Taxation of Non-Resident Companies with Significant Economic Presence in Nigeria | Olisa Agbakoba Legal

Taxation of Non-Resident Companies with Significant Economic Presence in Nigeria 

The Finance Act 2019 (“the Finance Act” or “the Act”) was signed into law on February 3, 2020. The major aim of the Act is to make the provisions of existing tax legislation more responsive to tax reform. The Act amended the Companies Income Tax Act, Cap C21, Value Added Tax Act, Cap. V1, Customs and Excise Tariff, Etc. (Consolidation) Act, Cap. C49, Personal Income Act, Cap. P8, Capital Gains Tax Act, Cap. C1, Stamp Duties Act, Cap. S8 and Petroleum Profit Tax Act, Cap. P13, Laws of the Federation of Nigeria 2004. 

One of the highlights of the Act is the introduction of a new tax regime for non-Nigerian companies with a ‘significant economic presence’ (“SEP”) in Nigeria. Section 4 of the Finance Act amended Section 13(2) (c), (e) and (4)of the Companies Income Tax Act and empowered the Minister of Finance to, by order; determine what constitutes the significant economic presence of a company other than a Nigerian company.

In exercise of the above powers, the Honourable Minister of Finance, Budget, and National Planning made the Companies Income Tax (Significant Economic Presence) Order, 2020 (“the Order”).

The Order sets out, among other things, the criteria for determining non-resident companies with significant economic presence.

Significant Economic Presence as Basis for Taxation of Foreign Companies

Section 13(2) (c), (e) and (4) of the Companies Income Tax Act(“CITA”) as amended by Section 4 of the Finance Act provides as follows:

“The profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from or taxable in Nigeria:

 (c) if it transmits, emits or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high-frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has a significant economic presence in Nigeria and profit can be attributable to such activity;

(e) if the trade or business comprises of furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident in Nigeria to the extent that the company has a significant economic presence in Nigeria;

Provided that the withholding tax income under this paragraph shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of subsection (2) (a)–(e).

(4) For the purpose of subsection (2) (c) and (e), the Minister may by order, determine what constitutes the significant economic presence of a company other than a Nigerian company.”

In the light of the foregoing, the Companies Income Tax (Significant Economic Presence) Order, 2020 (“the Order”) provides that for the purpose of the above provisions of CITA, a non-Nigerian company shall have a significant economic presence in Nigeria where it derives gross turnover or income of more than 25 million or its equivalent in other countries, in that year, from any or combination of the following – 

“(i) streaming or downloading services of digital contents, including but not limited to movies, videos, music, applications, games, and e-books to any person in Nigeria,

(ii) transmission of data collected about Nigerian users which have been generated from such users’ activities on a digital interface including website or mobile applications,

(iii) provisions of goods or services… directly or indirectly through a digital platform to Nigeria, or

(iv) provision of intermediation services through a digital platform, website or other online applications that link suppliers and customers in Nigeria”;

In determining the ₦25 million thresholds above, the activities of connected persons shall be aggregated. The Order defines “connected persons” to mean associates or business associates where one person is involved in the management, control or capital of the other or where same person or persons are involved in the management, control or capital of both enterprises.

taxation of non-resident companies in NigeriaThe Order also provides that where a non-resident company uses Nigerian domain name (.ng) or registers a website address in Nigeria; or has a purposeful and sustained interaction with persons in Nigeria, including reflecting the prices of its products and services in Nigerian currency or providing options for billing or payment in Nigeria currency, such company will be deemed to have a significant economic presence in Nigeria.

Furthermore, a non-resident company will be deemed to have a significant economic presence in Nigeria if the company provides technical (including advertising services, training, and provision of personnel), professional, management or consultancy services in return for payment to a person resident in Nigeria or to a non-Nigerian company with a fixed base or agent in Nigeria except where such payment is made to an employee of the person to whom the services are rendered under a contract of the employee as well as payments made for educational purposes or by a foreign base of a Nigerian company. 

The Order defines “any other electronic or wireless apparatus” as used in Section 13(2)(c) of the Finance Act to include digital or related activities carried on through satellite.

