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TAXATION OF NON-RESIDENT COMPANIES

TAXATION OF NON-RESIDENT COMPANIES

TAXATION OF NON-RESIDENT COMPANIES

TAXATION OF NON-RESIDENT COMPANIES

TAXATION OF NON-RESIDENT COMPANIES

Companies frequently broaden their operations internationally in today’s globalized economy in order to access new markets and seize global opportunities. A firm is referred to as a non-resident company when it conducts business in a nation other than where it was formed or registered. For enterprises trying to enter international markets or for people conducting cross-border commerce, understanding the notion of non-resident companies is essential.

 

The definition of non-resident corporations, their tax implications, and significant regulatory considerations will all be covered in this article.

Definition of Non-Resident Company

This is a company or corporation that is not registered or incorporated in Nigeria, but which derives income or profits from Nigeria. Exemption from incorporation does not confer exemption from payment of tax on such a Non-Resident company. Every company, resident or non-resident, is liable to tax in Nigeria if its income is liable to tax under the provisions of the Companies Income Tax Act CAP C21 LFN 2004 (as amended).

 The following are the circumstances under which a non-resident company will be liable to tax in Nigeria:

(a) Income derived through a fixed base or permanent establishment;

(b) Income derived in Nigeria through a dependent agent;

(c) Income derived from supervisory activity that lasts more than three months;

(d) Income derived in Nigeria from a turn-key project;

(e) Income derived by non-resident company from professional consultancy,

management and technical services rendered in Nigeria.

(f) Income derived by a non-resident company from investments such as dividends, interest, rent, and royalties. The withholding tax deducted from these incomes is taken as the final tax; and

(g) Income derived from a contract awarded to a Nigerian company, but sub-contracted to a non-resident company.

 

Exemption of Non-Resident Companies to tax

It is important to know that tax laws and regulations vary significantly from country to country and they are subject to change over time. Therefore, the tax treatment and exemptions for non-resident companies in Nigeria, are based on the existing tax laws, the nature of the transaction, as well as the tax treaties between concerned countries.

Non-resident companies may be exempted from tax based on the following conditions:

  • No Permanent Establishment: In Nigeria, non-resident companies may be exempted from taxation if they do not have a permanent establishment or fixed base within that country.
  • Tax Treaties: Bilateral tax treaties between countries often provide provisions for the avoidance of double taxation. These treaties may offer tax exemptions or reduced tax rates for specific types of income earned by non-resident companies.
  • Limited Duration and Activities: Depending on the duration of the transaction or activities non-resident companies may be exempted from tax.
  • Sovereign Wealth Funds and Diplomatic Entities: Non-resident companies that are sovereign wealth funds or diplomatic entities may be granted tax exemptions under specific international agreements.

 

Understanding the Rule of Fixed Base in International Taxation

The term “fixed base” is crucial in the field of international taxation when evaluating the tax obligations of non-resident persons and corporations operating abroad. International tax treaties and national tax legislation of the host country control the fixed base rule.

If a non-resident company has a “fixed base” from which it carries on its business or trade in Nigeria, the profits from such activities would be deemed to be derived from Nigeria.

The term “fixed base” implies that the place must be easily identifiable and must possess some degree of permanence. It includes:

(a) Facilities such as a factory, an office, a branch, a mine, gas or oil well, etc;

(b) Activities such as building, construction, assembly, or installation; and

(c) Furnishing of services in connection with the activities mentioned above.

However, two cases are specifically exempted and these include:

(i) Facilities used solely for storage or display of goods or merchandise;

and

(ii) Facilities used solely for the collection of information.

The Rule of Significant Economic Presence (SEP)

The Finance Act, 2019 (“the Finance Act”) introduced the concept of significant economic presence (SEP) to expand the scope of Nigerian tax on foreign companies deriving income from their activities in Nigeria which were hitherto not captured in the tax net. Consequently, the Companies Income Tax (Significant Economic Presence) Order, 2020 (“the Order”) was issued by the Federal Government of Nigeria.

The Order provides clarification on what constitutes a SEP for foreign companies doing business, or providing services to customers, in Nigeria, in line with Section 13(2)(c) and (e) of CITA.

 

Determination of SEP

The Order provides that a foreign company shall have a SEP in Nigeria in any accounting year, where it:

(a) Derives N25 million annual gross turnover or its equivalent in other currencies from any or

combination of the following digital activities:

  1. Streaming or downloading services of digital content, including but not limited to movies, videos,

music, applications, games, and e-books to any person in Nigeria; or

  1. Transmission of data collected about Nigerian users which has been generated from such users

activities on a digital interface including website or mobile applications; or

iii. Provision of goods or services other than those under sub-paragraph 5 of the Order, directly or

indirectly through a digital platform to Nigeria; or

  1. Provision of intermediation services through a digital platform, website, or other online applications

that link suppliers and customers in Nigeria.

(b) Uses a Nigerian domain name (i.e., .ng) or registers a website address in Nigeria; or

(c ) Has a purposeful and sustained interaction with persons in Nigeria by customizing its digital page or

platform to target persons in Nigeria, including reflecting the prices of its products or services in Nigerian

currency or providing options for billing or payment in Nigerian currency.

 

Determination of SEP for technical, professional, management, and consultancy services

The Order provides that a foreign company providing technical, professional, management, or consultancy services shall have an SEP in Nigeria in any accounting year where it earns any income, or receives any payment from a person resident in Nigeria, or a fixed base or agent of a foreign company in Nigeria.

Exemption from SEP

The Order exempts the activities of the following foreign companies from constituting a SEP in Nigeria:

  1. Any foreign company under a multilateral agreement and consensus arrangement to address tax

challenges arising from the digitalization of the economy who will be treated under such agreement or arrangement.

  1. Any foreign company making any payment, where the payment, is made:
  2. To its employee under a contract of employment; or
  3. For teaching in an educational institution or for teaching by an educational institution; or iii. By a foreign fixed base of a Nigerian company

 

Withholding tax (WHT) responsibilities are often placed on non-resident enterprises that satisfy the requirements for significant economic presence when a nation adopts a SEP framework for taxation.  Non-resident companies must carefully evaluate their activities and revenue streams from Nigeria to appropriately establish their tax obligations because the laws might differ substantially due to the nature of the revenue and transaction in question.

Conclusion

To ensure smooth operations and avoid any potential risks related to non-resident company status, it is essential to get professional guidance from tax specialists and legal consultants knowledgeable with the host Nigeria’s tax legislation. Non-resident businesses can successfully access Nigerian markets and experience sustainable growth in the modern economy following the implementation of appropriate strategic planning and actions.

 

For more enquiry on taxation on non-residential companies, kindly contact us at SOW Professional Services Ltd.

Website: www.sowprofessional.com

Phone: 07038254989

WhatsApp: 08152451523