Non-interest finance: how each product is taxed

A bank buys a machine for ₦10 million at a customer’s request and resells it to the customer for ₦11.5 million, payable in instalments. In a conventional loan the ₦1.5 million would be interest. Here it is a mark-up, and the bank is a trader, not a lender. Does VAT apply on the ₦11.5 million? Is there withholding tax?

The FIRS answered in a regulation that treats the transaction by its substance, as a loan, so that a non-interest bank is taxed like a conventional one.

This topic covers the regulation, the three groups of products (sale-based, equity-based and lease-based) and how each is taxed for VAT, withholding tax, stamp duties, capital gains and capital allowances. The previous topic covered the digital economy and the next the Startup Act. The rules come from the Non-Interest Finance (Taxation) Regulations 2022 and the Central Bank of Nigeria guidelines on which they rest.

Key terms in plain English

Syllabus check

This topic is in syllabus area D, company taxation. It covers:

• the framework and the meaning of non-interest finance
• the tax treatment of sale, equity and lease based products
• the position from 2026

CAMA 2020 and non-interest finance

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

The framework

Non-interest financial institutions work under the principles of Islamic commercial jurisprudence and the guidelines of the Central Bank, which in June 2022 issued revised guidelines on the non-interest instruments it offers authorised institutions. Before the regulation the tax law did not deal with them, which left a gap. The FIRS therefore issued the Non-Interest Finance (Taxation) Regulations 2022, effective 1 April 2022, to give equal treatment to conventional and non-interest finance.

The regulation has seven parts and covers twelve instruments. The common idea is that the tax follows the substance of the deal: where the bank’s return is a return on money, it is taxed as interest would be, and where the bank sells or leases an asset, the sale or lease is taxed as such.

Sale-based products

Equity-based products

Lease-based products

Why substance matters

If a mark-up were treated as the profit of a sale, the bank would charge VAT on the whole price and the customer might claim a deduction for the mark-up as a cost of goods, whereas a conventional borrower deducts interest.

Treating the mark-up as interest puts the two on the same footing: the principal is outside VAT, the interest bears withholding tax, and the borrower’s deduction is the same. The same reasoning governs the lease cases, where the form of the contract decides whether the customer or the bank owns the asset for capital allowances.

Sukuk and Takaful

The November 2025 examination asked about two products beyond the regulation's sale, equity and lease groups, and the marking guide gives the answer.

• Sukuk (certificates backed by a pool of assets, with returns from the rentals): the investors' return is treated as interest-equivalent and bears withholding tax like conventional bond interest. The marking guide gives 10% withholding tax, which is typically the final tax for the recipient. A transfer of the certificates attracts stamp duty unless exempt under the capital market rules, and the income of a corporate issuer is subject to company income tax.
• Takaful (a common fund to which members contribute, with any surplus shared back): the contributions are treated as premiums and are not taxable to the operator. The surplus distributed to participants is subject to withholding tax. The commissions and management fees earned by the operator are subject to VAT at 7.5%, and the agreements attract stamp duty.

The Murabaha mark-up and the lease in the exam

For a Murabaha, the marking guide adds that the mark-up earned by the non-interest institution is subject to company income tax, the withholding tax deducted on it is remitted under the withholding tax rules. The agreements are generally subject to stamp duty.

For an Ijarah lease, the interest element of the rentals is subject to company income tax, withholding tax and VAT for the lessor; the lessee may deduct the rentals if the asset earns income; and only the lessor claims capital allowances.

1. Murabaha:
   the purchase attracts VAT and withholding tax; the ₦100 million is a loan, and its repayment is outside VAT, stamp duty and CGT; the mark-up is 20% × ₦100 million = ₦20 million, treated as interest, with WHT at 10% = ₦2 million and company income tax on the profit.
2. Ijarah: the vehicles stay with Al-Juda, so it claims the capital allowances; the interest element of the rentals attracts CIT, WHT and VAT; the lessee deducts the rentals.
3. Sukuk:
   the return is 15% × ₦200 million = ₦30 million, treated as interest, with 10% withholding tax of ₦3 million as the investors' final tax; transfer of the certificates attracts stamp duty.
4. Takaful: contributions are premiums, not taxable to Al-Juda; the ₦15 million surplus returned to members is subject to WHT; fees are subject to VAT; the agreements attract stamp duty.

Challenges in applying the tax law

The marking guide lists these:

• the legal framework for Islamic finance is thin and relies on circulars and a regulation
• there is a risk of double or multiple taxation (VAT, stamp duty and CGT) on Murabaha and Sukuk
• tax officials may not understand Shari'ah-compliant structures
• there is no secondary market
• there is competition from conventional banks
• public awareness is low
• trained staff are scarce

Salam: what the sources give

Salam is the purchase of a commodity for deferred delivery in exchange for immediate payment: the price is paid in full in advance and delivery is fixed for a future date. In a parallel Salam the institution then contracts with a third party for the same commodity. The regulation deals with Salam in paragraph 5, which covers the agreement between the institution and its customer.

The aim of the regulation is equal tax treatment of non-interest and conventional finance, so a candidate states the definition of Salam, names the two contracts in a parallel Salam, and applies that principle of equal treatment.

The position from 2026

The Nigeria Tax Act 2025 repeals the Companies Income Tax Act, the Value Added Tax Act and the Stamp Duties Act, and the Nigeria Revenue Service replaces the FIRS. The 2022 regulation was made under the FIRS Act and refers to the repealed Acts. The November 2025 Pathfinder question applies the regulation to a 2024 year of assessment, so use it for periods before 2026.

For later periods, check for a re-issued regulation under the new Acts.

Worked examples

1. The ₦10 million is a loan to the customer, and the ₦10 million of the resale price is loan repayment, outside VAT, stamp duty and CGT.
2. The mark-up of ₦1.5 million is interest, subject to withholding tax.
3. WHT at 10% on interest = ₦150,000.

1. The ₦20 million contribution is a loan, not taxed.
2. The ₦2.4 million rent is interest, subject to WHT at 10% = ₦240,000.
3. The ₦5 million is principal repayment, so no VAT or WHT.
4. The transfer instrument attracts stamp duties.
5. The customer claims capital allowances on the asset.

1. It is a finance lease: the customer capitalises the payments as qualifying capital expenditure.
2. Each rental attracts VAT and WHT, and the final transfer attracts stamp duty.

1. An operating lease: the bank claims the capital allowances.
2. The customer deducts the rent if the machinery earns taxable income.

1. The share is a return on investment, taxed like a conventional return, for example interest.

How to score full marks

• Name the product and state which conventional product it matches.
• State the tax on each element: price, mark-up, rent, transfer.
• Say who claims capital allowances.
• Give the reason: tax follows substance.

Common mistakes in the exam

• Charging VAT on the whole Murabaha resale price.
• Forgetting stamp duty on the transfer of an interest.
• Letting the bank claim allowances on a finance lease.
• Treating the mark-up as a trading profit.

Quick revision

• Regulation effective 1 April 2022, twelve instruments, seven parts.
• Murabaha mark-up = interest; Musharakah profit = interest; rent in diminishing Musharakah = interest.
• Ijarah wa iqtina = finance lease; Ijarah = operating lease.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

Spotted a mistake? Tell us and we will check it.