones Act also contains certain fiscal incentives for businesses. It provides in Section 8 that approved enterprises within a zone would be exempted from all federal, state and local government taxes, levies, and rates. It also provides in Section 18 that such enterprises may repatriate capital, profits and dividends at any time. The Oil and Gas Export Free Zone Act grants similar incentives to approved enterprises operating within the zone.

Capital allowances are a form of tax relief under the CITA. Capital allowances are granted on the acquisition of qualifying capital expenditure that is used solely for the purpose of the business. Capital allowances serve to reduce the profits of a company, and ultimately reduce tax liability. Under the CITA, there are initial and annual allowances. The initial allowance can be claimed only in the year in which the asset was acquired, while the annual allowance, based on the remainder after deducting the initial allowance from the cost of the asset, is spread over the tax life (including the first year) of the asset until the cost of the asset is reduced to a book value of 10 naira.

Under the PPT Act, a petroleum investment allowance, which allows an uplift of up to 20 per cent on qualifying capital expenditure, is available as an incentive to encourage investment in offshore exploration. In addition to the petroleum investment allowance and capital allowances, companies operating production-sharing contracts (PSCs) in Nigeria's deep offshore and inland basin regions are entitled to either an investment tax credit (ITC) or an investment tax allowance (ITA), depending on when the PSC was signed, which is equal to 50 per cent of annual qualifying expenditure. The ITC operates as a full tax credit, while the ITA is deductible from profits before the calculation of tax. The ITC does not result in a deduction from qualifying capital expenditure for the purposes of calculating capital allowances. There are also special incentives available to oil companies to encourage gas utilisation or the development of gas delivery infrastructure. Most significantly, such companies can offset their gas-related capital allowance against their oil production profits. Given the difference in tax rates between gas production and oil production (30 per cent versus 85 per cent), this incentive has led to considerable investment in gas utilisation projects.

To stimulate the financial markets, the federal government, in 2012, issued a statutory instrument to exempt from taxation income earned from debt instruments. Consequently, income from bonds issued by sovereign or sub-sovereign entities and those of corporate bodies are exempted from tax in the hands of the bondholder. Proceeds from the disposal of government or corporate bonds are exempt from VAT. These exemptions for corporate bonds are only for a period of 10 years and will lapse in 2022. In addition, the government has increased the tax relief available to companies that incur expenditure on infrastructure or facilities of a public nature. Such companies will now enjoy a 30 per cent uplift in basis for deductibility of the relevant expenditure.

Under the PIA:

  1. the cost for acquiring petroleum rights is eligible for annual allowance of 20 percent, with a retention value of 1 per cent in the last year until the asset is disposed of;
  2. capital allowance is granted on specified capital expenditure at the rate of 20 per cent per annum for the first four years and 19 per cent in the fifth year with a retention value of 1 per cent until the asset is disposed of; and
  3. production allowance is granted for crude oil, condensates and natural gas liquids production by both leases that are converted OMLs based on a conversion contract and their renewals (at the rate of US$2.50 per barrel and 20 per cent of the fiscal oil price) and leases granted after the commencement of the PIA.
i Holding company regimes

Nigeria does not have any special holding company regimes.

ii IP regimes

Nigeria does not have any special IP regimes.

iii State aid

No state aid is available.

iv General

See Section I.

Withholding and taxation of non-local source income streams

i Withholding on outward-bound payments (domestic law)

By law, where any amount is payable by one company to another company or person as interest, royalty, rent, dividend, or as fees for technical, professional, management or consultancy services, the company making the payment shall first deduct tax at a rate of 10 per cent and pay it to the tax authority. This withholding tax is treated as the final tax when the payment is due to a non-Nigerian company. Where a dividend is paid to a Nigerian company, the amount deducted as withholding tax is treated as franked investment income and is not subject to further tax in the hands of the recipient. In all other cases, such withholding tax qualifies as a credit against CIT liability.

ii Domestic law exclusions or exemptions from withholding on outward-bound payments

Withholding tax exemptions are available on outward bound payments where:

