The Federal Inland Revenue Service (FIRS) has issued an information circular on tax implications of operations of Real Estate Investment Companies (REICs), which is approved or regulated by the Securities and Exchange Commission (SEC) under the provisions on Real Estate Investment Scheme (REIS). The Circular specifically provides clarification on the application of Sections 9, 19, 23, 24, and 80 of the Companies Income Tax Act Cap C21 LFN (as amended). All these sections were amended in the Finance Act, 2019.
Section 105 of CITA (as in the Finance Act) defines Real Estate Investment Company as a Company duly approved by the Securities and Exchange Commission to operate as a real estate investment scheme in Nigeria. FIRS states the following:
- That (REIS) includes a company, trust or other such corporate structures approved and regulated by the SEC, which is primarily engaged in and invests in income generating real estate asset or real estate related asset and is expected to distribute not less than 75% of its income within 12 months of receipt of the income.
- That Real estate for the purposes of the circular, means income generating property consisting of land or building. It also includes special purpose vehicle (SPV) holding such income generating lands and buildings.
2.0 INCOME OF REIC
The income of REIC is classified into the following:
1. Rental Income
2. Dividend from another REIC
3. Gains from disposal of assets
4. Others (fees and other income not related to REIS)
3.0 TAXATION OF THE INCOME OF REIC
FIRS has given guidance on the following provisions of CITA (as amended in the Finance Act), applicable to dividend and rental income of REIC earned under a REIS:
- Section 19 of CITA – Payment of Dividend
FIRS reiterates that distributions of rental and dividend income made by a REIC to its shareholders under a REIS are exempt from the application of Section 19 of CITA. This include the redistribution of dividend income.
However, FIRS emphasized on the following conditions (in the amendment to Section 23 of CITA) for the above to be excluded from dividend considered for tax under Section 19:
- The redistribution to shareholders must not be less than 75% of the rental or dividend income, and
- Such redistribution must be done not later than 12 months after the end of the financial year in which the rental or dividend income was received by the REIC.
- Section 23 of CITA – Profits Exempted
FIRS confirms that the rental or dividend income received by a REIC under a REIS is exempt from further income tax in the hand of the company, since the amount is deemed received on behalf of its shareholders.
However, the exemption is subject to fulfillment of the 2 conditions stated above (under Section 9 clarification). If the conditions are not met or any dividend is not distributed, such dividend will be chargeable to tax.
- Section 24 of CITA – Deductions Allowed
In Section 24(1)(k) of CITA, dividends or mandatory distributions made by the REIC to its shareholders under REIS is an allowable deduction.
However, FIRS with reference to Section 27 (1)(h), clarifies that the following shall not be allowed as deductions in computing the company’s assessable profits:
- Any dividend or mandatory distribution made by the REIC to its shareholders, being an expense relating to an exempt income; and
- Any other expense of the REIC incurred for the purposes of earning exempt income.
However, where the conditions that will allow a REIC to enjoy the tax exemption provided in Section 23(1)(s) of the Act is not met, rental or dividend income received by the REIC will constitute a taxable income under Section 9 of the Act. Consequently, all expenses incurred for the purposes of earning the rental and dividend income, including dividends or mandatory distributions made by the REIC to its shareholders, under a REIS shall be allowed.
- Section 80 of CITA – Deduction of Tax from Dividend
In line with the Finance Act, FIRS noted that any distribution or dividend payment to a REIC under a REIS shall not be subject to deduction of WHT. This means that if such distribution or dividend payment, to a REIC, is not under a REIS, such payment shall be subject to Withholding Tax (WHT) as appropriate.
In addition, Section 80 (6) clearly states that a dividend distribution by a REIC to its shareholders will be subject to withholding tax deduction at source by the REIC. FIRS further clarifies that this will not hold if the shareholder is also a REIC under a REIS
FIRS has informed taxpayers, practitioners and the general public that the information circular amends, updates or replaces contents of any circular, notice or other publication previously issued by the Service that is inconsistent with its contents to the extent of such inconsistency.
FIRS added that the Service may, at any time, withdraw or replace this Circular or publish an amended or updated version.