Tax incentives: economic development credit and free trade zones

A company plans a ₦20 billion plant to make electric motors. Under the old rules it would have applied for pioneer status and enjoyed a tax holiday. From 2026 it applies instead for an economic development incentive certificate, and the relief is a tax credit tied to the money it spends on qualifying assets.

The change from a blanket holiday to a performance-linked credit is the heart of this topic, and the exam asks for the process, the credit, the conditions and the free zone rules.

This topic covers the income tax exemptions in the Nigeria Tax Act (NTA) 2025, the economic development tax incentive that replaces the pioneer status regime, the application and approval process, the economic development tax credit and incentive period, cancellation, transition from the Industrial Development (Income Tax Relief) Act, and the tax rules for free trade zones. The previous topic covered investment income.

The next covers the company tax computation. The November 2020 Pathfinder (Question 4) asked for the objectives and forms of Nigerian tax incentives and the incentives for manufacturing, agriculture and telecommunications; it was set under the old pioneer regime, so its solution is different from ours.

Key terms in plain English

Syllabus check

This topic is in syllabus area B (taxation of companies and investment income, 35% of marks). It covers:

• the tax implications of the economic development incentive and of the earlier pioneer status regime, including application, certificates, relief periods and cancellation;
• incentives for gas utilisation, start-ups, small businesses, manufacturing, agriculture and exports;
• the tax implications of operations in the free trade zones.

CAMA 2020 and tax incentives

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Income tax exemptions (NTA 2025, Part 1 of Chapter 8)

Besides the company exemptions in the topic on company income tax, the Act also exempts, for individuals, pensions and retirement benefits under the Pension Reform Act, death gratuities and compensation, redundancy payments and compensation for loss of employment up to ₦50,000,000, wound and disability pensions, income from government bonds, wholly export-oriented dividends, foreign dividends, interest, rent and royalties brought in through approved channels, income of a person earning the national minimum wage or less, and military wages and salaries.

For companies it adds gains of angel investors and venture funds in a labelled start-up held 24 months, pension funds, and agricultural businesses for the first five years. A transitional 50% extra deduction applied to costs of wage awards to low-income workers (bringing pay up to ₦100,000 a month) and salaries of net new employees, in two calendar years between 2023 and 2025.

The economic development tax incentive

It replaces the pioneer status incentive with a credit linked to verifiable capital spending in priority sectors. Priority industries are in the Tenth Schedule; a priority company is one with an incentive certificate for producing and selling priority products. The Schedule lists 51 sub-sectors, each with a minimum QCE and a sunset (the number of years from 1 January 2026 after which the sector stops being eligible).

Examples: refining of crude oil and gas, ₦100 billion, 20 years; electric power generation, ₦100 billion, 20 years; manufacture of starches, ₦500 million, 15 years; mining of coal, ₦10 billion, 20 years; manufacture of motor vehicles and components, ₦50 billion, 15 years; music production, ₦250 million, 20 years; business process outsourcing, ₦2 billion, 10 years.

Eligibility. A sector may qualify if it is not operating on a scale suitable to Nigeria’s needs, or has good prospects. Development is in the public interest to create jobs, attract foreign direct investment, diversify the economy or stimulate growth in particular localities. The applicant is a Nigerian company, a company exempted from incorporation, or the promoters of a company to be incorporated.

QCE on or before the production day must be at least the Schedule minimum.

Application and approval

1. Address the application to the Secretary of the NIPC. It must show commitment of the minimum capital; state whether the ultimate parent is resident or non-resident; give details of the assets, cost, place and the production day; list any non-priority products or by-products; give loan and share capital details; give the ownership structure and directors’ nationalities (or promoters’ details); carry a signed declaration; and be accompanied by a non-refundable fee of 0.1% of QCE, maximum ₦5,000,000.
2. The NIPC recommends the application to the Minister of Industry, Trade and Investment with a projected tax expenditure impact report.
3. The Minister recommends it to the President, who approves. The certificate is then issued. For a company not yet incorporated the promoters must incorporate within three months; the certificate is issued after incorporation and takes effect from the production day. For an existing company the NIPC issues the certificate within 30 days of approval. A certificate cannot be retroactive.
4. The NIPC reports yearly to the Minister, who gives a copy to the President and the National Economic Council within 30 days, and publishes issued and cancelled certificates in the Gazette.

Production day and QCE certification

Within one month after its production day the company applies to the Industrial Inspectorate Department to certify it. Within one month of the certification the company asks the Nigeria Revenue Service (NRS) to certify the QCE incurred before the production day. Proceeds of asset disposals before the production day are deducted from QCE (at market value for non-arm’s length sales).

The Department issues the certificate within 14 days of inspection for a fee of 0.1% of QCE, maximum ₦5,000,000. If certified QCE is below the Schedule minimum, the NRS discountenances the certificate. Objection and appeal rights apply as for an assessment.