  1. the payment of a dividend is satisfied by an issue of shares of the company paying the dividend;
  2. dividend is paid by a company exempted from tax under the Industrial Development (Income Tax Relief) Act;
  3. dividend is paid by an enterprise operating within a free zone; or
  4. interest is paid by a Nigerian company on a foreign loan with a tenor of at least seven years.11

In all other cases of outbound remittance of payments, tax withheld at source by the company making the payment will be the final tax.

iii Double tax treaties

Nigeria has double taxation treaties with 14 countries.12 Residents of these countries enjoy a preferential withholding tax rate of 7.5 per cent on payments of interest, rent, royalties and dividends. While Nigeria's double taxation treaties mostly employ the credit method for the elimination of double taxation, a few treaties also employ the exemption method.

iv Other tax treaties

Nigeria signed the Multilateral Competent Authority Agreement on Country-by-Country Reporting in January 2016 and has produced the Income Tax (Country-by-Country Reporting) Regulations 2018 for the implementation of country-by-country reporting in Nigeria.

Nigeria is also a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The MLI already covers 96 jurisdictions and entered into force on 1 July 2018. Nigeria is yet to ratify this treaty.

Nigeria is also a signatory to the Common Reporting Standard (CRS) Multilateral Competent Authority Agreement (CRS MCAA). The CRS MCAA is a multilateral competent authority agreement, based on Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which aims to implement the automatic exchange of financial account information pursuant to the joint Organisation for Economic Co-operation and Development and G20 CRS, and to deliver the automatic exchange of CRS information between 101 jurisdictions.

v Taxation on receipt

As a general rule, dividends, interest, rent and royalties brought into or received in Nigeria by a Nigerian company do not qualify for a credit against Nigerian CIT in respect of foreign tax or withholding already suffered. Exceptions include when the income in question is liable to Commonwealth income tax or when the income is brought in from a country with a double taxation agreement with Nigeria that allows for such a credit. In an instance where a credit is not allowed, the ordinary treatment for these types of profits is to aggregate them with business profits subject to tax at the applicable rate of CIT; however, such profits will be exempt from CIT if they are brought into Nigeria through a commercial bank.

Taxation of funding structures

Small and medium-sized businesses are predominantly funded by equity, as most businesses of this size do not have access to long-term debt. On the other hand, most large businesses, including foreign-owned companies, are predominantly funded by debt.

i Thin capitalisation

Nigeria has thin capitalisation rules whereby tax deductibility of an interest expense on a related foreign-party loan is limited to 30 per cent of earnings before interest, taxes, depreciation and amortisation in any given tax year. Interest expense that is not fully utilised can only be carried forward for a maximum of 5 years. There are, also, anti-avoidance provisions under which the FIRS may disallow the deduction of interest and other financing costs that it deems not to be at arm's length.

ii Deduction of finance costs

Generally, finance costs may be deducted, provided that the relevant test for deductibility of expenses is satisfied. However, as group relief or consolidation is not available, it will be difficult to push acquisition debt down to the target except by, for example, the acquisition financiers directly refinancing target company debt or a mechanism such as post-completion merger.

iii Restrictions on payments

A Nigerian company can only pay dividends out of distributable profits, namely, trading profits, revenue reserves and capital gains. A company shall not declare or pay dividends if its directors are of the opinion that doing so will leave the company in a position where it is unable to meet its liabilities as they fall due.

iv Return of capital

A company may cancel paid-up shares that it considers to represent excess capital and return such capital to its shareholders. A resolution for the cancellation of shares for purposes of returning capital, like all other procedures that reduce share capital, must, however, first receive court sanction. At the discretion of the court considering an application for reduction of capital, creditors of the company making the application may object to the reduction. Before making an order confirming a reduction of capital, the court must be satisfied that the consent of every creditor entitled to object to the reduction has been obtained, or that the debt owed to them has been discharged, determined or secured, and that the company's authorised share capital has not, by reason of the reduction, fallen below the statutory minimum.

A court order confirming reduction of capital must be registered with the Corporate Affairs Commission before it can take effect and repayment can be made. The return of capital using this procedure is tax-neutral, because proceeds from a disposal of shares are not subject to either CIT or CGT.

