16 Mar Foreign Direct Investment and Applicable Tax Incentives
Foreign Direct Investment, also known as FDI is an investment by one company/individual in business interests in another country. This is usually either by setting up business operations or acquiring tangible business assets, including stakes in the other businesses.
FDI is made for reasons such as access to markets & resources, development of new resources, tax incentives, inter alia. Tax incentives are deductions, exclusions or exemptions granted by the government from tax liability, in order to encourage particular economic activities. Nigeria has various tax incentives aimed at encouraging investments in certain key sectors, some of which include the following;
Pioneer Status Incentive
This is a tax holiday given to new or existing companies over a period of time to encourage investment in specific industries. It is usually granted to companies engaging in new areas of business to enable the industry concerned make reasonable level of profit within its formative years. The pioneer status is initially granted to eligible or qualified industries for 3 years and may be extended upon application for a period of 1 year and a further term of 1 year. It may also be a 7 year tax holiday where the business or industry is located in an economically disadvantaged area of the country.
The Nigerian Investment Promotion Commission is the body in charge of administering this incentive and some of the approved pioneer industries include but is not limited to Mining and Processing of Coal, Processing of Cocoa, Waste treatment, disposal and material recovery, Manufacture of Iron and Steel from Iron Ore. See the Industrial Development (Income Tax Relief) Act, Nigerian Investment Promotion Commission Act and the Pioneer Status Incentives Regulation 2014.
There are various incentive schemes for companies whose business is export based/focused. The incentives range from tax exemption to duty draw backs and other forms of grant. Export processing zones (EPZ) are also types of incentives in Nigeria. They are areas where export trade activities can be carried on free of tax and foreign exchange restrictions.Profits of any Nigerian company in respect of goods exported from Nigeria are exempt from tax, provided that the proceeds from such exports are repatriated to Nigeria and are used exclusively for the purchase of raw materials, plant, equipment and spare parts.
Also, a company that is 100% export oriented but located outside an EPZ will enjoy a 3 year tax holiday, provided the company is not formed by splitting up or the reconstruction of an already existing business and the export proceeds constitute at least 75% of its turnover.
See Nigeria Export Processing Zones Act, The Investment Procedures, Regulations and Operational Guidelines for Free Zones in Nigeria, 2004, issued pursuant to Section 10 (4) of the Nigeria EPZ Act (the NEPZ Regulations), inter alia.
Rural Location incentives
Certain incentives are available to companies located in areas that are at least 20 kilometers away from infrastructures such as water, electricity or tarred roads.Where a company provides infrastructural facilities for the purpose of its business,such a company will be entitled to claim both the initial allowance on such expenditure and a further rural investment allowance whose rate is graduated based on the scale of facilities provided.
Where no public facilities exist, a hundred (100%) rural investment allowance will be allowed by the tax authorities on such rural infrastructural facilities.
Gas Utilization Incentives
Companies engaged in gas utilization in Nigeria are entitled to a free tax period of up to 5 years, accelerated capital allowance after the tax-free period, tax free dividends during the tax-free period amongst others.
Free Trade Zones
A Free Trade Zone (FTZ), also known as Export Processing Zone (EPZ), is an area where trade barriers have been eliminated to ensure increased investment opportunities. It is a location designated by the government as where export trade activities can be carried out free of tax and foreign exchange restrictions.FTZs are usually located in underdeveloped parts to attract employers and reduce poverty/unemployment and stimulate the local economy.There are two types of FTZ: General and Specialized. Some of the applicable laws in the FTZ include Nigeria Export Processing Zones Act (NEPZA),Oil and Gas Free Zone Act& Regulations (OGEFZA), Companies Income Tax Act and Value Added Tax Act.
The FTZ comes with various incentives directed at increasing investment and trading activities in Nigeria, some of which have been listed below;
- Exemption from all Federal, State, &Local Government taxes, levies and rates;
- Duty free importations of capital goods, machinery/components, spare parts, raw materials, and consumable items in the zone.
- Licensing of approved enterprises whether or not the business is incorporated under section 54 of the Companies and Allied Matters Act;
- Legislative provisions relating to taxes, levies, duties and foreign exchange are not applicable within the zone;
- The repatriation of foreign capital investment at any time with capital appreciation of the investment;
- Remittance of profits and dividends earned by foreign investors;
- Import/Export Licenses are not required for transactions;
- The import of goods for the purpose of approved activities in the FTZ are exempted from customs duty;
- Up to 100% foreign ownership of businesses is permitted;
- Foreign managers and qualified personnel may be employed by companies in the FTZ;
- Rent free Land at Construction stage, after which it will be determined by NEPZA;
- Up to 25% of production may be sold in Nigeria in the absence of a valid permit and on payment of appropriate duties; inter alia.
To establish a Free Trade Zone for personal or commercial purposes, an application indicating interest to establish a Free Zone and its location in the country must be made to NEPZA.
To register/locate a business in the Free Trade Zone, an application must be made to NEPZA, upon which an Operating License (OPL) will be issued by the Free Zone Administration. Obtaining this license constitutes registration and no further registration is required with the Corporate Affairs Commission (CAC).
Our Firm is able to advice on the attractive investment sectors in Nigeria and the applicable tax incentives.
The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact firstname.lastname@example.org