Tax-Exempt Profits and Incomes Under the Nigerian Company Income Tax Act: A Guide

 

Taxes play a significant role in shaping the economic environment of any nation. In Nigeria, the Company Income Tax Act (CITA) is a critical piece of legislation that governs how businesses pay their taxes. However, not all profits or incomes are subject to tax under this law. Certain profits and incomes are explicitly exempted, offering relief to specific sectors or activities deemed essential for economic growth. In this article, we’ll explore the types of profits and incomes that are exempted from tax under CITA, breaking them down in a clear and straightforward way.

 

Profits of Friendly and Co-operative Societies

Under CITA, the profits of any statutory or registered friendly society are exempt from tax as long as these profits are not derived from any trade or business carried on by the society. Similarly, co-operative societies registered under laws relating to co-operative societies enjoy tax exemptions, provided their profits come strictly from co-operative activities with their members.

This exemption is in place to encourage mutual aid and support systems among people and organizations that rely on shared resources rather than traditional business activities for generating income.

Charitable, Ecclesiastical, and Educational Activities

Organizations engaged in ecclesiastical, charitable, or educational activities of a public nature also benefit from tax exemptions. Again, this exemption is limited to profits that are not derived from commercial or business activities. The goal here is to support organizations that work to uplift communities through religion, charity, or education, without burdening them with tax obligations from these benevolent efforts.

Sporting Activities

If a company is formed specifically to promote sporting activities, its profits are exempt from tax, provided these profits are fully used to promote sports. This is to support the growth and development of sports within the country, ensuring that revenue generated in this sector is reinvested in improving sporting events, infrastructure, and nurturing talent.

Trade Unions

Registered trade unions enjoy tax exemption for their profits, as long as these profits are not derived from business activities. This allows unions to focus on advocating for workers' rights without the added financial pressure of taxes on their non-business income.

Unit Trust Dividends

Dividends distributed by Unit Trusts are exempt from tax. A Unit Trust is a type of investment fund where funds are pooled from various investors to invest in a variety of securities. This exemption helps to encourage collective investments and the distribution of dividends to investors without additional tax burdens.

Local Government-Owned Corporations

The profits of any body corporate established under any Local Government Law or Edict in force in Nigeria are exempt from tax. These local government-owned corporations are often set up to promote regional economic development, and the tax exemption allows them to operate more freely in achieving their goals.

Purchasing Authorities for Exports

Purchasing authorities established by law and empowered to acquire commodities for export from Nigeria are also exempted from tax on profits derived from the sale of those commodities. This is part of a broader strategy to encourage export activities in the country, ensuring that purchasing authorities can operate efficiently in global markets.

Economic Development Corporations

Certain corporations set up by state governments to promote economic development in that state benefit from tax exemptions. As long as the corporation’s profits are not derived from business activities or from shares in businesses, they enjoy this exemption. This measure aims to support state-led initiatives to improve the economic conditions of their regions.

Foreign Companies’ Profits Brought into Nigeria

Profits of a foreign company that would otherwise be chargeable to tax solely because they were brought into Nigeria are exempt from tax. This encourages foreign investment and capital inflows into the country, boosting economic growth by removing tax barriers to the repatriation of foreign earnings.

Foreign Dividends, Interest, and Royalties

Dividends, interest, rent, or royalty earned by a company from outside Nigeria and brought into the country through government-approved channels are exempt from tax. This exemption encourages the flow of foreign investment into the country and incentivizes Nigerian companies to seek opportunities outside the country.

Foreign Non-Resident Companies’ Interest

Foreign non-resident companies that hold deposit accounts in Nigeria are exempt from tax on the interest they earn, as long as the funds in the account were transferred in foreign currency. This applies to interest earned from January 1, 1990, onwards. This exemption helps attract foreign currency deposits into Nigerian banks, promoting stability in the financial system.

Interest on Foreign Currency Domiciliary Accounts

Interest earned on foreign currency domiciliary accounts in Nigeria is exempt from tax. This exemption applies to interest accruing from January 1, 1990, onward and encourages the use of foreign currency accounts within Nigeria, helping to bolster foreign exchange reserves in the country.

Dividends from Small Manufacturing Companies

Dividends received from small companies in the manufacturing sector during their first five years of operation are exempt from tax. This provision is intended to give new manufacturers a tax break during the critical early years of their business, allowing them to reinvest profits back into their operations.

Profits from Export of Goods

The profits of Nigerian companies in respect of goods exported from Nigeria are tax-exempt, provided the proceeds are repatriated to Nigeria and used for purchasing raw materials, plant equipment, and spare parts. This exemption supports companies engaged in export activities, encouraging them to reinvest in their operations and contribute to the local economy.

Supplies for Manufacturing Exports

Companies that supply inputs exclusively for the manufacturing of exportable products also benefit from tax exemptions. The exporter is required to provide a certificate of purchase for these inputs to ensure that the exemption is properly applied. This provision ensures that suppliers to export-focused manufacturers are also supported, fostering growth in the supply chain for export production.

Real Estate Investment Companies

Real estate investment companies are exempt from tax on dividends and rental income received on behalf of their shareholders, provided that at least 75% of this income is distributed to shareholders within 12 months. This exemption encourages the development of real estate investment structures and supports the real estate market.

Conclusion

The Nigerian Company Income Tax Act provides several exemptions designed to stimulate economic activity, promote investment, and support vital sectors such as education, sports, manufacturing, and exports. These exemptions allow companies to reinvest in their operations, reduce their tax burden, and contribute more effectively to national development. However, companies benefiting from these exemptions are still required to comply with tax registration and filing obligations, ensuring transparency and accountability within the system. Understanding these exemptions can help companies navigate the tax landscape more effectively and make informed decisions about their financial strategies.