How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?
The income from real estate is subject to the applicable tax laws and rates in the country. A company that owns real estate pays income tax from the profits on the rent based on the applicable rates under the Companies Income Tax Act Cap C21 LFN 2004 (as amended). The income of an individual owner of real estate is also taxed based on the Personal Income Tax (Amendment) Act 2011. The income tax rates for companies are up to a maximum 30% depending on turnover of the company in the relevant period and for individuals, between 7% and 24%.
Please note that based on the provisions of Section 40 of the Companies Income Tax Act and Section 16(c) of the Finance Act, 2020, small companies with an annual turnover of less than NGN 25 million are required to file their returns, reflecting the zero rates while a lower income tax rate of 20% applies to medium-sized companies with an annual turnover of between NGN 25 million and NGN 100 million. The maximum income tax rate of 30% is applicable to companies with an annual turnover of above NGN 100 million.
Furthermore, medium- and large-sized companies are entitled to a bonus of 2% and 1% of tax payable respectively, for early payment of income tax.
By the provisions of the Finance Act 2019 and the Federal Inland Revenue Service Circular on taxation of Real Estate Investment Companies, rental or dividend income due to real estate investment companies (duly registered with the Securities and Exchange Commission) are exempt from company income tax where at least 75% of the income is to be distributed to its shareholders within 12 months following the financial year end. The rentals and dividends of a Real Estate Investment Company are exempt from withholding tax. However, withholding tax is applicable on any further distribution to the shareholders of the real estate investment company.
The owner of a property on whose behalf withholding tax deductions were made from rental income and remitted to the appropriate tax authorities is entitled to utilize the tax credit note thereof to offset the income tax liabilities for the year.
The Finance Act 2021 expanded the definition of Real Estate Investment Companies to include Real Estate Unit Trust and it also provides that withholding tax which had been deducted from interest payments to unit trusts and paid to the FIRS would be the final tax due from such unit trust.