Doing Business in Nigeria

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Nigeria has an estimated population of over 160 million people with a land area of 923,768 square kilometers consisting of 910,768 square kilometer land and 13,000 square kilometer water. It offers investors abundant natural resources, a low-cost labour pool, and the largest domestic market in sub-Saharan Africa in addition to a stable political system with a democratically elected government.

However there are a number of issues which you must consider when you are looking to set up your business in Nigeria. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider.

What type of Business Structure should we use?

There are advantages and disadvantages to all of them, and there is no one correct answer, it’s all dependent on your specific business circumstances and needs. A brief overview of the main structures is below:

Establishment (a branch of your overseas business):

  • Foreign companies wishing to set up business in Nigeria are required to obtain local incorporation of the Nigerian branch or subsidiary
  • The foreign investor may incorporate a Nigerian branch or subsidiary by giving power of attorney to a qualified solicitor in Nigeria for that purpose
  • Exceptions from local incorporation could be obtained from the Secretary to the Federal Government of Nigeria for some specific reasons such as invitation to execute specific project by any tier of Government in Nigeria.
  • If the company is registered in Nigeria, the whole income will be liable to tax in Nigeria
  • If the company is not resident in Nigeria, the profit derived from Nigeria is taxable at the full tax rate of 30%
  • Every foreign company (whether incorporated in Nigeria or not) must file annual returns (using the prescribed forms) with the Corporate Affairs Commission
  • Foreign companies may set up representative offices in Nigeria for the purpose of promoting the business. However, such office can not engage in business or conclude contract.

Limited Company:

  • Provides limited liability to members of the company
  • Gives a perception of a local business, with longevity
  • Corporation tax to be paid on profits at the rate of 30%
  • All companies are required to file annual returns with the Corporate Affairs Commission
  • All limited liability companies are required to audit their accounts every year.

Limited Liability Partnership:

  • Members (partners) have limited liability
  • Profits are allocated to members who then pay Income Tax on these profits personally
  • The tax residence of the member will determine in what jurisdiction these profits are taxed Partnership:
  • Two or more persons may choose to carry on business in the form of partnership
  • Profits are allocated to members who then pay Income Tax on these profits personally
  • The tax residence of the Partners will be determined by their normal place of residence and not the place where the business is situated.
  • The liability of partners is not limited.
  • Every partnership is required to file annual returns with the Corporate Affairs Commission
  • There could be a limited partnership in which at least one of the Partners must have unlimited liability
  • The limited partner does not take active part in the business but only contributes a certain sum of money

How much Corporation Tax will the business pay?

Current Corporation Tax rates in Nigeria are:

Tax rate (%) Taxable profit Naira
Small co rate 20% 0 – 1,000,000 (for first four years of companies engaged in Manufacturing, Agriculture, Mining of Solid Minerals or wholly export business)
Full rate 30% Over 1,000,000 turnover

(NB: rates have been stable for the last ten years and are expected to remain so)

In addition to the company’s income tax, all companies (except those in Petroleum exploration and production) are required to pay Education Tax of 2% per annum on their profit.

A company making loss may be required to pay minimum tax if it has been in existence for more than four years and it is not engaged in agricultural business. A company would also be exempted from education tax if it has at least 25% equity capital imported into the country.

The rate of minimum tax is 0.125% of turnover above Naira 500,000 and the highest of any one of the following factors:

  • 0.5% of gross profit; or
  • 0.5% of net assets; or
  • 0.25% of paid-up capital; or
  • 0.25% of the turnover below Naira 500,000

In Nigeria taxation is actively used as a fiscal policy to attract foreign investment and encourage investors to some specific (preferred) sectors of the economy. Some of the incentives are:

  • Small Manufacturing companies with Naira 1,000,000 turnover and below pay tax at a reduced rate of 20%
  • Dividend paid from small manufacturing companies are exempted from tax in the first 5 years of business
  • Dividend derived from manufacturing companies in the petrochemical and liquefied natural gas subsectors are tax exempt
  • The profits of any Nigerian Company in respect of goods exported from Nigeria of which the proceeds are repatriated to Nigeria or used for the purchase of raw materials or plant and spare parts are exempted from tax
  • The profits of companies whose products are used for the manufacture of products for export are exempted from tax
  • Operations of registered enterprises in the Oil and Gas Free Zone are exempted from all forms of tax.
  • There are also other tax incentives for specific industries like Solid Minerals, Hotel and Tourism and Agriculture
  • Pioneer industries are exempted from tax.

Professional advice is required to have full information about the available tax incentives in Nigeria.

Nigeria currently does not practice group tax.

The Nigerian Tax Laws are being reviewed with the aim of simplifying the main ones and ensuring that they accord with global practices. The country is a federation and taxation is enforced by the three tiers of government namely Federal, State and Local Government. Every tier has a list of approved taxes for collection.

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