Tax incentives for foreign and local businesses in Nigeria

Corporations have the potential to significantly contribute to the development of developing nations like Nigeria, especially given their capacity to raise living standards through innovation, generate wealth by luring in domestic and foreign capital, and lower unemployment rates by generating new jobs.

Companies in Nigeria generally believe that the regulatory and commercial environment presents numerous obstacles to their ability to realize their full potential. These difficulties include high transaction costs, a variety of taxes, and erratic regulatory oversight.

Despite the aforementioned, there are incentives in Nigeria’s regulations that startups can leverage to increase productivity and gain more revenue for investment. This article seeks to provide a list of the incentives and tax credits available to foreign and domestic companies in Nigeria.

Tax incentives in Nigeria

1. Pioneer Status

Companies operating in certain sectors of the Nigerian economy that are thought to be crucial to the country’s development are granted “pioneer” status, which confers a tax holiday that provides relief from payment of income tax for a period of up to five (5) years, starting with an initial three (3) year period beginning from their date of the first production, which may be extended for an additional two (2) years.

Pioneer status is defined by the Industrial Development (Income Tax Relief) Act, Cap. I7 LFN 2004 (Industrial Act), and the Pioneer Status Incentive Regulations 2014 (Pioneer Regulations). Following the Industrial Act, the Federal Executive Council (FEC) may declare a sector as a pioneer sector and any product within that sector as a pioneer product in compliance with the law. Presently over 20 sectors qualify for the pioneer status, including manufacturing, agriculture, technology and others.

Paragraph 3 of the Pioneer Regulations specifies the pertinent documents that must be submitted in support of an application for the conferral of pioneer status, in addition to stipulating that only Nigerian companies with a minimum share capital of N10,000,000 are eligible to apply for pioneer status.

The Nigerian Investment Promotion Commission (NIPC) is the body charged with the responsibility of registering companies as pioneer status. To submit an application for pioneer status to the NIPC has requested the following documentation in support of applications: a formal letter of application addressed to the NIPC Executive Secretary, completed NIPC form 02 copies of the Memorandum and articles of association, incorporation forms, the Certificate of Incorporation, as well as a bank draft for N200,000 drawn in the NIPC’s favour, are also required.

2. Exemption of taxes on Foreign loans

Under Nigerian law, there are no restrictions on thin capitalization insofar as the minimum statutory share capital requirement—N10,000,000 for businesses with foreign ownership—is met. Thus, Nigerian businesses can borrow money from shareholders, take out loans from local and international banks, and use inter-group lending to get funding. However, there are restrictions on for-profit and non-connected parties’ transactions.

It is also crucial to note that, following Section 11 of the Companies Income Tax Act (CITA), interest on foreign loans is eligible for several tax exemptions, subject to the loan’s tenor, which cannot be less than two years and the loan’s moratorium period.

The Third Schedule to the CITA lists the applicable tax exemption bands with foreign loans having a repayment period of not less than 7 years and a grace period of not less than 2 years having a 100% tax exemption, foreign loans with repayment periods of not less than 5 years but no more than 7 years with a grace period of no less than 18 months gets a 70% tax exemption, and loans with no less than 2 years payment and a grace period of not less than 12 months get a 40% exemption on tax.

In actuality, the grace period mentioned has come to mean a moratorium on both principal and interest payments. Additionally, companies can deduct interest payments made on loans used as capital for the purchase of an item through which a profit is sought to be taxed under Section 24(a) of the CITA when determining their tax liability.

3. Avoidance of Double Taxation

Double taxation agreements exist between Nigeria and China, Belgium, Pakistan, Canada, France, the Netherlands, the Philippines, Romania, the United Arab Emirates, the United Kingdom, and South Africa.

In general, agreements between nations seek to reduce the effects of double taxation on revenue from a single source for Nigeria and other parties to the agreement. For instance, where the beneficiary is from a treaty country, the withholding tax rate, which is ordinarily 10% for dividends, interest, rent, and royalties, is reduced to 7.5%.

4. Impact of Business on Local Value

Concerning local value added, a 10% tax break is given to foreign companies, this tax break is valid for a maximum of five (5) years. This primarily applies to businesses engaged in the engineering sector, where locally sourced materials are used as inputs.

This is done to promote local fabrication as opposed to the simple assembly of completely disassembled parts.

5. Tax exemption on Investments

An eligible company would benefit from generous tax allowances under this programme for qualifying capital expenses incurred within five (5) years of the project’s approval date.

6. Economically disadvantaged community investments

A seven-year tax holiday of up to 100% is given for investments made in certain areas designated as economically disadvantaged areas, as well as an additional 5% depreciation allowance on top of the initial capital depreciation.

Conclusion

Due to the lack of a comprehensive platform or document that lists all applicable incentives and regulations, many corporations and investors are unaware of the tax incentives that are available to them in Nigeria.

Without the help of experts, a company’s search for such incentives can be as time-consuming as looking for a needle in a haystack. To that end, the Ministry of Foreign Affairs has published a detailed list of the incentives available to foreigners when investing in Nigeria.