If you’ve ever wondered what are the tax incentives for foreigners starting a business in Nigeria, this article provides all the answers that we hope will enable you to decide whether or not Nigeria is a good place to start your business as a foreigner.
There are many factors a foreign investor should put into consideration before investing into a country and one of those factors is the tax policies of the government of the country the foreigner wants to invest in.
WHAT ARE TAX INCENTIVES?
Tax incentives are policies that provide more favorable tax treatment to specific industries or sectors compared to the general industry. They come in the form of allowances, exemptions, and non-taxable incomes granted to foreign investors in Nigeria. Tax incentives are designed to encourage investment in certain industries or sectors. They help both local and foreign investors by reducing their tax burden and increasing their profits. However, not all industries or sectors are eligible for tax incentives.
Some of those incentives particularly as they relate to foreign investors will be considered below.
WHAT ARE THE TAX INCENTIVES AVAILABLE IN NIGERIA?
PIONEER STATUS
Under the Industrial Development (Income Tax Relief) Act, certain industries may be conferred “pioneer status” by the President. A company does not acquire pioneer status because such an investor operates in an industry that does not exist in Nigeria.
The tax relief period for businesses in pioneer industries is an initial three years and a subsequent two years subject to the fulfillment of certain conditions.
For a company to qualify, it must be listed among the companies or its business fall under business that pioneer status will be granted and the application for the grant of pioneer status must be made within one year the company is opened for business. The grant of pioneer status to a company enables the company concerned to make a reasonable profit within its formative years. The profit so made is expected to be plowed back to the company.
Parameters considered by the Nigerian Investment Promotion Commission to grant pioneer status are export potential, employment generation, valued addition, local content, corporate social responsibility, and others.
The pioneer status relief applies to local and foreign-owned businesses in Nigeria.
DOUBLE TAXATION TREATIES
Double taxation arises when a specific income or profit is taxed in two jurisdictions, that is, where the income is earned (the source state) or in the state of residence. On the other hand, double non-taxation occurs when a taxpayer evades tax on the profits or income in the source state and resident state. These issues may reduce the inflow of foreign direct investment and international taxation has created tax treaties as a solution.
Where there is a tax treaty between Nigeria and another country on the category of income, tax treatment, where this income would be taxable (at residence, at source, or both) and the timing for taxation, a foreign-owned company stands a better chance of not being fully taxed in its home country and Nigeria. Nigeria has tax treaties with sixteen (16) countries. They are Belgium, Canada, China, the Czech Republic, France, Italy, the Netherlands, Pakistan, Philippines, Romania, Singapore, Slovakia, South Africa, Spain, Sweden, and the United Kingdom.
DUTY DRAWBACK SCHEME
The Duty Drawback scheme is an export incentive program in Nigeria that exempts companies from paying taxes on imported raw materials used in the production of finished goods. This means that if a company has already paid taxes on the imported raw materials, they will not have to pay taxes again when exporting the finished goods. This program encourages foreign companies to import raw materials into Nigeria while saving on taxes when exporting the end product. It is designed to provide refunds on duties and surcharges paid on raw materials, including packing and packaging materials used in the production of goods, upon successful exportation of the final product. The new Duty Drawback scheme now offers automatic refunds of 60% upon initial screening by the Duty Drawback Committee and only requires a bond to be presented by a recognized Bank, Insurance Company, or other financial institution. This bond covers 60% of the refund to be paid to the exporter and will only be discharged after the application has been fully processed. Once the processing of the exporter’s claims is complete, any applicable balance will be granted by the Duty Drawback Committee, or refunds for any overpayments will be requested.
To be eligible for the scheme, a trading company must collect industrial products from one or more manufacturers, or import raw material inputs (including packaging and packaging materials) used for the production of goods exported by the company. The trading company must have a contract with the final producer of the product that allows the Duty Drawback Committee to obtain the necessary information and documents to act appropriately. Only companies incorporated in Nigeria can apply for this scheme.
