5 Types of Taxes in Nigeria for Businesses Must Know to Avoid Legal Complications
Learn about the 5 types of taxes in Nigeria that businesses must know to avoid legal complications. Stay compliant and avoid penalties with this guide.
Navigating Nigeria’s intricate tax system can be challenging for entrepreneurs running businesses in the country.
The system’s complexity can pose significant obstacles for business owners.
To avoid legal complications and ensure compliance, business owners must understand the various types of taxes, which are a vital aspect of every business operation in Nigeria. This understanding is especially important given the complexity of Nigeria’s tax system.
In Nigeria, businesses are categorized into three types: Sole Proprietorship, partnerships, and limited liability companies. Each business type has its own unique tax obligations, and understanding these taxes is essential for every entrepreneur in Nigeria.
Types of Taxes in Nigeria for Businesses
Company income tax
Nigerian-registered companies pay Company Income Tax on their profits, calculated on taxable profit (revenue – allowable expenses).
Only limited liability companies are subject to Company Income Tax; sole proprietorships and partnerships are exempt.
The current rate of Company Income Tax in Nigeria is 30%, payable annually on profits from business operations.
Profits from asset sales or investments are exempt from Company Income Tax.
Businesses can deduct certain expenses such as depreciation and capital allowances from their revenue.
Business owners must understand these intricacies to comply with tax regulations and avoid legal issues.
2. VAT
VAT is a consumption tax in Nigeria, with a current rate of 7.5%.
Registered businesses must charge and collect VAT on all taxable goods and services supplied to customers.
The VAT collected by businesses is remitted to the Federal Inland Revenue Service (FIRS).
Businesses must file their VAT returns monthly by the 21st day of the following month.
Failure to file or pay VAT on time can result in penalties and interest charges.
VAT exempts some goods and services, and others are zero-rated.
Businesses can claim input VAT incurred on their purchase of zero-rated goods and services.
VAT is an important revenue source for the government.
Compliance with VAT regulations is crucial for businesses to avoid penalties.
Maintaining good relations with tax authorities is also essential.
3. Withholding tax
Withholding Tax is deducted at source from payments made to individuals and companies in Nigeria.
Applicable to various payments, including rent, interest, dividends, royalties, and professional fees.
The tax is deducted by the payer of the income and remitted to the Federal Inland Revenue Service.
The rate of Withholding Tax varies based on the payment type and recipient status.
The rate for dividends paid to a resident individual is 10%.
The rate for dividends paid to a non-resident individual is 7.5%.
Failure to remit Withholding Tax can result in penalties and interest charges.
Understanding the intricacies of Withholding Tax is crucial for businesses to ensure compliance with tax regulations.
4. Personal income tax
Personal Income Tax is levied on individuals’ income in Nigeria.
Businesses must deduct Personal Income Tax from employees’ salaries and remit it to state tax authorities.
Tax rates vary by income bracket, ranging from 7% to 24%.
High earners pay more tax with a progressive tax system.
Personal Income Tax is a major revenue source for state governments in Nigeria.
Compliance with Personal Income Tax regulations is essential for businesses to avoid penalties and legal issues.
5. Education Tax
Education Tax is levied on the assessable profits of all registered companies in Nigeria.
The tax is used to fund the education sector in Nigeria.
Education Tax is applicable only to limited liability companies.
The current rate of Education Tax in Nigeria is 2%.
The tax is calculated on the assessable profits of a company after deducting allowable expenses and exemptions.
All registered businesses in Nigeria are legally obliged to file and pay Education Tax.
The tax is usually filed annually.
The deadline for filing is six months after the end of the company’s financial year.
Late filing or non-payment of Education Tax can result in penalties and interest charges.
By complying with Education Tax regulations, companies can contribute to the development of the education sector in Nigeria.
6. Capital Gains Tax
Capital Gains Tax applies to sales of land, buildings, stocks, and shares in Nigeria.
Capital Gains Tax is a percentage of the profit from asset sales and paid by the seller.
The tax rate is 10% and is paid by the seller of the asset.
Buyers deduct and remit the tax to the Federal Inland Revenue Service.
Compliance with Capital Gains Tax regulations is mandatory for all businesses selling capital assets in Nigeria.
Non-payment of tax may result in penalties and legal issues.
Seeking professional advice is advisable to ensure compliance with regulations.
