Resident companies are subject to tax on their worldwide income. Expenditure incurred wholly and exclusively for the production of taxable income is deductible.

Capital Gains

Gains on the disposal of chargeable assets (including land and buildings, motor vehicles, debts, options, goodwill, digital assets such as cryptocurrency, non-fungible tokens, and foreign currency but excluding shares) are subject to capital gains tax in Nigeria (see Sec. 8.1.) The gain is generally determined as the difference between the sale price and the acquisition price (without inflation adjustment) together with expenses incurred on disposal. Effective 1 September 2023, a loss incurred on the disposal of an asset can be offset against the gains accruing from the disposal of another asset of a similar class, with unabsorbed capital losses allowed to be carried-forward for a period of 5 years.

Roll-over Relief

Taxpayers can benefit from roll-over relief, i.e., taxpayers can defer the capital gain tax payable on the disposal/exchange of qualifying business assets if they are replaced by another asset of similar class for the same business within a period of twelve months before or twelve months after the disposal of the old asset. The capital gains tax payable on the disposal of the old asset is deferred until the new asset purchased is disposed of without being replaced by a purchase of another similar asset.

Qualifying assets include:

Class 1 – Buildings, land, plant or machinery which doesn’t form part of the building;
Class 2 – Ships;
Class 3 – Aircraft; and
Class 4 – Goodwill.

Effective 1 September 2023, qualifying assets also include shares and stocks provided the sales proceeds are reinvested within the same year of assessment.

Dividends

Dividends received by resident companies are generally taxable in Nigeria (see Sec. 8.1.). Dividends received by a resident company from another resident company are subject to a final withholding tax and consequently treated as franked investment income at the level of the recipient. Foreign-source dividends are added to ordinary taxable income and assessed to tax unless repatriated through approved financial channels, in which case they are exempt from tax. An exemption also applies with respect to dividends received from small manufacturing companies during their first 5 years of operation, as well as from wholly exporting businesses.

Excess Dividend Tax

Pursuant to CITA Sec. 19, where a Nigerian company distributes dividends for an accounting year in excess of its profits for the year, then the excess (or the entire dividend distribution in case no profits are booked for the relevant year) is deemed to represent the assessable profits for the year, and the company is assessed to corporate tax on the deemed profits so determined. Prior to the adoption of the Finance Act 2019, the law only foresaw an exclusion from this rule for dividend distributions by the bank holding companies from their franked investment income. The Finance Act 2019 introduced several exceptions to the excess dividend tax. Henceforth, the excess dividend rules do not apply in the case of:

Dividends paid out of the retained earnings of a company where the dividend had previously been subjected to income tax, profit tax, or capital gains tax;
Dividends paid out of profit exempted from income tax under the Industrial Development (Income Tax Relief) Act, Petroleum Profit Tax Act, Capital Gains Tax Act, or any other act;
Dividends paid out of franked investment income; and
Dividends paid out by a real estate investment company to its shareholders out of rental income or dividend income.

The Federal Inland Revenue Service (FIRS) issued an Information Circular on 12 May 2022 clarifying that dividends received by a holding company from its subsidiary after deduction of tax are regarded as franked investment income of the holding company and is not subject to excess dividend tax.

It is clarified that a subsidiary may pay the dividend due to its holding company gross of withholding tax, provided the holding company distributes such dividend to its shareholders net of withholding tax within 30 days of receiving the dividend from its subsidiary.

Petroleum Sector

Nigeria enacted the Petroleum Industry Act 2021 (PIA) replacing the existing Petroleum Profit Tax Act among other provisions with effect from 16 August 2021. The PIA is introduced to encourage investment in the Nigerian petroleum industry, balancing rewards with risk and enhancing revenues to the Government, and simplify the administration of petroleum sector.

The PIA establishes a separate Upstream Regulatory Commission and a Midstream and Downstream Petroleum Regulatory Authority for better administration of the industry.

Upstream Operations

Under the PIA, revenue from upstream operations is subject to the corporate income tax and ‘Hydrocarbon Tax’ (HT). The HT applies to crude oil, field condensates, and natural gas liquids produced from associated gas. It does not apply to associated and non-associated natural gas or frontier acreage.

The companies engaged in upstream operations are now granted 3 new classes of licenses namely:

Petroleum Exploration Licence (PEL) where the licensee grants exploratory rights on a non-exclusive basis for a single renewable 3-year term;
Petroleum Prospecting Licence (PPL) where the licensees have the exclusive right to drill exploration and appraisal wells, perform corresponding test production, and non-exclusive right to carry out petroleum exploration for a maximum of 6 years for onshore and shallow water acreages and 10 years for deep offshore and frontier acreages; and
Petroleum Mining Lease (PML), granted to qualified applicants to win and dispose of crude oil, condensates, and natural gas for a maximum of 20 years.

Midstream and Downstream Operations

The licenses for midstream operations may be granted subject to the approval of the application and payment of fees. Certain specific activities include crude oil refining, bulk storage, transportation pipeline, transportation network operations, wholesale petroleum liquids supply, etc. Companies cannot undertake certain activities relating to downstream petroleum, gas, and petroleum products operations without obtaining an appropriate license or permit from the concerned authority. The PIA provides for the establishment of midstream and downstream infrastructure fund (MGIF) to be funded by a levy (0.5%) derived from the wholesale price of petroleum products sold in Nigeria and natural gas produced and sold in Nigeria.

The new tax regime generally applies with immediate effect for new licenses/leases issued under the PIA and for existing oil prospecting and oil mining licenses that are converted to the new licenses or are renewed. Holders of existing licenses are not required to convert, however, and continue to be taxed under the petroleum profit tax act until the license expires.

Expenses incurred in arriving at the adjusted profit of any company engaged in upstream petroleum operations wholly, reasonably exclusively, and necessarily related to crude oil are deductible for tax purposes, subject to certain restrictions.

Previously, companies engaged in the production of oil and gas (upstream petroleum operations) in Nigeria were subject to tax under the Petroleum Profits Tax Act 1958 as amended, instead of the standard corporate income tax. In contrast, downstream petroleum operations were taxed as per the standard corporate tax rules and rates.

Losses incurred in a previous year and capital allowances on qualifying capital expenditure (in lieu of depreciation) were deducted to arrive at the taxable profit of a petroleum company. However, the deduction of capital allowances for an accounting year were not permitted to reduce the profit tax payable to 15% or less of the profit tax which would have been due in the absence of the capital allowance deduction.

Powerful Tax Solutions

Tax Rules Engine

Collaboration Tools

Latest Tax News