It is a common knowledge that dividend is an investment income. While dividend is generally liable to Withholding tax deduction at source, some dividend payments are exempted from tax, one which is dividend distributed by a unit trust (Companies Income Tax Act).
There is a provision in the Companies Income Tax Act Cap C21 LFN 2004 (as amended) whereby dividend can be liable to income tax. Section 19 of the Act provides that:
Where a dividend is paid out as profit on which no tax is payable due to-
- no total profits; or
- total profits which are less than the amount of dividend which is paid, whether or not the recipient of the dividend is a Nigerian company,
is paid by a Nigerian company, the company paying the dividend shall be charged to tax at the rate prescribed in subsection (1) of section 40 of this Act as if the dividend is the total profits of the company for the year of assessment to which the accounts, out of which the dividend is declared, relates.
However, the Finance Act 2019 has excluded the following dividend from the provisions of Section 19 of CITA:
- Dividends paid out of retained earnings of a company, provided that the dividends are paid out of profits that have been subjected to tax under Companies Income Tax Act, Petroleum Profit Tax Act (PPTA) or the Capital Gains Tax Act (CGTA);
- Dividend paid out of all tax-exempt incomes pursuant to the CGTA, PPTA & Industrial Development (Income Tax Relief) Act or any other legislation;
- All franked investment income under CITA; and
- Distributions made by a Real Estate Investment Company to its shareholders from rental or dividend income received on behalf of those shareholders
The above exclusions are regardless of whether the dividends are paid out of profits of the year in which the dividend is declared or out of profits of previous periods.
For the purpose of clarity, the Federal Inland Revenue Service (FIRS) issued an information circular on the determination of dividends paid out of retained earnings. The circular clarifies that:
In determining whether a dividend has been paid out of retained earnings for the purposes of Section 19(1), profits of the current year disclosed in the financial statements shall be considered first. For instance, where the profits reported for an accounting period are sufficient to cover the dividend declared for that year, such dividend will not be treated as having been paid from retained earnings.
An extract from the financial statements of Dividends Limited for 2019 shows the following:
Accounting Loss for the Year (500,000)
Retained Earnings brought forward 1,000,000
Dividend declared for 2019 (paid in 2020) 500,000
From the above illustration, N500,000 dividend paid will be exempt from the application of Section 19(1), because it is reasonably clear that the dividend was paid out of the company’s retained earnings for previous years.
An extract from the financial statements of MKL1 Nigeria Limited for 2019 shows the following:
Profit for the Year 1,000,000
Retained Earnings brought forward 2,000,000
Dividend declared for 2019 (paid in 2020) 1,500,000
From the above, dividend of N500,000 from the N1,500,000 paid can be said to be paid from the retained earnings of previous years, hence the amount to be subject to the application of section 19(1) shall be restricted to N1,000,000 i.e. dividend declared and paid from profit reported for the year 2019.
An extract from the financial statements of MKL2 Nigeria Limited for 2019 shows the following: N
Accounting Profit for the Year 5,000,000
Retained Earnings brought forward 10,000,000
Dividend declared for 2019 (paid in 2020) 4,000,000
The dividend of N4,000,000 declared and paid for 2019 will not be exempt from the application of section 19(1), since the accounting profit of N5,000,000 in 2019 is greater than the dividend paid for the year.