Heard of Minimum tax in Nigeria as an SME? Read this post and thank me later!
According to the law, companies in Nigeria (which are otherwise known as resident companies) pay companies income tax (CIT) at 30% on their total income (both in Nigeria or abroad) while companies not registered in Nigeria but doing business in the country are subject to CIT based on their income attributable to Nigeria. This CIT rate is assessed on a preceding year basis (i.e tax is on the profits for the accounting year ended in the year before the assessment).
For small companies operating in the manufacturing industry and export based; however, (companies whose annual turnover does not exceed N1 million) CIT is reduced to 20% in the first five years of commencement of operations.
- What happens if there is no profit to be taxed?
- What is minimum tax in Nigeria?
- Who are exempted from Minimum Tax in Nigeria?
- My company is dormant, so I don’t have any business with Minimum tax in Nigeria
- What if I want to close my company finally?
What happens if there is no profit to be taxed?
Ideally, lot of small and medium based business expect that there should be not tax paid when their businesses/ or companies make a loss at the end of a financial year.
The tax man does not see payment of CIT because it is ‘assumed’ that every asset owned by a business generates an inflow of income for the business whether or not profit is made at the end of the business/ financial year, therefore the tax authorities came about the minimum tax as a measure of anti tax avoidance whether the company involved states a profit, or indicates dormancy at the end of the specified tax assessment year.
Where it is noticed that a company in Nigeria is in a state of dormancy, minimum tax is charged on the company’s share capital or net assets, whichever plays higher.
What is minimum tax in Nigeria?
Section 32 of the Companies Income Tax Act, Minimum Tax Legislation states that:
Where in a year of assessment, the ascertainable profits of a company, from all sources, results in a loss or where the company’s ascertainable profits results in no tax being liable for payment, or where the tax payable is less than the statutory minimum tax allowable, such a company shall be liable to be charged and to pay a statutory minimum tax, which amount will be dependent on.
If the annual turnover of the company is N500,000 or less, and has been carrying on business for at least four (4) years, will be liable to pay a minimum tax of any higher of the following sums.
0.5% of the company’s gross profit;
or; 0.5% of the company’s net assets;
or 0.25% of the company’s paid up share capital;
or 0.25% of the turnover of the company for the relevant year of tax assessment.
Where, however, the turnover of the company is more than N500,000,
The minimum tax payable shall be the higher of the above rates that is charged for companies with an annual turnover of N500,000 or less, plus 0.125% (or fifty per cent) on the excess of the turnover that is above N500,000 will be charged as minimum tax.
Who are exempted from Minimum Tax in Nigeria?
- Companies that are involved in agriculture
- Companies that have not carried on business during the first four years of their incorporation
- Companies that have at least 25 imported equity capital fully paid for by a foreign company
My company is dormant, so I don’t have any business with Minimum tax in Nigeria
The fact that a company is in dormancy does not exonerate the company from payment of minimum tax in Nigeria. There is this general perception that dormant companies should not pay tax because they are not involved in any money making activities.
Hey, this perception is very wrong, as the tax authorities are making everything possible for companies to avoid tax in Nigeria.
As a tax avoidance measure by the FIRS, minimum tax is placed on the higher of a dormant company’s gross profit, or on its net assets, or paid up share capital, or turn over at the rates indicated earlier above. The only exemption to this minimum tax in Nigeria rule are also stated above.
I would therefore advise all owners of companies that are in dormancy and lack the knowledge of minimum tax to quickly contact their tax consultants or advisers to put their compliance in proper order so as to avoid penalties that may finally liquidate such businesses.
What if I want to close my company finally?
You will need professional assistance if you are to finally close down your business. Remember that a company can only be stopped from paying taxes in Nigeria if it has filed all necessary documentation to close the business.