Taxation of Unit Trust Schemes

Unit trusts are types of collective investment schemes where investors with the same investment objectives pool their financial resources together for the purpose of making large scale investments within the scope of the investment objective. The Investment and Securities Act (ISA), 2017 defines a collective investment scheme as “a scheme in whatever form, including an open-ended investment company, in which members of the public are invited or permitted to invest money or other assets in a portfolio. The investors share the risk and benefit of investment in proportion to their participatory interest or on any other basis as determined in the deed. There are two (2) types of unit trust schemes available namely: Open-Ended and Close-Ended.

Section 17 (1) of the Companies Income Tax Act Cap C21 LFN 2004 (as amended) provides for the taxation of a unit trust. The Act provides that:

Where under any of the provisions of the Investments and Securities Act, a unit trust scheme is established for the purpose of providing facilities for the participation of the public, as beneficiaries under a trust, in profits or income arising from acquisition, holding, management or disposal of securities or any other property whatsoever, this Act shall, in respect of the income arising to the trustees of an authorized unit trust, have effect:

  • as if the trustees were a company whose business consists mainly in the making of investments and the principal part of whose income is derived therefrom;
  • as if the rights of the unit holders were shares in the company; and
  • as if so much of the income accruing to the trustees as is available for payment to the unit holders were dividends on such shares

The profit of an authorized unit trust scheme is calculated as total income accruing to the trustees from all sources of the investment of the unit trust less management expenses and remuneration of managers.

According to Section 17 (5) of the Act, any distribution by the unit trust to unit holders are treated as dividends paid or payable to the unit holders in proportion to their rights. If the dividend is paid to a corporate entity, Section 23 (1)(f) of CITA exempts the dividend from income tax. However, if paid to an individual, the unit trust will have an obligation to deduction withholding tax and remit to the relevant state tax authority, as there is no provision in the Personal Income Tax Act Cap P8 LFN 2004 (as amended) that exempts dividend paid by a unit trust to an individual from income tax.

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