Tax exemption refers to a legal amount that can be deducted from income or profit that would otherwise be taxed. There are good number of things that are explicitly excluded from tax in Nigeria. People, things, and transactions that would otherwise be taxed are routinely exempted from taxation under the law. Churches, colleges, universities, health care providers, charities, trade groups, social clubs, and political organizations were all granted exemptions, most of which were not-for-profit. This article will go over the entire list of income that is tax-free in Nigeria.
WHAT IS EXEMPT INCOME?
Exempt income refers to any income that is not subject to income tax. Several types of income are susceptible to income tax throughout a financial year, according to Section 10 of the Income Tax Act of 1961. That is, if they follow specific rules and criteria.
EXEMPT INCOME: WHAT ARE THE DIFFERENT TYPES?
The types of income that are tax-free are as follows:
- House Rent Allowance
- Allowance for transportation, schooling for children, and a hostel fee subsidy.
- Housing Loan Exemption.
- Income defined as per Section 10, Section 54 of the Income Tax Act, 1961.
- Leave and Travel Allowance.
TAX EXEMPT LEGISLATION
Several other Acts or Agreements can confer tax exemptions on profits, incomes, gains, transactions, goods and services, in addition to the Companies Income Tax Act (CITA) Cap. C 21 LFN 2004 as amended, which contains generous exemptions from company profits.
The following pertinent Nigerian tax laws specify the legislative bases for granting tax exemptions:
- The Nigeria Export Processing Zones Authority Act;
- The Personal Income Tax Act, Cap. P8 LFN 2004 (as amended).
- Capital Gains Tax Act of 2004, Section C1 LFN 2004.
- Stamp Duties Act of 2004 (Cap. S8 LFN)
- Petroleum Profits Tax Act Cap. P13 LFN 2004
- Tertiary Education Trust Fund (Establishment, etc.) Act 2011
- Value Added Tax Act Cap. VI LFN 2004 as amended.
- Industrial Development (Income Tax Relief) Act Cap. 17LFN 2004
- The Mining and Minerals Act Cap. M 12 LFN 2004
- Oil and Gas Export Free Zone Decree No. 8 1996, now CAP. O5 LFN 2004
- Nigeria LNG (Fiscal Incentives, Guarantees, and Assurances) Act 1990;
- Double Taxation Agreements; and
- Acts establishing certain government organizations or corporations, such as Nigerian Liquefied Natural Gas Limited;
- Profits exempted under the Companies Income Tax Act (CITA)
CLASSIFICATION OF EXEMPT PROFITS
The gains that are exempt are divided into two categories:
- Exempted Profits from Companies Income Tax Provided the Profits are Not Derived from a Trade or Business Carried on by such Companies.
The five classes of the profits are:
- Any corporation that is a statutory or registered friendly society’s profits.
- Profits of any company that is a co-operative society registered under any co-operative society enactment or law.
- Profits from any corporation engaging in public ecclesiastical, charity, or educational initiatives.
- Profits of any company that is a registered trade union under the Trade Unions Act.
- Profits of any company or corporation created by state legislation for the aim of encouraging that state’s economic development.
The exemption will be forfeited if any of the gains indicated above are obtained from a trade or business, and such profits will be taxed.
- Exempted Profits from Companies Income Tax Even Though they March Be Derived From a Trade or Business Carried on by Such Companies.
The following are the several sorts of profits:
- Profits of a firm created for the aim of promoting sporting activities that are entirely expendable for that purpose;
- Unit Trust — dividend distributed by Unit Trust;
LIST OF INCOME EXEMPTED FROM TAX IN NIGERIA
The following income are tax-exempt in Nigeria:
Dividends received by a Nigerian resident firm from another Nigerian resident company are taxed at the source and are not subject to additional taxation.
Non-resident company dividends are taxable unless they are repatriated into Nigeria through government-approved methods. Any financial institution authorized to deal in foreign currency transactions by the Central Bank of Nigeria.
Throughout the first five years of operation, dividends earned from small manufacturing enterprises are tax-free. Dividends from investments in enterprises that are solely focused on exports are likewise exempt.
Interest received by a Nigerian corporation is subject to CIT at the applicable rate, with 10% tax withheld accessible as an offset against the final tax liability.
Government bond interest is tax-free (a portion of this will expire by 1 March 2023). Interest on domiciliary accounts in foreign currencies is likewise exempt.
WHT is imposed on interest paid to a non-resident investor at a rate of 10%, which is the final tax. Recipients who live in a nation that has a DTT with Nigeria get a 7.5 percent discount.
Royalties earned by a Nigerian corporation are subject to the applicable CIT rate. WHT can be used to offset the ultimate CIT liability at a rate of 10%.
Non-resident royalties received by a Nigerian corporation are taxed unless they are transferred into Nigeria through government-approved means.
Non-resident corporations receiving Nigerian royalties are only liable to 10% WHT, which is lowered to 7.5 percent if a treaty with Nigeria is in effect.
A Nigerian-based corporation is subject to taxation on its worldwide earnings. A non-resident corporation, on the other hand, is only taxed on income derived from Nigeria.
Dividends, interest, rents, and royalties received outside of Nigeria and transferred into Nigeria through government-approved methods are tax-free; otherwise, the income is taxable at the CIT rate appropriate to the company’s classification (small, medium, or large) and a 2% tertiary education tax.
The Central Bank of Nigeria and any bank or financial institution authorized to conduct foreign exchange transactions are examples of government-approved channels.
A Nigerian tax resident entity’s taxable overseas income cannot be legitimately delayed.
CIT does not apply to capital gains, however CGT may apply. For more details, go to the Other taxes page and look up capital gains tax.
Stock dividends (bonus shares) are subject to WHT in the same way that cash dividends are, although they are not considered in the recipient company’s taxable income.
OTHER SIGNIFICANT INCOME EXEMPTED FROM TAX
The income or profit of the following entities is exempt from CIT:
- Friendly societies that are either statutory or registered.
- Cooperative societies with a public character that are registered under any ecclesiastical, philanthropic foundation.
- Profit of a business operating in an EPZ or FTZ.
- A recognized trade union’s profit.
- Profits from exports can be invested in raw materials, spare parts, and equipment and machinery if they are imported into Nigeria through government-approved routes.
- Profit of a small business.
An amount granted by law as a diminution of income or profit which would otherwise be taxed has been variably described as a tax exemption. It is a portion of a taxpayer’s income that is not taxed. In this article, we go over the entire list of income that is tax-free in Nigeria.