In recent years, the Nigerian Government, particularly under the command of Prof, Yemi Osinbajo the Vice President of Nigeria, has set up, and continues to set up a lot of incentives and regulations aimed at improving the ease of doing business in Nigeria. This is so as to encourage local business participants to continue investing their money in corporate-commercial & other allied business ventures in the country and for incoming foreign players (expats, international companies) to have the confidence to import their capital into Nigeria following approved regulatory channels in order to invest in the different business opportunities offered in Nigeria. The Nigerian Government has understood the need for diverse commercial activities in all sectors of the Nigerian economy, and it is only with the application of robust frameworks and incentives that this can be achieved. Because of this, several Investment Incentives were introduced for the ease of doing business in Nigeria.
Applicable Policies and Protections for Investors in the Nigerian Economy
The Nigerian Investment Promotion Commission Act
The NIPC Act provides both general and special incentives to investors in the Nigerian economy in order to ease doing business in Nigeria.
General Provisions: The NIPC Act (S. 17 & 18 of the Act) provides for a one hundred percent (100%) ownership of investments by nationals in the Nigerian business environment, save for those specified under the “Negative List”.
Special Provisions: The NIPC has the power (as provided under S. 22) to, for the purpose of promoting strategic or major investments, negotiate specific incentive packages for investors.
Free Transferability: Foreign investors are guaranteed (S. 24 NIPC Act) a one hundred percent and unconditional repatriation in convertible currencies, through approved, authorized dealers, of:
- Capital and profits (Net, less tax and deductions)
- Payments for loan servicing where such foreign loan had been obtained;
- Remittance of proceeds (Net of applicable taxes) in the case of any sale or liquidation of the enterprise, alongside interests attributable to the investment.
Guarantees Against Expropriation: Investors are guaranteed the security of their investment to the effect that such investments shall not be subject to Nationalization (by the Nigerian Government whether at National, State, or Local Government Levels) or expropriation; neither can a person be mandated to surrender his interest in the capital of any Venture to another person or entity. Enterprises can only be acquired by the Federal Government if such acquisition is in the national interest, the investor paid due and adequate compensation for his loss; with an included right of access to Nigerian Law Courts for the determination of such interest and the accruing amount of compensation to which such investor is entitled. S. 25 NIPC Act.
Assistance to Enterprise: Enterprises are guaranteed assistance and guidance from the NIPC such as may be required by them and the Commission shall act as liaison between such Enterprises requiring assistance and all relevant Government Departments, Agencies and other public authorities. S. 26 NIPC Act.
Bilateral Investment Treaties
Double Taxation Agreements
These are agreements entered into between Nigeria and other member countries, geared towards the elimination of double taxation as it pertains to taxes on taxable income and capital gains from business ventures.
Section 41 of the Capital Gains Tax Act (CGTA) provides that any arrangement set out in an order made under Section 38 of the Personal Income Tax Act (PITA) and Section 45 of the Companies Income Tax Act (CITA) so far as they provide (in whatever terms) for relief from tax chargeable in Nigeria on capital gains by virtue of this section, have effect in relation to Capital Gains Tax.
Partners under this Arrangement: Belgium, Canada, China, Czech, France, Italy (Airline & Shipping only), Pakistan, Philippines, Romania, Slovak, South Africa, The Netherlands, United Kingdom.
Commonwealth Tax Relief
As a member of the Commonwealth, with its own policy in place to foster better economic relations amongst other Commonwealth countries, Section 44 of the Companies Income Tax Act (CITA) provides a tax relief for income/profits earned in other Commonwealth nations for which Commonwealth tax has been paid on and which are also taxable in Nigeria. The rate of relief is marked at half of the Nigerian tax rate.
ECOWAS Trade Liberalization Scheme
The ECOWAS Trade Liberalization Scheme is the main ECOWAS operational tool which is geared towards promoting the entire West Africa as a Free Trade Area. Geared towards trade liberalization by abolishing customs duties levied on imports and exports into the boundaries of Member States, it aims at facilitating free movement of goods and services across Member States.
Partners: Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo
The Personal Income Tax Act (PITA): The PITA is administered by the Federal Inland Revenue Service and the State Boards of Inland Revenue of the different States of the Federation.
Income Exempted: Section 19 of the Act provides for the classes of income which are subject to exemption under the PITA as provided under the Third Schedule to the Act.
Tax Credit Allowable against Tax Payable on Outside Income: Section 11 provides that where a Nigerian resident earns income from outside Nigeria and such is brought into Nigeria through Government-approved channels, such person shall be allowed tax credit against the tax payable by him.
