Tax Education: Amendment to tax exemption granted on interest on foreign loan.

INTRODUCTION

It is common for companies, especially the multinationals, to secure foreign loans. Often than not, this foreign facility usually attract interest expense.

Presumably, as a way of encouraging such facility being available for Nigerian entities, the Companies Income Tax Act Cap C21 LFN 2004 (as amended) exempts interest on foreign loan from income tax. Section 11 of CITA specifically provides that interest payable on any foreign loan …….. shall be exempted from tax as prescribed in Table I in the Third Schedule to this Act. Prior to the signing of the Finance Act, 2019 into law, it is possible for an interest on foreign loan to be 100% exempted from tax.

The old schedule provided the following exemptions:

Repayment period including moratoriumGrace period including moratoriumTax exemption allowed
Above 7 yearsNot less than 2 years100%
5-7 yearsNot less than 18 months70%
2-4 yearsNot less than 12 months40%
Below 2 yearsNilNil

However, the Finance Act, 2019 has amended the above exemptions as follows:

Repayment periodGrace periodTax exemption allowed
Above 7 yearsNot less than 2 years70%
5-7 yearsNot less than 18 months40%
2-4 yearsNot less than 12 months10%
Below 2 yearsNilNil

For the purpose of clarity, the Finance Act interpreted the following:

  • Moratorium: A period at the beginning of a loan term during which the borrower is not expected to make any principal payment or interest repayments, provided that where the principal or interest repayments are made during the period, the tax exemptions provided under this Schedule shall be adjusted by the Service in a proportionate manner.
  • Repayment period: The agreed tenor of the loan facility, provided that where the loan is repaid before expiration of this period, the tax exemptions provided under this Schedule shall be adjusted by the Service in a proportionate manner.

CONCLUSION

This in a way would check the tax planning of taxpayers in respect of foreign loan, whereby the agreement would be drafted in a manner that 100% tax exemption would be enjoyed (especially between related entities).

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