Acquisition structures, restructuring and exit charges

Anti-avoidance and other relevant legislation

i General anti-avoidance

Various tax laws contain general anti-avoidance provisions. These provisions allow the FIRS to make necessary adjustments to counteract the reduction in tax that would result from transactions it considers artificial. The FIRS may deem any transaction to be artificial if it finds that its terms have in fact not been effected or, where it is a transaction between related parties, if its terms do not reflect arm's-length dealings.

ii Controlled foreign corporations

There are no rules relating to controlled foreign corporations. Section 21 of the CITA empowers the tax authorities to tax undistributed profits of a Nigerian company where the company is controlled by five persons or fewer.

iii Transfer pricing

The Income Tax (Transfer Pricing) Regulations 2018 provide guidance in the application of the arm's-length principle in related-party transactions. The Regulations allow related parties to adopt any of a number of listed methods as a basis for pricing of controlled transactions. The methods are:

  1. the comparable uncontrolled price method;
  2. the resale price method;
  3. the cost-plus method;
  4. the transactional profit split method; and
  5. the transactional net margin method.

With the approval of the FIRS, a method outside of those listed above may be used. The Regulations also allow for advance pricing agreements with the FIRS. The Regulations replace the Income Tax (Transfer Pricing) Regulations 2012 and incorporate the 2017 updates on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Companies with related-party transactions of over 300 million naira are obliged to prepare and submit contemporaneous transfer pricing documentation. A transfer pricing declaration form must also be filed with the documentation. The Regulations stipulate punitive administrative penalties for late filing and non-disclosure.

iv Tax clearances and rulings

There are no provisions authorising the FIRS to give tax rulings. In practice, the FIRS does issue circulars and opinions regarding the tax treatment of contentious issues. However, such circulars and opinions have been held to be non-binding.

It is also not possible to obtain an advance ruling from the courts. In Nigeria, the courts will refuse to hear an action based on hypothetical or academic issues. Consequently, the only means of ascertaining the position of the law is to institute an action when a dispute arises between a company and the tax authority.

The parties to a merger, takeover or other corporate reorganisation involving the transfer of business undertakings or assets must obtain directions from the FIRS as to the value at which assets will be transferred. The parties must also obtain clearance from the FIRS in respect of any CGT resulting from the transaction.

Year in review

In support of the 2021 budget, the President signed the Finance Act, 2020 into law on 13 January 2021, ushering in vast changes to the fiscal legislation, including CITA, the Personal Income Tax Act (PITA), the VAT Act, the CGT Act, the Tertiary Education Trust Fund (Establishment) Act (the TET Fund Act) and the IDITRA. In support of the 2022 budget, the President has also signed the Finance Act, 2021 into law on 31 December 2021 with amendments to CITA, PITA, VAT Act, CGT Act, TET Fund Act and the Customs and Excise Tarriffs Etc. (Consolidation) Act.

i CITA amendments

The exemption of interest on agricultural loans has now been limited to loans to companies engaged in 'primary agricultural production', as against companies engaged in any agricultural activity. Also, the tax-free period incentive granted to companies engaged in agricultural production, introduced by the Finance Act of 2019, has now been rescinded.

The minimum tax payable by insurance companies for any year of assessment is now 0.5 per cent of gross premium for non-life insurance business, and 0.5 per cent of the gross income for life insurance business. For all other companies, the minimum tax rate has been reduced from 0.5 per cent to 0.25 per cent of gross turnover less franked investment income for tax returns prepared and filed for any year of assessment falling between 1 January 2020 and 31 December 2021.

Penalties or fines pursuant to legislation enacted by the National and State Houses of Assembly are now specifically disallowed as tax-deductible expenses.

Non-life insurance companies are allowed for the purpose of tax assessment to deduct reserves for unexpired risks and the total estimated amount of all outstanding claims and outgoings, provided that any amount not utilised towards settlement of claims and outgoings shall be added to the total profits of the following year.

Reinsurance companies are not allowed to deduct an amount more than 50 per cent of their gross profits for the year where the general reserve fund is less than the initial statutory minimum authorised share capital. A reinsurance company is also not allowed to deduct more than 25 per cent of its gross profits for the year, where the fund is equal to or exceeds the initial statutory minimum authorised share capital.

