Everything to know about Dividend Taxes in Nigeria

Everything to know about Dividend Taxes in Nigeria

Dividends Tax Explained

Dividends serve as a sweet reward for investors, reflecting the fruits of their investments in companies. Now, dividend taxes are a crucial aspect of shareholder returns and corporate finance. Thus, understanding the taxes on dividends is crucial for investors, as it ultimately determines your final return on investments. In this article, we will unravel the implications of dividend taxes and how they affect your total return on investments.

What are Dividends?

Dividends represent a portion of a company’s profits distributed to its shareholders as a reward for their investment in the company’s shares. These payments are typically made periodically, reflecting the company’s financial performance and management’s decision.

Dividend Taxes in Nigeria

Taxes on Dividends are governed by the Companies Income Tax Act. Section 80 (1) and (2) of the Companies Income Tax Act CAP C20 LFN 2004 (as amended) (CITA) stipulates that when a Nigerian company distributes dividends to any entity or individual, the distributing company is obligated to deduct a tax of 10% from the dividend payment. This deducted amount must then be remitted to the Federal Inland Revenue Service (FIRS) at the time of dividend payment. This tax, deducted and remitted during dividend payment, is referred to as the withholding tax on dividends (WHT). Taxation at the Corporate Level

At the corporate level, companies distributing dividends are required to pay a withholding tax of 10% on the gross amount of the dividends declared. This withholding tax serves as an advance payment of tax on behalf of the shareholders. Similarly, companies receiving dividends are subject to the same tax treatment, i.e. (a deduction of 10% WHT at source).

What this is essentially saying is that dividends owed to you would be adjusted for a 10% Withholding tax and you get a net of the amount. Let’s put this in a practical example:

Suppose you are a shareholder of Company A, a Nigerian corporation listed on the Nigerian Stock Exchange (NGX). Company A declares a dividend of ₦100,000 to be distributed to its shareholders.

As per Nigerian tax regulations, Company A is required to withhold a dividend tax of 10% at the point of payment. Therefore, before distributing the dividend to shareholders, Company A deducts ₦10,000 (10% of ₦100,000) as withholding tax on dividends (WHT).

Here’s how the calculation looks:

Dividend declared by Company A: ₦100,000

Withholding tax rate: 10%

Withholding tax amount: 10% of ₦100,000 = ₦10,000

After deducting the withholding tax of ₦10,000, Company A remits this amount to the Federal Inland Revenue Service (FIRS) on behalf of the shareholders.

As a shareholder, you receive the net dividend after the withholding tax deduction, which in this case would be ₦90,000 (₦100,000 – ₦10,000).

Tax Credits and Exemptions

It’s worth noting that shareholders may be eligible for tax credits or exemptions under certain circumstances. For instance, dividends received from companies operating in Free Trade Zones may be exempt from withholding tax.

Implications for Investors

Understanding the taxation of dividends is essential for investors to accurately assess their investment returns and tax liabilities. Let’s take a practical example of how dividend taxes could affect your ROI.

Sarah owns shares in a Nigerian company that pays annual dividends. Suppose Sarah receives ₦100,000 in dividends from her investment during the tax year. Tax Liability Calculation:

According to Nigerian tax regulations, dividends are subject to withholding tax at a rate of 10%. In Sarah’s case, the company deducts ₦10,000 (10% of ₦100,000) as withholding tax before disbursing the dividends to her.

After-Tax Returns

After accounting for the withholding tax, Sarah receives a net dividend of ₦90,000 (₦100,000 – ₦10,000). This represents her actual after-tax return on investment.

Also, investors should consult with tax professionals or financial advisors to optimize their tax planning strategies and maximize after-tax returns.

Compliance and Reporting Requirements

Both companies and individual shareholders have compliance and reporting obligations related to dividend taxes. Companies are required to withhold and remit the appropriate taxes to the relevant tax authorities, while individual shareholders must report dividend income in their tax returns.

Conclusion

In conclusion, dividend taxes play a significant role in the investment landscape of Nigeria, impacting both companies and individual shareholders. On the investing side, understanding the tax implications of dividends is crucial for investors to make informed decisions and optimize their investment returns. For companies, they must adhere to regulatory requirements regarding the withholding and remittance of taxes on dividends. Failure to comply with tax laws and reporting obligations can result in financial penalties and reputational damage.

FAQs

Is dividend taxable in Nigeria?

Yes, dividends received by shareholders in Nigeria are subject to taxation. The tax is withheld by the company distributing the dividends and remitted to the tax authorities on behalf of the shareholders.

How much tax will I pay on my dividend income?

The tax rate on dividend income in Nigeria is 10% for both resident and non-resident individuals.

How are dividends paid in Nigeria?

Dividends in Nigeria are typically paid to shareholders either through electronic bank transfers or by issuing dividend warrants.

Do I need to report dividend income in my tax returns?

Yes, individual shareholders are required to report dividend income in their tax returns as part of their overall income.

Sign up for the newsletter

If you want relevant updates occasionally, sign up for the private newsletter. Your email is never shared.

Home

Marketplace

Learn

My Items

Home

Marketplace

Learn

My Items

More