Taxation of investment income: dividends, interest, royalty and rent

A company receives a dividend of ₦4.5 million after 10% was withheld at source. Is the dividend taxed again? If the company passes it on to its own shareholders, can it use the tax already suffered? And what if the company has no taxable profit but declares a large dividend?

Investment income, dividends, interest, royalties and rent, has its own rules because tax is often deducted before the money arrives, and the exam tests how that deduction interacts with the company’s own tax.

This topic covers the basis of assessment of investment income, withholding tax, dividends (franked investment income, dividend tax, deemed distribution), interest and its exemptions, royalties, rent, authorised unit trusts and real estate investment companies (REICOs). The previous topic covered chargeable gains. The next covers tax incentives.

The March/July 2020 Pathfinder (Question 1) tested franked investment income, withholding tax and the tax treatment of dividends, treasury bill interest and REIT distributions for a Mauritius-owned group; its figures use the older rules, so its solution is slightly 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 taxation of dividend, interest, royalty and rent of Nigerian and non-Nigerian companies, under CITA, the Finance Acts, the Withholding Tax Regulations 2024 and the NTA 2025;
• the taxation of real estate investment companies.

CAMA 2020 and investment income

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

Basis of assessment and withholding tax

Dividend, interest, rent and royalty are assessed on the preceding year basis. Section 51 of the NTAA 2025 requires the payer to deduct tax at the rate in the Deduction of Tax at Source (Withholding) Regulations 2024 at the date of payment or settlement; between related parties, at the earlier of payment and recognition of the liability. Exempt bodies must still deduct tax when they pay interest, rent, dividends or royalties.

For a non-resident, tax deducted on dividend, interest, rent, royalty, directors’ fees and payments to entertainers and sportspersons is the final tax. Interest on short-term securities and corporate bonds earned by an individual after deduction is not taxed further. A small company is not liable to withholding tax on its income. The examples use 10%; use the rate in the question.

Dividends

• Amount and timing. The income is the gross dividend, arising on the day payment becomes due, and is treated as derived from Nigeria.
• Franked investment income (FII). A dividend received after withholding tax is FII and is excluded from total profit; the withholding tax is the final tax. If it is redistributed, the company may set off the tax it suffered against the withholding tax due on its own distribution (s. 51 NTAA).
• Non-resident recipients. Withholding tax on a dividend paid to a non-Nigerian company is the final tax; no further tax is payable.
• Exempt. Bonus shares received are not included in profits and carry no withholding tax; foreign dividends brought in through approved channels; dividends from authorised collective investment schemes; wholly export-oriented dividends; and (CITA) dividends out of profits exempt from tax or of a pioneer company.
• Dividend tax (s. 9 NTA). Where a Nigerian company declares a dividend out of profits on which no tax is payable, because there is no total profit or total profit is less than the dividend, it is charged at 30% as if the dividend were its total profit of the year to which the accounts relate. It does not apply to dividends out of retained earnings already taxed, out of exempt profits, to FII, or to REICO distributions of rent and dividend income. Before the Finance Act 2019 the tax applied to all dividends above total profit, and a tax on interim dividends existed; both were removed or narrowed.
• Deemed distribution (s. 10 NTA). Where a Nigerian company controlled by not more than five individuals has not paid out profits, the tax authority may direct, in writing, that the part that could have been distributed without harming the business is treated as distributed. The gross amount is income of the shareholders in proportion to their ordinary shares on the deemed day. The direction must be made within three years of receiving the audited accounts, may be appealed, and applies to a limited liability partnership by treating all profits as distributed to the partners.

Interest

Interest is chargeable and arises in Nigeria where the payer is a resident or a Nigerian permanent establishment, wherever paid. The NTA defines it widely:

• penal interest
• income from government or corporate securities, bonds and debentures
• premiums, discounts and fees
• a share of profit under non-interest finance
• the finance cost in a finance lease
• related exchange differences
• compensating payments under regulated securities lending

Exempt: interest from outside Nigeria brought in through approved channels; compensating payments that qualify as interest; and income from bonds issued by a State or the Federal Government.

