A Nigerian company borrows from its foreign parent, pays large interest, and shows little profit. The tax law answers with a cap: interest on debt from foreign connected persons is deductible only up to 30% of earnings before interest, tax, depreciation and amortisation. The excess is not lost at once, but it can be carried forward for five years.
Nigeria uses this earnings test in place of a debt to equity ratio, so the name thin capitalisation describes the purpose rather than the method.
This topic covers who and what the rule catches, how EBITDA is worked out, the carry forward, the penalties, and how the rule works with transfer pricing and the other tests for interest. The previous topic covered the total profit computation. The next covers real estate and agricultural businesses.
In 30 seconds
Rule (section 24 and the seventh schedule): interest on debt issued by a foreign connected person is deductible up to 30% of EBITDA. Excess: carried forward for not more than five assessment years. Excluded: a Nigerian subsidiary of a foreign company that is a bank or an insurer (but Nigerian banks and insurers that pay interest to a foreign subsidiary are caught).
Also required: transfer pricing compliance, WREN, and no interest on debt for exempt income. Penalty: 10% plus interest at the Central Bank policy rate plus a spread.
Key terms in plain English
| Term | What it means |
|---|---|
| EBITDA | Earnings before interest, tax, depreciation and amortisation |
| Connected person | A person under common control or a related party |
| Debt | Any loan or arrangement giving deductible finance charges |
| Excess interest | Interest above the 30% cap, carried forward |
| Thin capitalisation | Funding a company with debt in place of equity |
| Transfer pricing | Arm’s length pricing of related-party dealings |
Syllabus check
This topic is in syllabus area D, company taxation. It covers:
- the 30% of EBITDA interest limit
- connected persons, debt and exclusions
- the carry forward and penalties
CAMA 2020 and company tax
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 377(1) and s. 378 | Directors prepare financial statements that give a true and fair view | The audited accounts give the figures used in the tax computation |
| s. 305 and s. 308 | Directors must act in good faith and with the care, diligence and skill of a prudent director | Directors answer for correct returns and tax paid on time |
| s. 119 | A company must keep proper books of account | The records support each deduction and are kept for six years |
The rules in more depth
Who and what is caught
The rule applies to a Nigerian company, or a fixed base of a foreign company in Nigeria, that incurs interest or a similar cost on debt issued by a foreign connected person. Connected persons are persons under common control, ownership or management; persons who are not connected but get an explicit or implicit guarantee or deposit for the matching debt; and related parties under the 2018 transfer pricing regulations.
Debt means any loan, financial instrument, finance lease, derivative or arrangement that gives interest, discounts or other finance charges deductible in computing business profits.
The limit
The interest in excess of 30% of EBITDA of the Nigerian company for the accounting period is disallowed. EBITDA is assessable profit plus the interest deducted plus depreciation and amortisation.
Carry forward
Where interest is not wholly deducted in a year, the part not deducted is carried forward and allowed against profits of later years, within the same limit. But no interest is carried forward for more than five assessment years after the year in which the excess was first computed. In each later year the same rule is applied.
Exclusions
A Nigerian subsidiary of a foreign company that carries on banking or insurance is excluded. The rule does apply to Nigerian banks and insurers that are parents of foreign companies and pay interest to them.
Penalty
A person who breaches the seventh schedule pays a penalty of 10% and interest at the Central Bank monetary policy rate plus a spread fixed by the Minister, on any adjustment the Service makes for excess interest in a year.
Other tests that still apply
- The interest must meet the transfer pricing regulations first. The 30% rule does not replace them.
- It must be incurred wholly, exclusively, necessarily and reasonably to produce taxable profit.
- Interest on a loan that earns exempt income is not allowed (apportion mixed loans).
- Interest on gas utilisation loans no longer has special approval since the Finance Act 2019: it must meet this rule, the WREN test and relate to taxable income.
The position from 2026
The Nigeria Tax Act 2025 carries an interest limitation rule. Check it for the base and the carry forward period from 2026, and use the rules above for years to 2025.
Worked examples
Example 1: the full working. Jones Nigeria Limited has assessable profit ₦1,000,000 after deducting interest of ₦500,000 to other creditors and ₦750,000 to its Canadian parent, and depreciation of ₦300,000. Of the other creditors’ interest, ₦200,000 was for tax-exempt profits.
- EBITDA = ₦1,000,000 + ₦1,250,000 + ₦300,000 = ₦2,550,000.
- Interest qualifying for deduction.
₦1,250,000 − ₦200,000 = ₦1,050,000. - 30% of EBITDA = ₦765,000. The deduction is the lower: ₦765,000.