Please note that Duty Drawback applications must be submitted within two years from the date of exportation. To be eligible for the drawback payment (both individual and fixed drawback), the product produced with imported inputs must be exported within 18 months after the importation of inputs.
FREE TRADE /EXPORT PROCESSING ZONES
Companies in Nigeria that export goods are exempt from paying taxes on the profits they make, as long as the money earned from the exports is brought back to Nigeria and used solely for the purchase of raw materials, plant, equipment, and spare parts. However, this exemption does not apply to companies in the oil and gas industry, including those involved in upstream, midstream, and downstream activities.
SECTOR-SPECIFIC INCENTIVES
In addition to the general investment incentives discussed above, Nigeria offers sector-specific incentives to promote investment in specific industries. These incentives are tailored to address the unique needs and challenges of each sector. Some of the notable sector–specific incentives are as follows:
AGRICULTURAL SECTOR
Companies that work in agriculture are not required to pay the minimum company income tax. The interest earned from agricultural loans is also exempt from tax, provided that the loan has a moratorium period of not less than 18 months and the interest rate is not more than the base lending rate at the time of the loan. According to the Industrial Development (Income Tax Relief) Act, small and medium-sized companies that are primarily engaged in agricultural production are exempted from Company Income Tax for an initial period of 4 years, which may be extended for two additional years if they perform well in agricultural production.
POWER SECTOR
A company investing in the power sector is eligible for a 3-year income tax holiday, which may be renewable for additional years. During the tax holiday period, tax-free dividends are available if the investment was made in foreign currency. Furthermore, the purchase of plant machinery and equipment for the utilization of gas in downstream petroleum operations is exempt from Value Added Tax. Additionally, the company can enjoy an investment allowance of 15%, which does not reduce the value of the asset.
OIL AND GAS SECTOR
The following tax incentives are applicable in this sector:
1. 20% per annum capital allowance in the first 4 years, and 19% in the 5th
2. Investment tax credit at the current rate of 5%
3. 30% petroleum profit tax rate
ROAD INFRASTRUCTURE DEVELOPMENT AND REFURBISHMENT INVESTMENT TAX CREDIT SCHEME.
The Federal Government of Nigeria introduced a public-private intervention scheme on 25/01/2019. The scheme aims to construct, refurbish, and maintain critical road infrastructure in key economic areas of Nigeria. Companies that participate in the scheme will be given tax credits against their Company Income Tax liability for the cost of eligible road construction or refurbishment. This will continue until they recover the full cost of the project.
OTHER GENERAL TAX INCENTIVES
The following tax reliefs apply to both local and foreign-owned companies in Nigeria. Some of them include;
1. Small companies (with less than N25,000,000 turnover) are exempted from remitting company income taxes.
2. Where a company develops infrastructure in rural areas, such a company is entitled to a rural investment allowance of between 15% to 100% of the cost incurred in providing such facilities.
3. All companies are entitled to a 95% capital allowance in the first year of the purchase of plants and machinery subject to certain conditions.
4. In-plant training: Companies with in-plant training facilities are entitled to a 2% tax concession on the cost of facilities for five years.
5. Local raw materials utilization: Where a company uses locally sourced raw materials in production, such company is entitled to up to 30% concession for five years to industries that attain minimum local raw materials utilization as follows: Agro- 80%, Agro-Allied – 70%, Engineering – 65%, Chemical -60% and Petro-Chemical -70%
6. About 120% of expenses on Research and Development are tax deductible in Nigeria subject to certain conditions.
CONCLUSION
There are numerous applicable tax reliefs not listed in this article and it is advisable to make proper consultations on existing tax incentives applicable to your business sector as a foreign investor. With a firm grasp of tax incentives available to your business in Nigeria, you can take advantage of these tax incentives to maximize business profit through proper tax structuring and planning.
If you need to make inquiries in this regard, please reach out to us HERE through the Whatsapp icon on this page to schedule an appointment.
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