Exemption of Dividend from Tax: The Third Schedule of PITA lists income which are exempted from tax:
- Interest on any bank loan granted to an individual engaged in agricultural business or trade; or engaged in the fabrication of any local plant and machinery; or on loan which is secured as capital for any cottage industry established under the
- Dividends paid to a person by a company incorporated in Nigeria, provided that the equity participation of the dividend recipient is either wholly paid for by foreign currency or by assets brought into Nigeria.
It should be noted that the list of tax exemptions listed in the Third Schedule of PITA is by no means exhausted to the ones listed above. A more comprehensive list is available in the Third Schedule of the Act.
Capital Gains Tax Act
The CGTA is administered by the Federal Inland Revenue Service, with the applicable tax credit rate of 10%.
Exemption On Retirement Benefits Schemes
Section 28 of the Act provides that a gain shall not be a chargeable gain if income is accrued:
(a) as part of any retirement or benefits fund approved under Section 20 PITA;
(b) as part of any national provident fund or other retirement schemes established under the provisions of any Act or enactments for employees throughout Nigeria;
(c) of any of those funds that is exempt under paragraph (w) of the Third Schedule of PITA and;
(d) as a result of the disposal of a right to, or to any sum payable out of any superannuation fund.
Exemption Of Gains Accruing On Securities, Stocks, Shares
Section 30 CGTA provides that gains accruing to a person after the disposal of Nigerian Government securities, stocks and shares shall not be chargeable gains.
Tax Exemption On Proceeds Re-Invested
Section 33 CGTA provides that where gains accrue to an individual from the reinvestment of dividends disposed on securities, then such are not chargeable.
The Companies Income Tax Act
This Act provides for certain incentives to businesses and corporate entities, which are all underlisted below.
Profits Exempted from Tax (as provided for under S. 23 of the Act)
The companies listed below, are, among other companies provided under the same Section, exempted from paying tax on profits:
(a) the profits of any company being a statutory or registered friendly society, in so far as such profits are not derived from a trade or business carried on by such society;
(b) the profits of any company being a co‐operative society registered under any enactment or law relating to co‐operative societies, not being profits from any trade or business carried on by that company other than co‐operative activities solely carried out with its members or from any share or other interest possessed by that company in a trade or business in Nigeria carried on by some other persons or authority;
(c) the profits of any company engaged in ecclesiastical, charitable or educational activities of a public character in so far as such profits are not derived from a trade or business carried on by such company;
(d) the profits of any company formed for the purpose of promoting sporting activities where such profits are wholly expendable for such purpose, subject to such conditions as the Board may prescribe;
(e) the profits of any company being a trade union registered under the Trade Unions Act in so far as such profits are not derived from a trade or business carried on by such Trade Union;
(f) dividend distributed by Unit Trust;
(g) the profits of any company being a body corporate established by or under any Local Government Law or Edict in force in any State in Nigeria;
(h) the profits of any body corporate being 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.
NB: There are other listed profits under the aforesaid Section 23 which are not included in the list above.
Furthermore, in addition to the above, the Companies Income Tax Act provides for further incentives which include:
- Research and Development Deductions: Before calculations are made to ascertain profit and losses for purposes of company tax, the Company can deduct sums for its research and development which shall not exceed 10% of its profits for that year. 26 CITA.
- Reconstruction Investment Allowance (10%)
- Rural Investment Allowance: Companies undergoing their operations in rural areas which lacks certain basic life amenities are granted certain allowances with regards to water, electricity, among others, at percentages provided under 34 CITA.
NOTE: The Companies Income Tax Act makes a myriad of provisions for tax deductions, tax-free dividends, interest deductions in gas utilization, investment tax reliefs, among others, all geared at rendering the Nigerian business economy business-friendly for investors.
Pioneer Status Incentive
Certain companies and industries which are designated as “Pioneer Industries” and which have “Pioneer Status”, shall, at the applicable exemption rate of 30%, be:
- Granted income tax relief for a period of three (3) years, which can be extended for another one-year period thereafter, and another one-year period, or for one period of two years from the initial periods.
- Federal Inland Revenue Service.
- Nigerian Investment Promotion Commission
- Industrial Inspectorate Department, Ministry of Trade & Industry
Eligibility for Pioneer Status
- Companies must make their application within the first year of assumption of business activities.
- Applicant companies must be engaged in commercial activities listed as pioneer industries or pioneer products.
- Applicant shall have a non-current tangible asset of at least one hundred (100) million naira.
- Applicant must demonstrate the tangible impact the business will make on Nigeria’s economic growth and industrial development.
- Applicant is expected to provide all documentation evidencing legal/regulatory compliance.
