Nigeria has terminated the flat 7.5% withholding tax rate previously applicable on dividends, interest and royalties earned by taxable persons resident in countries with a tax treaty with Nigeria with effect from 1 July 2022.
Going forward, the withholding tax rates under domestic law (i.e. 5% for individuals and 10% for companies on dividends, interests and royalties) will apply also to payments to residents of treaty countries. This applies unless the rates in the tax laws exceed the maximum rate under the tax treaty, in which case, the maximum rate specified in the tax treaty will apply.
The Federal Inland Revenue Service (FIRS) announced these changes through an information circular on the Claim of Tax Treaties Benefits and Commonwealth Relief in Nigeria ("the Circular"). In a follow up to the Circular, the FIRS issued a public notice on the application of withholding tax on dividends, interests and royalties paid by Nigerian residents to non-resident recipients of such payments in countries with which Nigeria has already entered and executed tax treaties.
The circular/notice also provides that the withholding treaty rate cap applies only to payments made to non-resident entities having no permanent establishment in Nigeria and payments received by them from Nigeria are not connected to such permanent establishment.
However, where the payment is connected to a permanent establishment or a fixed base in Nigeria, the domestic withholding tax rate applies on the dividend, interest and royalties, regardless of the withholding tax rate specified in the relevant tax treaties.
The Circular was issued on 11 May 2022 in line with FIRS' powers under the Federal Inland Revenue Services (Establishment Act) 2007 and it replaces an earlier Circular issued in 2021 on the subject. Hence, any previous ruling, direction, or approval issued by the FIRS on the applicable withholding tax rate under tax treaties is automatically revoked by 1 July 2022.