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Here’s How To Qualify for Pioneer Tax Incentives in Nigeria

The Federal Government of Nigeria recently added 27 industries to the Pioneer Industry List. The Pioneer Industry List is a list of industries and products which qualify under Nigerian law for Nigeria’s Pioneer Status Incentives. The Federal Government of Nigeria grants Pioneer Status Incentives to businesses in industries where economic activity is not being undertaken on a scale suitable for economic development. The primary objective of Nigeria’s Pioneer Status Incentive Scheme is to encourage investments in ‘Pioneer Industries’ and to drive the overall growth of the Nigerian economy. The Pioneer Status Incentives are administered by the Nigerian Investment Promotion Commission (NIPC).  In this Client Update, we curate some of the most recurring questions that we have been asked in the past week by investors and business sponsors about eligibility for Nigeria’s Pioneer Status Incentives.

What are the Tax Benefits Available to Applicant Companies under the Pioneer Incentive Scheme?

The tax benefits available under the Pioneer Incentive Scheme are in the form of tax holidays from companies’ income tax. A Nigerian company is ordinarily expected to pay income tax at a rate of 30% on its profits accruing in, derived from, brought into or received in Nigeria. However, beneficiaries of the Pioneer Status Incentive will not be liable to pay companies income tax for a total period of 5 years. Where the business is located in an economically disadvantaged local government area of the Federation, beneficiaries of the Pioneer Status Incentive can be eligible for up to a total of 7 years in tax holidays. Beneficiaries of the Pioneer Status Incentive will also be entitled to tax-free dividends, certain capital allowances and can set off tax losses incurred during their respective tax holiday against taxable profits earned after the tax holiday.

It is important to note that businesses formed as partnerships and business names are not ordinarily entitled to Pioneer Status Incentives. Accordingly, such businesses may have to restructure to qualify for the Pioneer Status Incentive. It is equally important to note that the Pioneer Status Incentives relate only to companies income tax; as such, beneficiary companies will still be required to pay other applicable taxes which may be determined by the nature of a particular transaction/business or the state in Nigeria where the business is carried on.

Which New Industries Were Added to the Pioneer Industry List?

  1. Mining and processing of coal
  2. Processing and preservation of meat/poultry and production of meat/poultry products
  3. Manufacture of starches and starch products;
  4. Processing of cocoa
  5. Manufacture of animal feeds;
  6. Tanning and dressing of Leather
  7. Manufacture of leather footwear, luggage and handbags
  8. Manufacture of household and personal hygiene paper products
  9. Manufacture of paints, vanishes and printing ink
  10. Manufacture of plastic products (builders’ plastic ware) and moulds
  11. Manufacture of batteries and accumulators
  12. Manufacture of steam generators
  13. Manufacture of railway locomotives, wagons and rolling stock
  14. Manufacture of metal-forming machinery and machine tools;
  15. Manufacture of machinery for metallurgy
  16. Manufacture of machinery for food and beverage processing
  17. Manufacture of machinery for textile, apparel and leather production
  18. Manufacture of machinery for paper and paperboard production
  19. Manufacture of plastics and rubber machinery
  20. Waste treatment, disposal and material recovery
  21. E-commerce services
  22. Software development and publishing
  23. Motion picture, video and television programme production, distribution, exhibition and photography
  24. Music production, publishing and distribution
  25. Real estate investment vehicles under the Investments and Securities Act
  26. Mortgage backed securities under the Investments and Securities Act
  27. Business process outsourcing.

Will a Company Qualify For Pioneer Incentives Just Because It Carries on Business in a ‘Pioneer Industry’?

No. The fact that a company carries on business in an industry which the Federal Government has determined to be a ‘Pioneer Industry’ will not automatically entitle an applicant company to obtain the Pioneer Status incentives. The NIPC takes a number of factors into consideration – These includes the extent to which an applicant company complies with the Expenditure Test, the extent of an applicant’s compliance with sectoral regulations, compliance with tax regulations and the results of the due diligence visit carried out by government officials on the applicant company. It is useful to note that new/existing companies may have to restructure in order to qualify for the Pioneer Status Incentives

What is the Expenditure Test?

The Expenditure Test is one of the tests used by the Federal Government to determine eligibility for the Pioneer Status Incentives. The Expenditure Test requires applicant companies to incur a certain amount of capital expenditure to qualify for the Pioneer Status Incentives. The Expenditure Test is central to the success of an application for the Pioneer Status Incentives. Under the 2017 NIPC Guideline, applicant companies are required to have Non-Current Tangible Asset of up to one N100,000,000 (One Hundred Million Naira) to qualify for the Pioneer Status Incentive.

Are Existing Companies Eligible for the Pioneer Tax Incentives?

It depends on a number of factors. Although, the 2017 NIPC Guidelines require that applicant companies must apply in their first year of production/service, existing companies  may still qualify for the Pioneer Status Incentives where the necessary structuring considerations are implemented. Amongst others, one of such structuring considerations is the difference between the first year of incorporation and the first year of production or service in relation to an application for the Pioneer Status Incentives. In certain industries like the technology industry or the manufacturing industry, there is usually a significant time lag between the date of incorporation and the date production or services will commence.

What are the Major Cost Components for a Pioneer Status Application?

The major cost component for a Pioneer Status Application includes;

Application Fees: N200, 000 (Two Hundred Thousand Naira)

Due Diligence fees: N500, 000 (Five Hundred Thousand Naira). This fee covers flights, accommodation and subsistence for three NIPC staff to visit an applicants’ project. The applicant company is responsible for transporting all NIPC staff between the airport or bus station, the project location, and their accommodation.

Service Charge: A service charge of 1% of pioneer profits is payable to the NIPC annually no later than 30th June 2017 (for all applications received from 7 August 2017) to be determined from its estimated savings (that is, the savings which the company would make as a result of the tax exemption). The applicant company is also mandated to submit to the NIPC, its 5 year financial projections to assist the NIPC in evaluating the service charge payable to the NIPC. The NIPC requires that Applicants for Pioneer Status Incentive whose applications were received and processing wasn’t completed prior to 7 August 2017 may opt to pay either 1% of actual pioneer profits annually or the previous fees of 2% of projected tax savings for the first three years of commercial production. It is important to note that applicant companies are required to pay a service charge deposit of N2,500,000 (Two Million Five Hundred Thousand Naira)  upon receipt of an approval in principle from the NIPC. It is useful to note that the due diligence fee and service charge deposit are deductible from the total service charge, over the pioneer period and where no profit is made during the pioneer period, all fees are non-refundable

Can the Pioneer Status Incentive Granted to a Beneficiary Company be Revoked?

Yes. Some of the grounds for revoking the Pioneer Status Incentives  granted to a beneficiary company includes a case of breach of the provisions of the relevant law or the conditions of the pioneer certificate by a beneficiary company or in the event of tax evasion or where the financial books of the company are compromised in order to short change the NIPC in relation to the applicable service charge. A Pioneer Status Incentive may also be revoked where the directors of an applicant company provides misleading or false information to the NIPC during or after the application process.

Please note that the following is not intended to constitute legal advice. If you require a comprehensive list of all the industries on Nigeria’s Pioneer Incentive List or legal support or assistance with respect to the procurement of the Pioneer Status Incentives, we kindly ask that you speak to your Balogun Harold contact or reach us on info@balogunharold.com. Note that the fees itemised above are subject to change. You are also advised to seek professional counsel with regards to the current fees payable in respect of any statutory payments.