The tax credit and incentive period

• Credit: 5% per annum for 5 years on each eligible QCE acquired within 5 years from the production day.
• Use: offset against tax payable in any year in the priority period, except the additional tax from the 15% minimum effective tax rate.
• Carry forward: unused credit, or QCE whose 5-year credit has not been fully claimed, may be carried forward for five years after the priority period, then lapses.
• Incentive period: starts on the production day and lasts five years, extendable once for five years if the company invests 100% of its profits during the period to expand the same product or products.
• Separate books: a priority company with non-priority business must keep separate certified records; if it does not, all income is deemed non-priority and no credit is given. Credit on priority activities is set only against priority business profit.
• Plantations: the trade starts when planting first reaches commercial production, and pre-production maintenance is qualifying plantation expenditure.
• No double relief: a company with the credit cannot take a similar incentive under the Act or any other law.

Changes in the company

If a priority company buys another priority company, both statuses end on the expiry date of the surviving certificate. If it takes over the business of a company without status, that business needs its own application. If it is acquired by a company without status, the status does not pass unless the buyer applies and is approved.

On a merger of priority companies the status ends on the merger date; the new company may apply, for a period no longer than the later of the two certificates.

Cancellation

The NIPC cancels a certificate on the company’s application, on cessation or winding up, or if production does not start within 12 months of the proposed production day. The Minister may suspend a certificate for non-compliance and give three months to remedy; if not remedied the President may cancel and benefits may be withdrawn.

The effective date of cancellation is the production day if the company ran less than a year, or the last anniversary of the production day if it ran longer, or the production day if conditions were never met. The NRS may withdraw the credit up to six years after cancellation, with no limit for fraud.

Transition

A company with a pioneer certificate under the Industrial Development (Income Tax Relief) Act keeps its relief for the unexpired period at 1 January 2026. A company granted the new incentive before a sector’s sunset keeps it for the unexpired period.

Free trade zones

An export processing zone entity is licensed under the Nigeria Export Processing Zones Act; an export free zone entity under the Oil and Gas Free Zones Authority Act. They must show proof of export proceeds to claim relief.

Profits are fully exempt where total sales are exports or inputs for export, not more than 25% of sales are to the customs territory. Sales are to persons in the petroleum or gas industry as stated in the Act. If more than 25% is sold in the customs territory, tax accrues on the profit from those sales. From 1 January 2028, profit on customs territory sales is fully taxable whatever the percentage.

A zone entity liable to the 15% minimum effective tax rate is not exempt. The entity must still register, file returns and deduct tax at source.

If it contracts manufacturing to a related resident company outside the zone, the income from sale of the goods is treated as that company’s income unless at arm’s length; other services from a related resident company follow the transfer pricing rules; and services rendered by a person in the customs territory to a zone entity, or consumed by it there, bear the usual taxes.

Worked examples

1. Annual credit.
   5% × 20,000,000,000 = ₦1,000,000,000 for five years.
2. In Year 1 its tax payable is ₦600,000,000, so it uses ₦600,000,000 and ₦400,000,000 is unused.
3. The unused credit carries forward, and lapses if not used within five years after the priority period.

1. 0.1% × 20,000,000,000 = ₦20,000,000.
2. The cap is ₦5,000,000, so the fee is ₦5,000,000.

1. Apply to the Industrial Inspectorate Department to certify it by 1 April 2027.
2. Within one month of certification, apply to the NRS to certify QCE.

1. The company ran more than one year.
2. The effective date is the last anniversary of the production day: 1 January 2029.

1. 300 ÷ 1,000 = 30%, above the 25% limit.
2. Tax accrues on the profit from the ₦300m of customs territory sales.
3. From 2028 that profit is taxable whatever the percentage.

How to score full marks

• Name the regime: pioneer status for old years, economic development incentive from 2026.
• Give the process in order: NIPC, Minister, President, certificate.
• Quote the numbers: 5% for 5 years, 0.1% fee, ₦5m cap, 12 months, 25%.
• Compute the credit per QCE and apply it to tax payable only.
• State what is excluded: the minimum tax top-up, non-priority income.
• End with the transition for existing pioneer companies.

Common mistakes in the exam

• Describing the incentive as a tax holiday.
• Applying the credit against the minimum tax top-up.
• Forgetting the Schedule minimum QCE.
• Missing the 12-month production deadline.
• Saying a certificate can be backdated.
• Ignoring that free zone entities must still register and file.

Quick revision

• Credit: 5% a year for 5 years on each QCE acquired within 5 years of production day.
• Incentive period 5 years plus 5 if profits are fully reinvested.
• Application: NIPC, Minister, President; fee 0.1% capped at ₦5m.
• Cancel if no production within 12 months; withdraw credit up to 6 years later.
• Free zones: exempt if exports and 25% or less to the customs territory; 2028 change.
• CAMA 2020: ss. 305, 308, 377(1), 378, 404.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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