Implications of this New Tax Regime

In the light of the foregoing, non-resident companies with SEP are now required to register for income taxes, prepare financial statements in respect of the income generated from Nigeria; determine the profits that are attributable to their activities in Nigeria, and file annual tax returns to the Federal Inland Revenue Service (“the FIRS”) as provided by CITA. On the other hand, Nigerian companies are now required to deduct withholding tax (“WHT”) from payments made for services provided by non-Nigerian companies. 

Additionally, the Order provides that foreign companies covered under any multilateral agreement to which Nigeria is a party or any consensus arrangement aimed at addressing the tax challenges arising from the digitalization of the economy will be treated in accordance with such agreement or arrangement from the effective date in Nigeria.

taxation of non-resident companies in NigeriaThis is noteworthy since Nigeria is a member of the Organization for Economic Co-operation and Development’s Inclusive Framework on Base Erosion and Profit Shifting (“the OECD Framework on BEPS” or “the framework”). Thus, the government recognizes that an agreement may be reached under the framework on a unified approach for the allocation of taxing rights and profits pertaining to SEPs. 

However, the framework’s current unified approach will only apply to groups with annual revenues above €750 million ($840 million). Also, even where this threshold is met, a group may still be excluded from the scope of the approach if its profit margins are below a threshold which is yet to be determined. The implication of the foregoing is that many non-resident groups that do not qualify to be taxed under the current unified approach may continue to be taxed under the extant SEP Order and the applicable rules.

It is therefore advisable for non-resident companies who wish to rely on any tax treaties or consensual arrangements including the OECD Framework on BEPS, to engage FIRS in this regard, to claim benefit under such arrangement.

Challenges to the Taxation of Non-Resident Companies with Significant Economic Presence in Nigeria 

The first challenge to be noted with respect to this tax regime is that while the Order was published on 29 May 2020, the effective date is 3 February 2020 which is the effective date of the Finance Act, having been signed by the President of Nigeria on that day. The implication of this on transactions and/or payments carried out before 29 May 2020 is still unclear. It is expected that the Minister and/or FIRS will issue a circular to provide guidance in this regard.

It is also not clear how the FIRS intends to enforce this Order with respect to non-resident digital companies. While Nigerian customers of such companies may be expected to make withholding tax (“WHT”) deductions and remit to FIRS; FIRS may yet issue a circular to this effect.

Moreover, neither the Finance Act nor the Order states how to determine the amount of profits of a foreign digital company that will be taxed. While the OECD public consultation document, of 13 February 2019 on Addressing the Tax Challenges of the Digitalisation of the Economy, contemplates that only a portion of the profits from the transaction should be taxed in the jurisdiction where the non-resident company has significant economic presence, it is not yet settled whether this can be applied in Nigeria in view of the arm’s length principle of profit attribution provided in the Income Tax (Transfer Pricing) Regulation 2018 and other relevant legislation, and reemphasized by the Tax Appeal Tribunal in the case of Prime Plastichem Nigeria Limited v. Federal Inland Revenue Service, Appeal No.: TAT/LZ/CIT/015/2017, judgment delivered on 19 February 2020. Thus, fractional apportionment of profit may only apply to companies with SEP, if new legislation or guideline is introduced to allow such method of determining taxable profit.

In practice, when FIRS is unsure about the taxable profits of non-residents, an assessment is based on a percentage (usually 6%) of the Nigerian sourced turnover. It must however be noted that companies with SEP are not included in the categories of non-residents that can be taxed in this manner. Nevertheless, FIRS can still employ this method of taxation, relying on sections 30 and 65 of CITA that allows FIRS to tax companies using the best of judgment assessment.


Non-resident companies with a customer base in Nigeria are advised to consider how this new tax regime affects them. While we await clarifications from FIRS on the gray areas pointed out above, affected companies may, in the meantime, engage FIRS on these issues. This will help to avoid disputes and possible double taxation. Nigerian companies are also advised to consider deducting WHT from payments made to non-resident digital companies in view of this new tax regime.

Non-resident companies with SEP in Nigeria are also advised to bear in mind the provisions of relevant treaties and arrangements that may affect their tax liability when negotiating agreements. Both resident and non-resident companies are advised to seek expert opinion on specific issues that may affect them.

Written by: Ifeatu Medidem (Senior Associate) and Ugochukwu Eze (Trainee Associate), Olisa Agbakoba Legal