- Excess = ₦1,050,000 − ₦765,000 = ₦285,000, carried forward and added to the interest of the next year to test against that year’s limit, for not more than five assessment years.
Example 2: using the carry forward. In the next year the company’s EBITDA is ₦4,000,000 and its interest is ₦900,000.
- Interest for the year plus the excess b/f = ₦900,000 + ₦285,000 = ₦1,185,000.
- 30% × ₦4,000,000 = ₦1,200,000, which is higher, so the whole ₦1,185,000 is allowed and nothing is carried forward.
Example 3: a local loan. A company pays interest of ₦400,000 to a Nigerian bank and has EBITDA of ₦600,000.
- The 30% rule is for debt from foreign connected persons, so the Nigerian bank interest is not capped by it.
- It is allowed if it passes the WREN test.
How to score full marks
- Work EBITDA first, adding back interest and depreciation.
- Remove interest for exempt profits before the limit.
- Take the lower of the cap and the qualifying interest.
- State the carry forward of the excess for five years.
Common mistakes in the exam
- Taking 30% of profit instead of EBITDA.
- Forgetting to add back the depreciation.
- Capping interest to local banks.
- Carrying the excess forward for ever.
Quick revision
- 30% of EBITDA; foreign connected debt.
- Five years carry forward; banks and insurers excluded.
- Transfer pricing and WREN still apply.
Practice questions
Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.
Question 1. Interest on debt from foreign connected persons is limited to:
- 10% of profit
- 30% of EBITDA
- 50% of revenue
- 100%
Show the answer
B. Section 24.
Question 2. Excess interest is carried forward for up to:
- One year
- Three years
- Five assessment years
- Ten years
Show the answer
C. Five assessment years.
Question 3. EBITDA stands for:
- Earnings before interest, tax, depreciation and amortisation
- Earnings before income and tax
- Expenses before income
- None
Show the answer
A. As defined.
Question 4. A Nigerian subsidiary of a foreign bank is:
- Caught by the rule
- Excluded
- Taxed twice
- Exempt from tax
Show the answer
B. Banks and insurers that are subsidiaries are excluded.
Question 5. The penalty is:
- 5%
- 10% plus interest
- 50%
- None
Show the answer
B. 10% and interest at CBN rate plus spread.
Question 6. Which still applies alongside the rule?
- Transfer pricing
- Nothing
- Only VAT
- Only stamp duty
Show the answer
A. The rule does not replace it.
Question 7. Interest on a loan for exempt profit is:
- Allowed
- Not allowed
- Doubled
- Allowed in 2026
Show the answer
B. Apportion where mixed.
Question 8. A connected person includes a person under:
- Common control
- No relation
- Only a bank
- A tax office
Show the answer
A. Common control, ownership or management.
Question 9. The deduction is the:
- Higher of cap and qualifying interest
- Lower of cap and qualifying interest
- Cap only
- Interest only
Show the answer
B. The lower figure.
Question 10. The seventh schedule is in:
- CITA
- VATA
- PITA
- Stamp Duties Act
Show the answer
A. Companies Income Tax Act.
Question 11 (10 marks). Explain the interest restriction rule for companies. (10 marks)
Question 12 (10 marks). A company has assessable profit ₦2,000,000 after interest of ₦1,500,000 (all to a foreign parent) and depreciation of ₦500,000. Compute the deductible interest and the excess. (6 marks)
Question 13 (10 marks). Define connected persons and debt for the purpose of the rule. (6 marks)
Model answers
Show the model answer to Question 11
Interest on debt from a foreign connected person is deductible up to 30% of EBITDA. (3) The excess is carried forward for not more than five assessment years. (3) Banks and insurers that are subsidiaries of foreign companies are excluded. (2) Penalty of 10% and interest; transfer pricing and WREN still apply. (2)
Show the model answer to Question 12
EBITDA = ₦2,000,000 + ₦1,500,000 + ₦500,000 = ₦4,000,000. (2) 30% = ₦1,200,000. (2) Deductible ₦1,200,000; excess ₦300,000 carried forward. (2)
Show the model answer to Question 13
Connected persons: persons under common control, ownership or management; persons receiving an explicit or implicit guarantee for matching debt; related parties under the transfer pricing regulations. (3) Debt: any loan, financial instrument, finance lease, derivative or arrangement giving interest or finance charges deductible in computing profits. (3)
Pathfinder on Interest restriction: the 30% of EBITDA rule and its carry forward
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Revise first: The limit
Revise first: The limit
Source: ICAN Pathfinder, Taxation. Diets covered: May 2026 and November 2025.
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