Berkeley Legal | Tax Requirements for Real Property Transactions in Nigeria
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21 Aug Tax Requirements for Real Property Transactions in Nigeria

The Real Estate industry in Nigeria is a significant contributor to the Nigerian economy and an attractive sector for potential investors.   Real Estate transactions may appear complex as a result of the various taxes levied by the government .

The relevant taxes include some of the following:-.

  • COMPANY AND PERSONAL INCOME TAX

Any profit earned from income derived from property transactions, whether by individuals or corporates  is liable to tax. For corporates,  the corporate tax rate in Nigeria is 30% of the annual profit of the corporation. Where the income earner is an individual or a registered business enterprise or partnership, the rate is graduated. Whilst , the tax rate is 24% for individuals earning N3,200,000.00 and above, per annum.

In Lagos State, the tax rate is dependent on the level of income the taxpayer earns. It ranges between  5% and 20%.

  • VALUE ADDED TAX

Goods and services in Nigeria are subject to  Value Added Tax (VAT) at the rate of 5%. This includes goods and services utilized in the real estate industry. Such goods and services are not usually inherently real estate transactions, but are ancillary to real estate transactions; for example, , legal, insurance or agency services rendered in the course of real estate transaction.

  • CAPITAL GAINS TAX

The Capital Gains Tax Act Cap C1 LFN 2004[1] provides that whenever a Nigerian Taxpayer makes a gain as a result of disposal of an asset, including a real estate asset, whether situated in Nigeria or outside Nigeria, such gain is  liable to a 10% Capital Gains Tax (CGT)[2]. The tax payable shall be less allowable expenditures incurred in enhancing, preserving or defending title to the asset (i.e. Stamp duty, Insurance, professional fees, advertising etc.).[3]

However, it is important to note that gains arising from the disposal of an individual’s principal private residence are exempted from the provisions of Capital Gains Tax Act.

  • STAMP DUTIES

The Stamp Duties Act, Cap 411 LFN 2004 requires that all written instruments evidencing the transfer of any interest in or lease of any property to any person, must be stamped.  The documents of transfer in are only legally enforceable once they are stamped

The Stamp Duties Act empowers the Federal and State Governments to impose, charge, and collect stamp duties in different circumstances. The Federal Government has the sole authority to impose, charge and collect Stamp Duties in respect of documents relating to matters between a Company and an individual, group or body of individuals.[4]

The act further provides that except where express provisions are made in the Stamp Duties Act, (such as documents that must be stamped before execution e.g. Insurance Policies) any unstamped or insufficiently stamped instruments may be stamped within 40 days from its first execution except such days is reduced by an order pursuant to section 23(7).[5]

Any document which ought to be stamped but is not stamped will not be admissible in evidence in any civil proceedings in Nigeria.

  • EDUCATION TAX

In addition to paying Companies Income Tax, corporations in Nigeria, engaged in any commercial activity, which includes real estate or real property transactions from which they make a profit, are liable to pay two per cent (2%) of such profit as Education tax to the Education Trust Fund. This tax is viewed as a social obligation placed on all Companies in ensuring that they contribute to the development of  educational facilities in the country. This Tax is collected on behalf of the Education Trust Fund by the Federal Inland Revenue Service (“FIRS”).

  • WITHHOLDING TAX

Withholding tax is an advance and indirect tax, deducted at source from the invoices of the taxpayer. Withholding tax rates are usually 10% or 5% for corporate bodies and individuals respectively. The collecting authority for the tax can be the FIRS or the State Inland Revenue).

When a company or individual supplies goods or services to another company, an invoice will usually be issued in respect of the transaction. If, for example, the amount payable by the purchaser is N1million and the relevant tax rate is 10% then at the time of payment, the purchaser will pay N900,000 to the supplier, deduct N100,000 from the invoice of the supplier and remit it to the relevant tax authority.

The Purchaser is also obligated to obtain evidence of remittance in the form of a withholding tax credit note on behalf of the supplier. The Supplier can subsequently use the tax credit note to reduce any income tax payable at the end of his year of assessment

  • STATE PROPERTY TAXES

Different states impose certain taxes, charges and fees for the registration of properties. For instance, under the Lagos state Land Use Charge Law, land use charge is paid annually by property owners in Lagos. As the name implies, this charge is in the form of a tenement rate the land owner pays to the government for granting him a “lease” over the land since by law the state government owns all the land in the state.

CONCLUSION

Compliance with these tax requirements by all the parties involved in Real Estate transactions is essential to avoid any potential tax liability.

 

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 info@berkeleylegal.com.ng

 

[1] Section 3

[2] Section 2(1)

[3] Section 13(1)(a)(b) & (c)

[4] Section 4(1) & (2)

[5] Section 23