Tax Liabilities Beyond Borders: How Nigeria’s new tax regime affects the Nigerian diaspora

Introduction

The right of a country to tax income, profits or gains of an individual or entity is generally predicated on two rules: (i) the residence rule which empowers a country to tax the income, profits or gains of its residents, irrespective of the jurisdiction from which the income is derived; and (ii) the source rule which empowers a country to tax income derived from sources within its territory, irrespective of whether the person deriving the income is resident in a different country.

The practical implication of the residence and source rules is that Nigerian residents are taxable on their global income while non-residents are only taxable on income derived from sources located in Nigeria. These rules require a sufficient territorial connection of either the person deriving the income or the source of the income to Nigeria for the income to be taxable in Nigeria. Under the old regime, Nigerians living abroad were only taxable on income derived from Nigeria under certain conditions, and not on income derived from sources outside Nigeria. While the new tax regime is also largely based on the residence and source rules and should ordinarily not apply extra-territorially to income derived by Nigerians living abroad from offshore sources, the Nigeria Tax Act, 2025 (“NTA”) has introduced provisions that have significant implications for the Nigerian diaspora. This article discusses how the new tax regime affects the Nigerian diaspora.

The old rules on taxation of individuals

The now repealed Personal Income Tax Act (“PITA”) provided the framework for taxation of individuals in Nigeria. The PITA provided for taxation of the total income of a person deemed to be resident in Nigeria and of “a person resident outside Nigeria who derives income or profit from Nigeria.”[2] While the tax authorities of the States and the Federal Capital Territory were empowered to collect tax on the total income of persons resident within their territories, the Federal Inland Revenue Service (now the Nigeria Revenue Service) was empowered to collect tax on income derived from Nigeria by non-resident persons (including Nigerians living abroad).

The PITA also provided the framework for determining the residence of individuals. Specifically, the First Schedule to the PITA prescribed the tests for determining whether an individual is resident in any State in Nigeria, and in the case of an individual possibly resident in more than one State, the State in which such individual would be deemed to be resident in any year for tax purposes.

Taken as a whole, the framework in the First Schedule to the PITA required an individual to maintain some form of physical presence in a state territory to be considered a resident. Under this framework, Nigerians living abroad were generally not treated as residents and were only taxable on income derived from Nigeria.

The new framework on taxation of individuals

The NTA provides for the substantive rules governing taxation of individuals while the Nigeria Tax Administration Act, 2025 (“NTAA”) provides the framework for compliance and enforcement. Like the PITA, the NTAA empowers the revenue authorities of the States to collect taxes from individuals that are resident in their States and the Nigeria Revenue Service (“NRS”) to collect taxes from non-resident individuals. The NTAA also substantially reenacts the provisions of the First Schedule to the PITA and thereby retains the rules for determining residence of individuals as previously prescribed under that Schedule. However, the NTA has expanded the definition of resident individual to include any individual that may have physical, economic or family ties in Nigeria. Section 201 of the NTA defines a resident individual to include an individual who in any year of assessment:

(a) is domiciled in Nigeria;

(b) has a permanent place available for his domestic use in Nigeria;

(c) has place of habitual abode in Nigeria; or

(d) has substantial economic and immediate family ties in Nigeria.

Broadly, an individual will be considered to be domiciled in Nigeria if the person’s permanent home is Nigeria. This will generally apply to individuals living in Nigeria and will rarely apply to Nigerians living abroad who only visit Nigeria for short stays.

A place of habitual abode is where a person regularly resides. The concept “… refers to the frequency, duration and regularity of stays that are part of the settled routine of an individual’s life and are therefore more than transient.” Under this criterion, a person who works abroad but has a place in Nigeria to which he regularly returns within any year of assessment for short periods of stay, can qualify as a resident individual and be taxable in Nigeria.

Having a permanent place available for domestic use suggests that a person exercises control over and has an unfettered access in the sense of having a legal right of possession or ownership of a place in Nigeria that is used for domestic purposes. The related term in the OECD Model Tax Convention, 2017 and Nigeria’s Double Taxation Agreements is a “permanent home” available to a person. The Commentary on Article 4 of the OECD Model Tax Convention explains that for a place to be treated as a permanent home of an individual, “… the individual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration.” The Commentary further explains that having a permanent home means that “… the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc.).” It connotes a place that is permanently accessible to the person without the requirement of a third party’s permission or license.

