Introduction:
Tax residency rules are essential for determining the tax obligations of individuals and businesses. They establish where a person or entity is considered a resident for tax purposes and, consequently, which country has the right to tax their income. In Nigeria, the Finance Act 2019 introduced significant amendments to tax residency rules, affecting both individuals and businesses. In this article, we will delve into the key changes brought about by the Finance Act 2019 and their implications for tax residency in Nigeria.
1. Tax Residency Rules Defined:
Tax residency rules determine the criteria under which an individual or a business is considered a resident of a particular country for tax purposes. Residency rules vary from one country to another and play a crucial role in allocating taxing rights among countries.
2. Amendments to the Finance Act 2019:
The Finance Act 2019 made several notable amendments to Nigeria’s tax residency rules, particularly regarding individuals and companies. These changes include:
- Individuals: Prior to the Finance Act 2019, an individual was considered a Nigerian tax resident if they resided in Nigeria for at least 183 days in any 12-month period. The Act reduced this threshold to 120 days, making it easier for individuals to become tax residents in Nigeria. This change may have implications for individuals working in Nigeria on short-term assignments or living in neighboring countries.
- Companies: The Act introduced a new criterion for determining the tax residency of companies. A company is now considered a Nigerian tax resident if it derives at least 25% of its annual gross income from Nigeria. This amendment aims to capture multinational companies with significant economic activities in Nigeria, even if they are incorporated elsewhere.
3. Implications for Taxpayers:
The changes in tax residency rules introduced by the Finance Act 2019 have implications for both individuals and businesses:
- Individuals: Individuals who spend 120 days or more in Nigeria within a 12-month period may be subject to Nigerian tax on their global income. This could affect expatriates, business travelers, and individuals working remotely from Nigeria.
- Companies: Companies that derive a substantial portion of their income from Nigeria may be subject to Nigerian tax on their worldwide income. This change could impact multinational corporations operating in Nigeria.
4. Double Taxation Agreements (DTAs):
To mitigate double taxation resulting from changes in tax residency rules, Nigeria has signed Double Taxation Agreements (DTAs) with various countries. DTAs provide mechanisms for determining tax residency and allocating taxing rights in cases of conflicting residency claims. Businesses and individuals should be aware of the provisions of relevant DTAs to avoid double taxation.
Conclusion:
The Finance Act 2019’s amendments to tax residency rules in Nigeria reflect the government’s commitment to modernizing its tax system and ensuring a fair allocation of taxing rights. These changes have important implications for individuals and businesses, particularly those with international activities. Understanding and complying with tax residency rules is essential to avoid unintended tax consequences and potential disputes. Seeking expert guidance and staying informed about relevant DTAs can help taxpayers navigate the complexities of tax residency in Nigeria and optimize their tax planning strategies.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