Insurance companies that engage the services of insurance agents, loss adjusters and insurance brokers shall include in their annual tax returns a schedule showing the name and address of such persons, the date their services were employed and terminated, and payments made to such persons for the period covered by the tax returns.

Life insurance companies are allowed to deduct from their incomes: (1) an amount that makes a general reserve and fund equal to the net liabilities on policies in force at the time of an actuarial valuation; (2) an amount that is equal to 1 per cent of gross premium earned or 10 per cent of profits (whichever is greater) to a special reserve fund and accommodation until it becomes the amount of the statutory minimum paidup capital; and (3) all normal allowable business outgoings.

ii PITA amendments

Payments to non-resident individuals, executors or trustees for the provision of technical, management, consultancy or professional services are subject to final withholding tax of 5 per cent.

Contributions to a pension, provident or other retirement benefit fund, society or scheme recognised under the Pension Reform Act are now deductible for the purpose of ascertaining taxable income.

Persons earning minimum wage, as defined in the National Minimum Wage Act, now enjoy income tax exemption.

Amounts paid as premium by an individual in the preceding year of assessment as life insurance premium for their life or the life of their spouse is allowed as a deduction.13

iii VAT Act amendments

To provide clarity in relation to goods and services liable to VAT, 'supply of goods and services' has been introduced. Incorporeal rights are classified as a taxable supply of service. Also, immovable properties (excluding land and buildings) are now included in the definition of goods. Supply will be deemed to take place at the time an invoice or receipt is issued by the supplier in respect of that supply or payment of consideration is due to or received by the supplier in respect of the supply, whichever happens first.

Furthermore, non-resident suppliers of taxable goods and services to Nigerian residents are now required to register with the FIRS.

iv CGT Act amendments

The timelines for filing CGT returns are now specified to be not later than 30 June and 31 December in respect of all chargeable assets disposed of within the relevant periods.

Furthermore, any sum obtained by way of compensation for loss of office up to a maximum of 10 million naira is exempt from CGT.

v TET FUND Act amendment

Companies with a turnover of less than 25 million naira are now exempted from paying the 2 per cent EDT.

vi IDITRA amendment

A company engaged in primary agricultural production with turnover less than 100 million naira will be granted an initial tax-free period of four years that may be extended, subject to the satisfactory performance of such primary agricultural production, for an additional maximum period of two years.

vii Customs and Excise Act amendment

Imposition of excise duty at 10 naira per litre on non-alcoholic, carbonated and sweetened beverages.14

viii Petroleum Industry Act

In August 2021, the PIA became effective following assent by the President. See Section III.i for the major fiscal changes introduced by the PIA.

Outlook and conclusions

With Nigeria's tax-to-GDP ratio being at 6.1 per cent (one of the lowest in the world) and unstable revenue from oil, the federal government's resolve to increase tax revenue remains strong. We, therefore, expect to continue to see aggressive initiatives from the federal government geared towards widening the tax net, and curbing tax evasion and profit shifting.

Structures, restructuring and exit charges

i Acquisition

Foreign companies acquiring interests in local businesses usually avoid doing so through a local vehicle unless the circumstances demand it. Instead, most foreign investors prefer to use an investment vehicle located offshore, usually in a low-tax or double taxation treaty country.

It is quite common for acquisitions of this type to be funded by debt or by portfolio investments. Consideration payable to local sellers is usually structured as a cash payment for shares in the local entity. This structure is tax neutral.

ii Reorganisation

Mergers and other corporate reorganisations that involve the exchange of shares or cash payment for shares are tax neutral. CGT is not payable upon the sale or transfer of assets during business reorganisation between parties who are related for at least 365 days prior to the business reorganisation, provided that such assets are not sold by the acquiring company within 365 days after the business reorganisation.

iii Exit

A foreign investor wishing to liquidate an investment in a Nigerian company may do so by winding up the business or selling its shares in the business. Capital returned in the process of winding up and proceeds from the sale of shares will not be subject to tax in Nigeria.