Under CITA exemptions also covered domiciliary account interest, interest on loans by banks for primary agricultural production (moratorium of at least 12 months and a rate not above the bank’s base lending rate) and, from the Finance Act 2019, a part of the interest on foreign loans:

• above 7 years with a 2-year moratorium, 70%
• 5 to 7 years with 18 months, 40%
• 2 to 4 years with 12 months, 10%
• under 2 years, nil

Royalty and rent

Royalty is any payment for the use of, or right to use, property. Rent is any payment for the use or occupation of property and accrues daily over the period it covers. Rent received in advance is spread over the rental period, up to a maximum of five years. Royalty and rent from outside Nigeria brought in through approved channels are exempt.

Allowable rental expenses: tenement rate or land use charge; cost of collecting rent; advertising for tenants; repairs; bad debts; interest on money borrowed to acquire or renovate the property; commission; insurance; water rate. Disallowed: expenses not incurred to earn the rent, capital expenditure, depreciation, and appropriations of profit.

Authorised unit trusts

The trustees of a unit trust authorised by the Securities and Exchange Commission are treated as an investment company, the unit holders’ rights as shares and income available to unit holders as dividends. The taxable profit is the income from all investments less management expenses.

Real estate investment companies

A REICO is a company approved by the Securities and Exchange Commission to run a real estate investment scheme. Distributions to its shareholders are deductible; dividend tax does not apply to distributions of rent and dividend income; and dividend and rent received on behalf of shareholders are exempt if at least 75% is distributed within 12 months after the end of the financial year.

The shareholder is not exempt on what it receives. The REICO is taxed on its own management fees and other income, and on rent and dividends if the 75% test is failed.

Worked examples

1. Gross dividend.
   4,500,000 ÷ 0.90 = ₦5,000,000; tax withheld ₦500,000.
2. The dividend is FII: excluded from total profit, no further tax.

1. Withholding tax due on its payment.
   10% × 15,000,000 = ₦1,500,000.
2. Set off the ₦500,000 it suffered.
3. It pays ₦1,000,000 to the tax authority.

1. Section 9 treats the dividend as total profit.
2. Tax = 30% × 20,000,000 = ₦6,000,000.

1. The maximum spreading period is five years.
2. Annual rent.
   12,000,000 ÷ 5 = ₦2,400,000.

1. 240,000,000 ÷ 280,000,000 = 85.7%, above 75%.
2. Distributed within 12 months, so the income is exempt.

1. Deemed income: ₦3,200,000; ₦1,600,000; ₦800,000; ₦2,400,000.
2. Each is taxed as income of the shareholder.

How to score full marks

• Gross up net dividends before computing.
• Say whether the recipient is resident, since that decides if withholding tax is final.
• Show the withholding set-off on redistribution.
• Test dividend tax: untaxed source and dividend above total profit.
• Spread advance rent and list allowable expenses.
• Check the 75% and 12-month tests for a REICO.

Common mistakes in the exam

• Taxing franked investment income a second time.
• Forgetting the set-off of withholding tax on redistribution.
• Applying dividend tax to dividends out of taxed profit.
• Spreading advance rent over more than five years.
• Taxing a REICO that met the 75% and 12-month tests.
• Forgetting that exempt bodies still deduct withholding tax.

Quick revision

• Preceding year basis; withholding tax under s. 51 NTAA and the 2024 Regulations.
• FII: no further tax; set-off on redistribution; non-resident: final tax.
• Dividend tax s. 9: 30% on dividend from untaxed profit above total profit.
• Deemed distribution s. 10: company controlled by five or fewer individuals; three-year limit.
• Rent in advance: spread, up to five years; REICO: 75% within 12 months.
• CAMA 2020: ss. 305, 308, 426, 427, 433.

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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