Launching a startup in Nigeria is an exciting endeavour that comes with its own set of hurdles. Primarily, the complexities of Nigerian tax law pose a major challenge for any founder. Non-compliance with tax regulations can lead to hefty penalties and hinder your startup’s growth. Making mistakes early on can have long-lasting consequences, impacting your finances and potentially jeopardizing your business.
This article gives the knowledge to make informed decisions. By understanding key tax considerations, you can ensure your startup operates compliantly and minimises its tax burden.
Understanding the Legal Structures
The legal structure you choose for your startup in Nigeria has significant implications for your tax liabilities, both for the company and its employees. Here’s an overview of the three most common structures and their tax considerations:
1. Sole Proprietorship:
- Simplest and most common structure.
- No legal distinction between the business and the owner.
- Owner bears all personal liability for business debts and taxes.
- Tax implications:
- Owner files personal income tax (PIT) and pays taxes on all business profits.
- Not subject to CIT, but may still be liable for other taxes like VAT depending on business activities.
2. Partnership:
- Formed by two or more individuals who share ownership, profits, and losses.
- Partnerships can be general (all partners share equal liability) or limited (limited liability for some partners).
- Tax implications:
- Partnership itself does not pay tax.
- Each partner reports their share of the partnership’s profits or losses on their personal income tax return.
3. Limited Liability Company (LLC):
- Separate legal entity from its owners (shareholders).
- Offers limited liability protection to shareholders, meaning their personal assets are generally shielded from business debts.
- More complex and regulated compared to sole proprietorship and partnership.
- Tax implications:
- LLC pays CIT on its profits.
- Shareholders pay PIT on dividends received from the LLC.
Key Taxes Applicable to Startups
Understanding various tax categories is crucial for effective tax planning. Here’s an overview of the key taxes applicable to startups in Nigeria:
1. Company Income Tax (CIT)
CIT is levied on the profits earned by a company after deducting allowable expenses.
- Rate structure:
- 30% for large companies with a gross turnover exceeding ₦100 million.
- 20% for medium-sized companies with a turnover between ₦25 million and ₦100 million.
- 0% for small companies with a turnover below ₦25 million.
- Incentives and exemptions:
- Pioneer Status Incentive (PSI): Grants tax relief for companies in specific sectors deemed crucial for economic development.
- Industrial Training Fund (ITF) exemption: New companies are exempt from paying ITF contributions for the first three years.
- Research and Development (R&D) allowance: Companies can deduct a portion of their R&D expenses from their taxable income.
For Non-Resident-Companies whose activities constitute a Significant Economic Presence (SEP) in Nigeria, CIT is charged on only the portion of the profit attributable to such activities in Nigeria. Every company carrying on trade or business in the country or whose activity constitutes SEP is expected to prepare audited financial statements and file CIT returns within 6 months from the end of their financial year.
2. Value Added Tax (VAT)
VAT is a consumption tax levied on the value added to goods and services at each stage of production and distribution.
- Applicability:
- Generally applies to companies with a turnover exceeding ₦25 million in the preceding year.
- Startups can voluntarily register for VAT if it suits their business model.
- Registration and filing:
- Required to register with the Federal Inland Revenue Service (FIRS) and file VAT returns regularly.
- Registered companies collect VAT on taxable supplies and deduct VAT incurred on purchases.
3. Withholding Tax (WHT)
WHT is a mechanism for collecting tax at source on certain payments, ensuring prompt payment and reducing administrative burden.
- Categories subject to WHT:
- Dividends: 10% WHT withheld on dividends paid to resident companies and 25% for non-resident companies (unless a Double Taxation Agreement (DTA) applies).
- Interest: 10% WHT on interest paid to non-residents (unless a DTA applies).
- Management fees, royalties, and technical service fees: 10% WHT withheld on payments made to non-resident companies (unless a DTA applies).
- Salaries and wages: PAYE (Pay As You Earn) deducted from employee salaries and remitted to the relevant authorities.
4. Payroll Taxes:
Payroll taxes are deducted from employee salaries and remitted to relevant authorities.
- These include:
- PAYE: Deducted based on employee income tax brackets.
- National Pension Commission (PENCOM) contributions: 18% of basic salary (at least 10% contributed by the employer, 8% by the employee).
- National Health Insurance Scheme (NHIS) contributions: Applies to companies with at least 10 employees. 10% is contributed by the employer and 5% by the employee.
5. Pay-as-you-earn (PAYE):
PAYE tax rates range from 7% to 24% of the taxable income. The below table shows personal income tax rates in Nigeria.
| Annual Taxable Income | Rate | Tax Payable per Annum |
| First ₦300, 000 | 7% | ₦21,000 |
| Next ₦300, 000 | 11% | ₦33,000 |
| Next ₦500, 000 | 15% | ₦75,000 |
| Next ₦500, 000 | 19% | ₦95,000 |
| Next ₦1,600, 000 | 21% | ₦336,000 |
| Above ₦3,200, 000 | 24% | Multiply just the excess amount over ₦3.2 million by 24%. For instance, the annual taxable income of ₦4 million is ₦192,000, equivalent to 24% of the ₦800,00 (excess amount over ₦3.2 million). |
Tax Planning Strategies for Startups
Proactive tax planning helps startups optimize their tax position and maximize financial resources for growth. Here are some key strategies:
1. Maintaining Accurate Records:
- Crucial for claiming deductions and demonstrating compliance.
- Organize receipts, invoices, and financial statements chronologically.
- Invest in accounting software or hire a bookkeeper for efficient recordkeeping.
2. Understanding Tax Incentives:
The Nigerian government offers various tax incentives for startups in specific sectors or regions. Research available incentives like the Pioneer Status Incentive (PSI) and Industrial Training Fund (ITF) exemption.
3. Tax-efficient Compensation Structures:
Traditional salaries attract payroll taxes. Consider alternative methods with potential tax benefits:
- Stock options: Granting employees ownership shares can incentivize long-term commitment and attract talent.
- Performance-based bonuses: Tie bonuses to specific achievements to incentivize productivity while potentially reducing taxable income.
Consult a tax professional to understand the implications of different compensation structures
4. Seeking Professional Advice:
The Nigerian tax system can be challenging to understand and explore. AutoComply ensures compliance with taxes, helps you optimize tax strategies, and guides you through potential complexities.
Tax Obligations for Employees
1. Personal Income Tax (PIT):
PIT is levied on the gross income earned by employees, including salaries, bonuses, and allowances. Nigeria uses a progressive tax rate structure, meaning the tax rate increases as income increases. Employees are categorized into different tax brackets based on their annual income as shown in the table above.
2. Filing Requirements and Deadlines:
Employees are responsible for filing their personal income tax returns annually. The filing deadline is usually March 31st of the following year. Failing to file or pay taxes on time can result in penalties and interest charges.
3. Understanding Pay Slips:
- Pay slips detail your salary breakdown, including deductions for PAYE, pensions, and health insurance.
- Review your pay slip regularly to ensure accurate deductions and understand your net pay.
4. Employee Tax Responsibilities:
- Employees are individually responsible for filing their tax returns and meeting deadlines.
- Consult a tax professional if you have any questions or require assistance with filing your tax return.
Conclusion
Implementing these strategies and understanding tax obligations, ensures startups and their employees can navigate the Nigerian tax landscape effectively and attain financial sustainability for long-term success.
This article provides general information and does not constitute professional tax advice. Consult a qualified tax advisor for personalized guidance specific to your situation.
