Tax Education: Restriction on the tax-deductibility of interest on foreign loans

Section 24 of the Companies Income Tax Act Cap C21 LFN 2004 (as amended) provides for the deductibility of interests on borrowed funds (including foreign loans). Precisely, the Act provides that any sum payable by way of interest on any money borrowed and employed as capital in acquiring the profits, shall be a deductible expense.

However, the Finance Act, 2019 has introduced Seventh Schedule to the CITA that restricts the interest expense on foreign loan from a foreign company to a Nigerian subsidiary or a fixed base of a foreign company in Nigeria that would be deductible in a particular year of assessment, to 30 per cent of earnings before interest, taxes, depreciation and amortization of the Nigerian company. The excess will be disallowed and carried forward to the next assessment year. The Act provides that:

…….where a Nigerian company or a fixed base of a foreign company in Nigeria, incurs any expenditure by way of interest or of a similar nature in respect of debt issued by a foreign connected person, the excess interest thereon shall be a disallowable deduction….

The Act further provides that the excess over 30 per cent of EBITDA shall be carried forward to the following assessment year (s) and will be deductible from profit (if any) to the extent of the restriction (i.e. 30% of EBITDA). The excess interest can be carried forward to a maximum of 5 assessment years from the year it was first computed. This means that any excess interest after the 5th year of assessment will be permanently disallowed for tax purpose.


The Finance Act has exempted any Nigerian subsidiary of a foreign company which is engaged in the business of banking and insurance from the restriction provisions.


The Act provides that any company which violates the restriction provisions will be liable to a penalty of 10 per cent and interest at Central Bank of Nigeria monetary policy rate plus a spread to be determined by the Minister of Finance on any adjustment made by FIRS relating to excess interest charged in any year.


For the purpose of clarity, the Finance Act provides the following interpretations:

  1. Connected Persons

This has been interpreted to mean:

  • any person controlled by or under a common control, ownership or management
  • any person who is not connected but receives an implicit or explicit guarantee or deposit for the provision of corresponding or matching debt
  • any related company as described under the Nigerian Transfer Pricing Regulations 2018
  1. Debt

Any loan, financial instrument, financial lease, financial derivative, or any arrangement that gives rise to interest, discounts or other financial charges that are deductible in the computation of income chargeable under the head “profit and gains of business or profession”.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Website Powered by

Up ↑

%d bloggers like this: