The Nigerian Tax Reform Acts introduce far-reaching changes aimed at broadening the tax base, improving equity, reducing arbitrage, and modernising tax administration. Below is a concise summary of some significant changes which every company and individual should know.
1. Expanded Tax Exemptions for Small Companies
The exemption threshold for small companies has been significantly increased. Companies with annual turnover of ₦100 million or less (previously ₦25 million) and fixed assets not exceeding ₦250 million are now exempt from Companies Income Tax (CIT), Capital Gains Tax (CGT), and the newly introduced Development Levy. This means that a large number of MSMEs will be exempted from tax.
2. Increased Capital Gains Tax
CGT for companies has increased from 10% to 30%, aligning it with the CIT rate and eliminating arbitrage between capital gains and trading income. For individuals, capital gains will now be taxed at their applicable personal income tax rates.
3. CGT on Indirect Share Transfers
Capital gains tax now applies to indirect transfers of shares in Nigerian companies through offshore holding structures (subject to treaty reliefs). The exemption threshold for direct share disposals has increased to ₦150 million within any 12-month period, provided gains do not exceed ₦10 million.
4. Introduction of a Development Levy
A 4% Development Levy on assessable profits has been introduced for all companies except small companies. This consolidates several existing levies, including TET, IT Levy, NASENI Levy, and Police Trust Fund Levy, into a single charge.
5. Minimum Effective Tax Rate (ETR)
Large Nigerian companies and multinational groups (with global turnover of €750 million+ or Nigerian turnover of ₦50 billion+) are subject to a minimum effective tax rate of 15%. Where subsidiaries pay below this threshold, a top-up tax applies at the Nigerian parent level.
6. Controlled Foreign Company (CFC) Rules
Undistributed profits of foreign subsidiaries controlled by Nigerian companies may now be taxed in Nigeria where such profits could reasonably have been distributed.
7. Expanded Taxation of Non-Resident Companies
The scope of taxable activities of non-resident companies has been widened, including the introduction of “force of attraction” rules. Certain activities carried out by related parties, as well as EPC contracts partly performed outside Nigeria, may now be taxed in Nigeria.
8. Minimum Tax for Non-Resident Companies
Non-resident companies with taxable presence in Nigeria are subject to minimum tax based on a percentage of EBIT attributable to Nigeria, but not less than applicable withholding tax or 4% of Nigerian income.
9. Restriction of Free Zone Tax Exemptions
Free Zone companies retain tax exemption on exports and supplies linked to exports. However, proportionate tax applies where over 25% of sales are made to the customs territory. From 1 January 2028, any sales to the customs territory will subject the entire profits of the Free Zone entity to tax.
10. Introduction of Economic Development Incentive (EDI)
The Pioneer Status Incentive has been replaced with an Economic Development Incentive, offering a 5% annual tax credit for five years on qualifying capital expenditure, with carry-forward provisions.
11. More Progressive Personal Income Tax Regime
Individuals earning ₦800,000 or less per annum are now exempt from Personal Income Tax, while higher earners face increased rates up to 25%. Compensation for loss of employment or injury is now exempt up to ₦50 million (previously ₦10 million). So if an employee loses his job or a there is an injury at work, compensations give to the employee in these instances will not be taxed, except its more than N50,000,000.00. Please note that the taxed portion is the amount in excess of the threshold.
12. Clear Definition of Resident and Non-Resident Individuals
PIT now clearly applies to the worldwide income of resident individuals, defined to include those with substantial economic or family ties in Nigeria. Employment income is taxed in Nigeria based on residence or performance of duties. This means that the income of people resident in Nigeria with virtual jobs abroad will now be subject to tax.
13. Establishment of a Tax Ombuds Office
A Tax Ombuds Office has been created to independently review and resolve taxpayer complaints and disputes with tax authorities.
14. Expanded Input VAT Recovery
While the VAT rate remains 7.5%, businesses can now recover input VAT on goods, services, and fixed assets, provided they relate to VATable supplies.
15. Zero-Rated VAT on Essential Goods and Services
The list of zero-rated items has been expanded to include essential goods and services such as food, healthcare, education materials, electricity services, and non-oil exports while still allowing input VAT recovery. This means that there will be no 7.5% VAT on any of these exempted items.
16. Mandatory VAT Fiscalisation and E-Invoicing
Nigeria has formally adopted VAT fiscalisation and mandatory e-invoicing, placing it among early adopters in Africa.
17. Revised VAT Sharing Formula
The Federal Government’s VAT share has reduced to 10%, while States and Local Governments now receive 55% and 35%, respectively, with allocation based on equality, population, and consumption.
18. Significantly Increased Penalties
Penalties for non-compliance have been substantially increased, including higher filing penalties, fines for contracting with non-tax-registered entities, and sanctions for obstructing tax administration.
19. Mandatory Disclosure of Tax Planning Arrangements
Companies are now required to proactively disclose tax planning arrangements that result in any form of tax advantage, significantly increasing transparency obligations.
20. Institutional Reforms
The Federal Inland Revenue Service (FIRS) has been renamed the Nigeria Revenue Service (NRS). State Internal Revenue Services are now autonomous, with provisions for joint audits and intergovernmental cooperation.
Conclusion
With the new tax regime now fully in force, a clear understanding of the relevant provisions is essential. The reforms introduce both opportunities and increased obligations for companies and individuals, making proactive planning more important than ever. Businesses and taxpayers are therefore advised to seek appropriate legal and tax advice to ensure their affairs are properly structured, compliant, and aligned with the new requirements, while also identifying available reliefs and incentives.