The concept of a permanent place available for domestic use has a wider scope than those of domicile and place of habitual abode in that it does not require the physical presence of the individual to create a tax residence. Proof of control, ownership or unrestricted access would be sufficient if the place is maintained for domestic use. A property owned or rented by an individual could qualify the individual as a tax resident. All that is important is the existence of a legal right to use or access the place. Therefore, a Nigerian living abroad could be treated as a resident individual if he or she has a house, whether owned or rented, for domestic use in Nigeria, even if the place is in fact not used in a given year of assessment.

The most problematic of the criteria for determining individual residency is substantial economic and immediate family ties. There is no objective basis for determining the nature of economic interest a person must have in Nigeria to be treated as a resident individual. Substantial economic ties could be interpreted to mean any number of economic interests, including ownership of real estate, shareholding in Nigerian companies or having other investments in Nigeria. However, merely having commercial interest or dealings in Nigeria will not be sufficient. Those interests must be substantial and what is substantial in any given case is subject to subjective assessments and the peculiar circumstances of an individual. Therefore, what is substantial in one case may not be considered substantial in another.

With respect to family ties, a person’s immediate family includes parents, siblings, spouse and children. This means a Nigerian living abroad will be treated as a resident individual and taxable in Nigeria if the person has sibling(s), parent(s), spouse or children in Nigeria.

As noted earlier, Nigerian residents are liable to tax on their global income. The implication is that Nigerians living abroad will be liable to tax on their global income in Nigeria if they qualify as resident individual.

Equally noteworthy is the fact that once a person qualifies as a resident, it is the tax authority of the State where the person is deemed to be resident that can exercise taxing powers over the person. Therefore, where a person meets any of the criteria for residency, the secondary issue would be to determine the State he is deemed to be resident. In the case of persons deemed to be resident in Nigeria under the criteria of domicile, habitual abode and having a permanent place available for domestic use, this can be more easily determined as the State where such place of abode, domicile or home is situated would invariably qualify as the State of residence.

The situation can get complicated with the substantial economic and immediate family ties criteria. Unlike the other criteria that can be identified with a single location, economic and immediate family ties can be spread across different States. For instance, a person may have his parents in one State and siblings in different other States. Similarly, a person may have investments in different companies headquartered in different States or have real property spread across different States. In such a case, determining which State can exercise taxing rights over the income of the person can become a serious challenge. Different States may seek to assert a right to tax the global income of an individual in such case, and this could create problems of double or even multiple taxation, and serious compliance burdens.

Under these new criteria, a significant majority of Nigerians living abroad are likely to qualify as Nigerian residents and become liable to tax on their global income in Nigeria. This creates a risk of double taxation as the income that would become taxable in Nigeria would typically be subject to tax in the country of actual residence. While the NTA allows taxes paid abroad to be utilized as a credit to offset taxes payable in Nigeria on the same income, this relief will only effectively exempt tax payment in Nigeria if the overseas tax is higher than or equal to the tax payable in Nigeria. Where the overseas tax is lower than the tax payable in Nigeria, the difference between the overseas tax and the Nigerian tax will be payable. Even where no tax would be payable, there will still be a compliance obligation for Nigerians living abroad to file returns and the risk of penalties for non-compliance.

Conclusion

The definition of resident individual is all-encompassing. A person who is not domiciled in Nigeria may have a habitual abode or a place permanently available for domestic use or have substantial economic ties or immediate family in Nigeria. This broad definition of resident individual makes it imperative for Nigerians living abroad to carefully assess their situations to understand the extent to which the new rules may apply to them. To ease the compliance burden that would arise from the implementation of these new rules, it is important for States to introduce a simplified and uniform compliance framework for Nigerians living abroad.  Also, to avoid the risk of different state tax authorities treating a person as a resident under these new rules, it is important for the Joint Revenue Board to adopt a streamlined approach to resolving such potential issues.

Agbada S. Agbada – Senior Associate, Aluko & Oyebode