Answer ... (a) What taxes are levied and what are the applicable rates?
The Finance Act, 2019 provides for the taxation of real estate in Nigeria, with complementary tax incentives. The taxes levied on real estate transactions are:
- companies income tax;
- personal income tax;
- value added tax;
- capital gains tax;
- stamp duties;
- education tax;
- withholding tax; and
- state property taxes.
Different states impose certain taxes, charges and fees for the registration of property. For instance, under the Lagos State Land Use Charge Law, the land use charge is paid annually by property owners in Lagos. As the name implies, this charge takes the form of a tenement rate which the landowner pays to the government for granting him or her a ‘lease’ over the land, since by law the state government owns all the land in the state.
(b) How is the taxable base determined?
The property tax charges and fees vary from state to state. The property tax amount is calculated based on the residential area and thus varies from one property type to another.
(c) What are the relevant tax return requirements?
Different requirements apply for particular taxes.
(d) What exemptions, deductions and other forms of relief are available?
The tax incentives available for real estate under the Finance Act include the following.
Exemption from companies income tax: The Finance Act provides that dividends and rental income received by a real estate income company (REIC) on behalf of its shareholders is exempt from companies income tax, provided that at least 75% of the dividend or rent earned is distributed within 12 months of the end of the financial year in which the income is earned (Section 23(1)(s) of the Companies Income Tax Act). However, where the REIC fails to distribute the dividend or rental income within the stipulated 12-month period, the income will be subject to companies income tax. This provision grants tax-exempt status to real estate and its fulfilment is a critical requirement for tax transparency. However, management fees, profits and other income earned by or with regard to real estate will be subject to companies income tax (Section 23(1B)(b) of the Companies Income Tax Act).
Deductibility of dividends or mandatory distributions made by REICs: The Finance Act also allows for dividends or mandatory distributions made by a Securities and Exchange Commission-approved REICs to their shareholders to be taken as allowable deductions for companies income tax purposes (Section 24(k) of the Companies Income Tax Act). It would appear that this provision acts as a counter-check to ensure that only REICs that pay dividends and other mandatory distributions enjoy the tax exemption under Section 23. In essence, where a REIC fails to make distributions in a given year, it cannot avail of the tax exemption provisions, as it will not be entitled to make deductions as required under Section 24(k). Essentially, where a REIC fails to pay dividends and other mandatory distributions to its shareholders, and by extension fails to take the deductions, the undistributed sum will be subject to tax accordingly.
Other exemptions: These include:
- exemption from excess dividend tax provision; and
- exemption of dividends and distributions to REICs from withholding tax.