CIT (Exemption of Bonds and Short Term Government Securities) Order 2011
This Order makes provisions for interest earned on issued Bonds and other short-term securities, alongside the proceeds of the disposal of Government and other corporate securities. At such, it exempts, from taxation, interest earned on:
- i. short-term Federal Government securities such as treasury bills and promissory notes
- bonds issued by Federal, State and Local Government and their agencies
iii. bonds issued by corporate bodies including supra-nationals.
This tax exemption is for a period of 10 years, with the exception of bonds issued by the Federal Government, which shall continue to be exempt from tax effective from 2011.
The Value Added Tax Act
The VAT Act provides for several tax-based reliefs for businesses which provides goods and services provided for under the First Schedule of the Act. Foods and services like: medical services, basic food items, books and promotional material, exported services, amongst a whole other class of goods and services which are provided for under S. 2 & 4 of the First Schedule, VAT Act.
NB: There are certain sector-specific tax and business incentives offered to businesses, for certain initial periods, alongside for investors in sector-specific industries like the Agro-Allied Industries. For the Agro-Allied industries, certain incentives apply, like corporate income tax reliefs, indefinite carry-forward of losses and enhanced capital allowances.
Solid Minerals: Companies that are into the solid mineral business are granted a tax allowance for the initial three years of business operations and 95% capital allowance of qualified capital allowance expenditure.
Tourism & Hospitality: Companies in this industry are allowed a tax exemption of 25% of their income which must be put in reserve and utilized for building and expansion of facilities, leading to tourism development.
Oil & Gas: Companies working in both the Upstream and Downstream sectors of the Oil & Gas industry are granted a myriad of incentives. These include certain graduated royalty rates approved at certain percentages, depending on whether their activities involve onshore production (20%); production in territorial waters and continental shelf. Furthermore, Section 5 of the Deep Offshore and Inland Basin Production Sharing Contracts Act CAP. D3 LFN 2004 as amended provides royalty rates payable in respect of deep offshore contracts.
Companies involved in investment activities under certain industries are allowed certain tariff incentives. These include: 0% import duties payable on green equipment and agricultural machinery under certain HS Headings. Furthermore, these tariff-based incentives applicable to import duties payable at port of entry are extended to the Aviation industry, Power Sector, Sugar Processing, Mineral Mining for Solid Minerals, Iron & Steel, Automotive Design & Development. Certain tax exemptions from imports are granted to these aforementioned industries to aid their business operations.
NB: To become qualified for these tariff-based incentives, general guidelines must be adhered to, to wit: registration with the Corporate Affairs Commission, evidence of tax payment through the Tax Identification Number, and certification by relevant Ministries (where applicable).
These are administered by the Nigerian Export Promotion Council and the Federal Ministry of Industry, Trade and Investment. Export (Incentives and Miscellaneous Provisions) Act, No. 65 of 1992, Cap. E19, Laws of the Federation of Nigeria (LFN) provides for a post-shipment incentive designed to improve the competitiveness of Nigerian products and commodities and expand the country’s volume and value of non-oil exports.
Export Processing Zones Incentives
In order to be eligible, enterprises must be within approved zones and approved by NEPZA. They are entitled to, among other things: 100% foreign ownership, full capital and dividend repatriation, waiver on all import and export licenses.
Activities permitted in Export Processing Zones:
(a) Manufacturing of goods and services;
(b) Warehousing freight forwarding and customs clearance;
(c) Handling of duty free goods (transhipment, sorting, marketing, packaging, etc);
(d) Banking, stock exchange and other financial services; insurance and re-insurance.
Oil & Gas Export Free Zone Incentives
For enterprises approved by the OGFZA under the OGFZA Act and operating within an approved Zone, certain incentives are allowed, and they include, among others:
(a) 100% foreign ownership of investment;
(b) Free transferability of capital, profits and dividends by foreign investors;
(c) Rent-free land at construction stage; after which rent shall be payable.
Furthermore, a company that has incurred capital expenditure in its qualifying building and plant machinery on approved manufacturing activity in an export processing has a 100% capital allowance. S. 35(1) CITA.
Furthermore, there is a 75% duty rebate on raw materials processed within an Oil & Gas Export Free Zone.
This Summary was prepared by the Business Law Team at Hermon Law. These summaries are provided for general business guidelines only. For further information and specialist assistance, reach out to the Hermon Law Team using any of our contact details. You can contact us using our Contact Form or call us on +234 1 453 7933, +234 1 453 7934 for further information.
© 2017 Hermon Law Firm.
Hermon Law Firm is a corporate-commercial law firm situate in the heart of Lagos, Nigeria; the fastest growing commercial hub in the whole of Africa.