List Of Incomes Exempted From Tax In Nigeria

Incomes exempted from tax refers to tax-free transactions and incomes at the local, state, or federal levels. Usually, in every country, individuals and companies pay taxes to the government that will be used for the welfare and development of the country. 

However, not all incomes are taxed. For example, in Nigeria, many incomes are excluded from taxation. These transactions or income that would normally be taxed are excluded by law. 

For example, tax exemptions were given to churches, colleges, universities, health care providers, charities, trade groups, social clubs, and political groups, most of which were not profit-motivated. 

The essence of this tax exemption is to help local companies grow, earn investors’ confidence and stimulate economic growth. It also helps to build and sustain the bilateral relationship between Nigeria and other countries where Nigeria is doing business. 

So this blog post explains the meaning of tax-exempt income and the different incomes exempted from tax.

What Is Tax-Exempt Income?

Tax-exempt income is any income the local, state or federal government does not include in its income tax. People and organizations may have to report this income on their tax returns, but it won’t affect how much tax they have to pay. The report is only for information purposes.

That means the taxpayer is free from any obligation regarding taxation. The government grants this privilege to certain individuals and companies for a reason. 

Section 10 of the Income Tax Act of 1961 says that many types of income in Nigeria are subject to tax throughout the year. That is if they abide by the rules governing tax.

Below are the different income types exempted from tax in Nigeria below.

List Of Income Exempted From Tax

Below are the different incomes that are tax-free. They include the following:

• Travel and leave allowance
• Allowance for children’s education, transportation, and hostel fee subsidy.
• House rent 
• Housing loan exemption

Tax Exempt Legislation

Some Acts and Agreements confer exemptions from tax on incomes, transactions, profits, gains, goods and services. This also includes the Companies Income Tax Act (CITA), which contains tax exemptions from company profits. 

Below are the Nigerian tax laws that state the legislative basis to grant tax exemptions.

• Petroleum Profits Tax Act Cap. P13 LFN 2004
• The Nigeria Export Processing Zones Authority Act
•  The Mining and Minerals Act Cap. M 12 LFN 2004.
•  Tertiary Education Trust Fund (Establishment, etc.) Act 2011. 
•  Value Added Tax Act Cap. VI LFN 2004 as amended.
• The Personal Income Tax Act, Cap. P8 LFN 2004 (as amended).
• Double Taxation Agreements
• Capital Gains Tax Act of 2004, in Section C1 LFN 2004.
• Industrial Development Act Cap. 17LFN 2004
• Stamp Duties Act of 2004 (Cap. 58 LFN)
• Oil and Gas Export Free Zone. Decree No. 8 1996, now CAP. 05 LFN 2004
• Nigeria LNG Act 1990;
• Profits that are exempted under the Companies Income Tax Act (CITA)
• Acts establishing certain government corporations or organizations like the Nigerian Liquefied Natural Gas Limited

Classification Of Profits That Are Exempted From Tax

The profits or gains that are exempted from tax are classified into two. They include the following:

1. Profits are exempted from Company Income Tax as long as the profits are not from a business the company engages in.

These categories of profits include:

• The profits of any company registered as a cooperative society under the cooperative society act.
• Profits from any company that is into charity, religious, or educational initiatives.
• The profits of any company registered trade union under the Trade Unions Act.
• Profits made by any company or corporation set up by state law to promote the state’s economic development. 

2. Profits are exempted from income tax even though they are derived from a company’s business. 

These profits include:

• Profits from a company created solely to promote sporting activity. 
• Dividends from Unit Trust 

Also read: List of indigenous owned manufacturing Companies in Nigeria

List Of Incomes Exempted From Tax In Nigeria

Below is the list of incomes exempted from tax in Nigeria. They include the following:

a. Dividend Income

Dividends are payments made to you by a company because you own shares in that company.

When a Nigerian-based company gets dividends from another Nigerian-based company, the dividends are taxed at the source and are not subject to taxation again.

But dividends from companies not based in Nigeria are taxed unless brought into the country through government-approved channels (i.e., any financial institution authorized by the Central Bank of Nigeria to carry out foreign currency transactions).

During the first five years of small manufacturing companies, their dividends are not subject to CIT. In addition, dividends from investments in businesses solely into export are not taxed. 

Equally, dividends paid to real estate investment companies and Unit Trusts are not subject to withholding tax (WHT). Also, stock dividends are not part of the recipient company’s income that can be taxed.

b. Interest Income

Interest income is the money someone pays you for using your money or lending it to someone else. On a larger scale, interest income is how much an investor makes from the money he puts into a project or investment.

The interest on government bonds is not taxed as well as interest on domiciliary accounts. Also, a 10% WHT is charged on interest paid to a non-resident investor.

And individuals living in a country that has double tax treaties (DTT) with Nigeria get a discount of 7.5%.

c. Royalty Income

Royalty income is the payment owners get for using their intellectual property, creative works, or mineral rights for natural resources like oil and gas that are taken from their land. These payments are made through license agreements or royalty agreements.

Royalties give owners cash flow through a legal contract for a royalty-based license that pays a percentage of gross revenue, net sales, or another rate negotiated during the license term.

When a Nigerian company receives royalty income from non-resident companies, it is taxed unless they are remitted through an approved financial institution. 

Non-resident companies that get royalties from Nigeria only have to pay 10% WHT, and can be reduced to 7.5% if there is an existing treaty between the two countries.

d. Foreign Income

Foreign earned income is money you earned for your services in a foreign country. That is when your tax home is in that country and you have met the bona fide residence test or the physical presence test.

Based on that, dividends, rent, interest, and royalties received outside of Nigeria and transferred into Nigeria through government-approved financial institutions are not taxed. 

Other Incomes Exempted From Tax

• Friendly societies that are legal or registered.
• Cooperative societies that are registered with religious or charitable organizations with a public character.
• The profit of a business established within an export processing zone (EPZ) or free trade zone (FTZ). 
• Profits that a registered trade union makes.
• Profits gotten from exports. As long as it is brought into the country through a government-approved channel and invested in spare parts, raw materials and plant and machinery.
• Profits from a small company.

Conclusion 

From this blog post, we hope that you understand the incomes exempted from tax in Nigeria. These include dividend income, royalty income, foreign income, interest income etc.

Also, some groups, like religious bodies, charitable organizations, social clubs etc., are exempted from tax. And the idea behind tax exemptions is to promote economic growth and bilateral relationship between countries.