Tax Incentives and Legal Benefits for Businesses in Nigerian Free-Trade Zones

Nigeria’s Free Trade Zones (FTZs) are valuable for businesses, offering significant advantages, especially regarding tax incentives and legal benefits. These zones are strategically designed to drive economic growth by attracting foreign and domestic investments, facilitating job creation, and promoting the exchange of technology and expertise. This is a comprehensive overview of the key benefits:

Tax Incentives

• Corporate Income Tax Exemption:

Businesses operating within Nigeria’s FTZs benefit from a full exemption from corporate income tax. This allows companies to reinvest profits into their operations and expansion without the burden of corporate taxes. This significantly enhances profitability and growth potential.[1]

Withholding Tax on Dividends:

Investors and shareholders in FTZs enjoy exemptions from withholding tax on dividends. This means that dividends paid to shareholders are not subject to tax deductions, allowing investors to receive the full earnings, which can be especially attractive to foreign investors.[2]

Capital Gains Tax Exemption:

Capital gains realized by companies operating within FTZs are exempt from taxation. This exemption encourages investments in assets and properties within the zones, as profits from the sale of these assets are not subject to capital gains tax.[3]

Compliance Costs

Companies doing business within FTZs are not required to deal with multiple regulators as required by other companies. The company deals with one regulator, which is the Nigeria Export Processing Zones Authority (NEPZA), which then organizes all the relevant regulators under one umbrella in order to provide companies within the FTZs with one port of call for all regulatory matters. This significantly reduces the company’s compliance costs.

It should be noted that although FTZ Companies enjoy several tax exemptions, the FIRS in pursuance to the provisions of the Finance Act 2020 now requires FTZ companies to fulfill relevant filing obligations by filing their tax returns whether or not they have any tax liabilities for the year of assessment. [4]

Also, employees are liable to Pay-As-You-Earn (PAYE) taxes. Therefore, FTZ companies are required to deduct from source, the personal income tax of their employees and remit same to the relevant tax authority within 10 days of the end of every month.

Additionally, Free Zone Companies are required to:

1. Register with FIRS and obtain a Taxpayer’s Identification Number (TIN);
2. Maintain proper books of accounts;
3. Maintain an accurate record of employees;
4. Deduct and remit Pay-As-You-Earn (PAYE) taxes
5. Pay Company Income Tax on any profit generated from the operation of the company outside the free trade zone
6. Deduct and remit WHT as applicable, on transactions with companies operating outside the Zone

Repatriation of Profits:

Investors in FTZs can repatriate 100% of their profits and dividends without any restrictions. This ensures that returns on investment can be easily transferred back to the investor’s home country, enhancing the attractiveness of FTZs for international investors.[5]

Duty-Free Importation:

One of the most attractive incentives is the duty-free importation of capital goods, machinery, equipment, and raw materials necessary for business operations. This benefit drastically reduces the initial investment costs and ongoing operational expenses, making it easier for companies to start and expand their operations.[6] An approved enterprise shall be permitted to import into the Zone, free of customs duty, goods which are to be used exclusively within the Zone for purposes of the approved activity without the need to obtain any import or export license.[7]

Exemptions from Licensing Requirements

Subject to the provisions of this Nigerian Export Processing Zones Act 1992, an approved enterprise operating within the Zone shall not be required to obtain import or export licenses for goods imported into the Zone for use in the approved activity[8]. The elimination of the requirement for import and export licenses significantly reduces the administrative burden on businesses and makes the process of bringing goods into and out of the FTZs more efficient and less time-consuming.[9]

This provision, coupled with the exemption from customs duties, simplifies the logistics of importing and exporting goods, reduces operational costs, and enhances overall business efficiency. By minimizing bureaucratic hurdles, these legal benefits foster a conducive environment for both local and foreign businesses, promoting economic growth and industrial development in Nigeria.[10]

Waiver of Expatriate Quotas:

FTZs in Nigeria offer a waiver of expatriate quotas, allowing businesses to employ as many expatriates as necessary without limitations. Additionally, foreign capital invested in these zones can be repatriated at any time, including any capital appreciation, providing further flexibility and security for investors. This access to skilled labor supports the development and growth of businesses within the zones.[11]

Land and Infrastructure Benefits:

Companies in government owned FTZs receive rent-free land during the construction phase, reducing initial setup costs. The zones also provide developed infrastructure, including transportation, utilities, and communication networks, facilitating efficient business operations.[12]

Ownership and Trade Flexibility:

FTZs permit 100% foreign ownership of businesses, offering full operational control to international investors. Furthermore, raw materials and components for goods destined for re-export are exempt from duties and taxes, enhancing trade flexibility.[13]

Dispute Resolution:

Disputes between the government and enterprises within the zones are resolved by the authority in an expeditious and equitable manner. This ensures that any conflicts are handled swiftly, maintaining a stable business environment.

The Nigerian Export Processing Zones Authority (NEPZA) has established a dedicated Dispute Resolution Center (NDRC) to handle conflicts that arise within the FTZs. This center aims to provide a cost-effective and timely resolution mechanism, leveraging international arbitration frameworks such as the Singapore Convention on Mediation and the New York Convention on Arbitration[14].

Additionally, the Investment Procedures, Regulations, and Operational Guidelines for Free Zones in Nigeria (2004) outline the procedures for resolving disputes between the government and enterprises operating within the zones.[15]

Ban on Strikes and Lockouts

For a period of ten years from the commencement of operations, FTZs enforce a ban on strikes and lockouts. This legal guarantee ensures a stable labor environment, preventing disruptions that could affect business continuity.[16]

Legal Protection for Intellectual Property

FTZs offer robust protection for intellectual property rights, ensuring that businesses can safeguard their innovations, trademarks, and patents. This legal protection fosters an environment conducive to innovation and creativity.

Conclusion

Nigeria’s Free Trade Zones offer a comprehensive range of tax exemptions and reductions that significantly enhance the attractiveness of these zones for both foreign and domestic investors. These incentives not only reduce operational costs but also provide a supportive environment for business growth and industrialization. By leveraging these benefits, companies can maximize profitability and contribute to the broader economic development of Nigeria.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

[1]      Section 23(s) of the Companies Income Tax (Amendment) Act, 2007

[2]      Section 8 of the Nigerian Export Processing Zones Act (1992)

[3]      Section 32 of the Capital Gains Tax Act (1990)

[4]      FIRS Public Notice of 15th April 2021 pursuant to the Provisions of Section 58 and 59 of the Finance Act, 2020

[5]      Section 18(1)(b) of the Nigerian Export Processing Zones Act (1992)

[6]      Section 12(1) of the Nigerian Export Processing Zones Act (1992)

[7]      Section 12(1) of the Nigerian Export Processing Zones Act (1992)

[8]      Section 18(1)(d) of the Nigerian Export Processing Zones Act (1992)

[9]      Ibid.

[10]    Ibid.

[11]     Ibid.

[12]     Section 18(1)(f) of the Nigerian Export Processing Zones Act (1992)

[13]     Section 18(1)(g) of the Nigerian Export Processing Zones Act (1992)

[14]     https://nepza.gov.ng/nepza-leading-horn-for-aggressive-investments-pursuit-through-sezs-adr (accessed on 12th July 2024)

[15]     Investment Procedures, Regulations, and Operational Guidelines for Free zones in Nigeria (2004)

[16]     Ibid.