Introduction:
The Act introduced significant changes to the tax treatment of these income streams, impacting how companies are taxed on dividends received and interest earned. As an audit firm dedicated to educating and empowering prospective customers, this article provides insights into the provisions of the Nigeria Finance Act 2020 related to the taxation of dividends and interest for Nigerian companies. Understanding these provisions is vital for Nigerian companies to optimize their tax planning, comply with the new regulations, and make informed financial decisions.
- Taxation of Dividends: The Finance Act 2020 amended the Companies Income Tax Act to introduce the taxation of dividends at both the corporate and individual levels. At the corporate level, dividends declared by Nigerian companies are now subject to a withholding tax of 10%. This means that the company distributing the dividends is required to withhold 10% of the dividend amount and remit it to the tax authorities before distributing the net amount to the shareholders.
- Exemption of Dividends from Taxation for Small Companies: The Act provides tax relief for small companies with an annual turnover of less than N25 million. Dividends received by these small companies are exempt from taxation at the corporate level. This measure aims to support small businesses and encourage entrepreneurship.
- Taxation of Dividends Received by Individuals: The Finance Act 2020 also introduced changes to the taxation of dividends received by individuals. Previously, individuals receiving dividends were taxed at a flat rate of 10%. However, the Act replaced this with a progressive tax rate based on the individual’s total income. The new rates are 10% for dividend income up to N10 million and 20% for dividend income above N10 million.
- Taxation of Interest Income: The Act introduced provisions for the taxation of interest income earned by Nigerian companies. Companies are now required to pay a withholding tax of 10% on interest income earned from loans, fixed deposits, and other interest-bearing investments. This withholding tax is deducted at the source before the interest is paid out.
- Exemptions for Interest Income: Certain interest incomes are exempt from taxation under the Finance Act 2020. Interest income earned from Federal and State Government securities, such as bonds and treasury bills, is exempt from withholding tax. Additionally, interest income earned on foreign loans with a tenor of over seven years is also exempt from withholding tax.
- Compliance and Record-Keeping: With the introduction of new provisions related to the taxation of dividends and interest, companies must prioritize compliance and accurate record-keeping. Proper documentation of dividend distributions, withholding tax calculations, and interest income earned is essential to ensure compliance with reporting requirements and avoid potential penalties.
- Impact on Financial Decision-Making: The changes in the tax treatment of dividends and interest may influence financial decision-making for Nigerian companies. Companies need to consider the tax implications when distributing dividends, raising funds through loans, or investing in interest-bearing instruments. Understanding the tax rates and exemptions is crucial for optimizing financial decisions.
Conclusion:
The Nigeria Finance Act 2020 brought significant changes to the taxation of dividends and interest for Nigerian companies. Companies must understand these provisions to optimize their tax planning, comply with the new regulations, and make informed financial decisions. As an audit firm, we are committed to assisting our prospective customers in understanding and navigating the provisions of the Finance Act 2020 related to the taxation of dividends and interest, providing them with the knowledge and guidance needed to comply with the regulations and optimize their financial outcomes in the evolving Nigerian tax landscape. By staying informed and proactive, companies can adapt to the changing tax environment and thrive in Nigeria’s competitive business environment.
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.
