Is Your Tax Bill Eating Away Your Profits? Explore Tax Incentives to Reduce Your Tax Liability

Many Nigerian businesses struggle with the weight of corporate taxes, hindering their ability to invest in expansion and innovation. However, a strategic understanding of the Nigerian tax ecosystem can unlock a wealth of opportunities. The Nigerian government offers a robust framework of tax incentives designed to stimulate specific sectors and business types. By leveraging these benefits, companies can significantly reduce their tax liabilities and free up valuable resources for growth. This article provides a comprehensive overview of the key tax incentives available to Nigerian businesses. We will delve into programs for labeled startups, approved enterprises in free trade zones, pioneer companies in critical industries, and the advantages extended to small businesses. Ready to optimize your tax strategy and unlock significant financial advantages? Let’s explore the tools at your disposal.

The Drivers Behind Nigeria’s Tax Incentive Programs

The Nigerian government’s tax incentive framework is not accidental. Each incentive program is strategically designed to address specific economic goals. Some drivers of these initiatives include:

Fueling innovation and research
Unlocking export potential
Empowering domestic investment
Bridging regional disparities
Attracting foreign investment

By understanding the rationale behind these incentives, businesses can strategically position themselves to benefit from these programs and contribute to the nation’s overall economic well-being.

A Look at Nigeria’s Tax Incentives

Labeled Startups

Nigeria’s Startup Act recognizes the critical role of innovative startups in driving economic growth. To empower these young companies, the government offers a compelling package of tax incentives for “labeled startups” – those officially recognized by the Nigerian Startup Act. Incentives available to Labelled Startup:

A labeled startup will get Pioneer status. i.e. Income tax relief for a period of 3 years and an additional 2 years if still within the period of a labeled startup from the date of issuance of the asset.
A labeled startup shall enjoy full deduction of any expenses on research and development which are wholly incurred in Nigeria.
A labeled startup shall be exempt from contributions to the Industrial Training Fund (ITF) where it provides in-house training to its employees for the period where it is designated as a labeled startup.
A labeled startup shall be entitled to an investment tax credit equivalent to 30% of the investment in the labeled startup.
Capital gains tax shall not be charged on gains that accrue from the disposal of assets in a labeled startup provided the assets have been held in Nigeria for a minimum period of 24 months.

Approved Enterprises

Nigeria’s network of Free Trade Zones (FTZs) offers a unique environment for businesses seeking to expand their global reach and optimize their tax profile. Companies operating within these designated zones, known as “Approved Enterprises,” enjoy a range of attractive incentives: Incentives available to Approved Enterprises within FTZs;

Exemption from all federal, state, and local government taxes, rates, and levies.
Duty-free importation of capital goods, machinery/components, spare parts, raw materials, and consumable items in the zones
Repatriation of foreign capital investment.
Full remittance of profits and dividends earned by foreign investors.
Import and export licenses shall not be required.
Rent-free land at the construction stage; thereafter rental payment shall be determined by the Authority.
Allows for up to 100% foreign ownership of investments.
Up to 25% of production may be sold outside the zone (custom territory) against a valid permit and on payment of appropriate duties.

Pioneer Companies

The Nigerian government recognizes the importance of fostering new industries and encouraging domestic production of essential goods. To achieve this, they offer a compelling set of tax breaks for “pioneer companies” – those venturing into industries deemed critical for national development. Incentives available to Pioneer Companies:

Pioneer companies are entitled to tax relief (i.e. exemption from income tax) for a period of three years and can be extended by an additional period of two years.
Withholding tax exemption on dividends paid by Pioneer companies to the shareholders.
Any losses incurred by Pioneer companies during the pioneer period can be offset against profit after the pioneer period.
The qualifying capital expenditure incurred during the pioneer period is deemed to be incurred on the first day of the post-pioneer period.

Small Companies

Prior to the Finance Act 2019, there was no segregation of companies, as all companies were liable to income tax at the rate of 30 % on their taxable profit. However, the Finance Act 2019 now classifies companies into 3 categories namely; small companies, medium companies, and large companies based on their turnover level, and stipulates different income tax rates of 0%, 20%, and 30 % respectively. Recognizing the vital role of small businesses in driving economic growth, the Nigerian government offers a comprehensive package of tax breaks specifically designed for “small companies,” defined by the Companies Income Tax (CIT) Act as those “with a turnover of #25,000,000 (twenty-five million naira) or less” in a year. These incentives aim to ease the administrative burden and financial strain on small businesses, allowing them to focus on establishing a strong foundation and achieving sustainable growth Incentives available to Small Companies: • Small companies are exempt from all forms of corporate income taxes i.e. CIT and Tertiary Education Taxes (TET). However, this does not exempt small companies from filing their income tax returns as and when due (i.e., typically six months after the end of its accounting year). The exemption of small companies from payment of income taxes implies income derived by them should be outrightly exempt from withholding tax (WHT) deductions since WHT is typically an advance CIT payment. • Small companies are exempt from minimum taxes which is computed at the rate of 0.5% of a company’s gross turnover, where the company has no taxable profit, or when the income tax payable is lower than the minimum tax computation. This is to ensure that no form of income tax is paid by small companies. • Small companies are exempt from compliance with the provisions of the Value Added Tax (VAT). That is, small companies are not legally required to register for VAT, issue tax invoices, remit and render monthly returns. They are also exempt from the penalties prescribed by the VAT Act for non-compliance with the administrative provisions. • Small companies tend to have easy access to special funds or financing schemes established by the Government, providing them with easier access to credit (loans, guarantees, venture capital funds, subsidized interest rates) at favorable terms. • Small companies participating in trade promotion programs, trade fairs, and exhibitions organized by the government can facilitate access to both domestic and international markets.

Unlocking Your Full Potential with Stransact

Navigating the complexities of Nigeria’s tax landscape can be a daunting task. However, with the right guidance, you can transform these incentives from potential benefits into tangible advantages that propel your business forward. At Stransact, our tax and strategy professionals go beyond just tax filing. We provide insightful analysis and strategic planning to help you optimize your tax profile, maximize the benefits of available incentives, and minimize your overall tax burden. Our expertise empowers you to make informed decisions that contribute to your long-term growth and success. Don’t miss out on the valuable opportunities presented by Nigeria’s tax incentive framework. Let us bring value to every transaction and empower you with the confidence to achieve your business goals. Contact Stransact today at [email protected]