Understanding the concept of Permanent Establishment in Nigeria

The concept of Permanent Establishment (PE) plays a significant role in international taxation, it is central in determining whether a foreign entity or non-resident company (NRC), conducting business within a jurisdiction, is subject to that jurisdiction’s tax laws. In Nigeria, like many other jurisdictions, the determination of a PE is crucial for the taxation of foreign enterprises engaged in business activities within its jurisdiction. Nigeria’s tax system aligns with international principles outlined by the Organization for Economic Co-operation and Development (OECD) and treaties signed with other countries to define the conditions under which a foreign business must pay taxes in Nigeria. The regime for taxation of PEs in Nigeria is primarily governed by the international principles set by various Double Tax Treaties (DTT) and the OECD Model Tax Convention with complementary provisions in the Companies Income Tax Act (CITA). It is important to note that where a DTT exists, it overrides the provisions of the CITA. This article aims to simplify the concept while highlighting some of the noteworthy considerations for the establishment of PEs in Nigeria.

THE CONCEPT OF PERMANENT ESTABLISHMENT

A PE is generally understood as a fixed place of business through which a foreign enterprise carries on its business activities, wholly or partly, in another jurisdiction. Internationally, the PE concept is widely adopted in bilateral tax treaties, with the OECD Model Tax Convention being a cornerstone document in defining it. Under Article 5(1) of the Convention, a PE refers to a “fixed place of business” through which the business of an enterprise is wholly or partly carried out. This definition has been widely adopted in Nigerian DTTs with various countries. Significantly, an NRC would be deemed to have a PE in Nigeria if it undertakes business activities through a fixed base or dependent agent in Nigeria. For example, a foreign company may establish a PE by creating a place of management, a branch, office, setting up a factory, workshop, or utilizing a dependent agent who habitually concludes contracts on behalf of the foreign company. We have provided a succinct review of the various forms of PE below.

To establish a PE in Nigeria, a nexus to Nigeria must be established. This nexus may be triggered by carrying on of business activities at a physical/fixed place of business or through a dependent agent. Further, the nexus may take the form of provision of digital services or technical, management, consultancy or professional services that results in significant economic presence. In some cases, the length of time within which business activities are carried out may also be a triggering factor in determining the existence of a PE. Notably, the concept is closely linked to the idea of “taxable presence” which is the requirement for a foreign company to pay taxes on the income generated within the Nigerian jurisdiction.

FORMS OF PERMANENT ESTABLISHMENT IN NIGERIA

Permanent Establishment in Nigeria can take various forms. The OECD Tax Convention and various DTTs makes provisions to enumerate several situations that constitute a PE, and it provides guidelines for taxation based on the form of establishment.

1. Fixed base – Place of Business

Primarily, a fixed place of business refers to a link between the place of business and a specific geographical point. Where an NRC or foreign company carries on a business at a fixed base or place, to the extent that profit is attributable to such a base, a PE would be triggered. This fixed base may take the form of an office, a place of management, a building site, a construction or installation project, a factory, a branch, a workshop, a mine, oil & gas wells, a quarry, or any other place of extraction of natural resources. Notably, the Supreme Court has established that a fixed base refers to a place where a company has carried on its business for an extended period notwithstanding that it is not the owner of the place. Similarly, if a foreign company opens an office in Nigeria e.g., for marketing, distribution, or representation, it may establish a PE subject to tax. However, a PE in Nigeria does not include facilities used solely for storage or display of goods or merchandise and collection of information.

2. Construction or Installation Projects

By the provisions of Article 5(3) of the OECD Model Convention, an NRC may trigger the establishment of a PE where it is involved in an installation or construction project for a defined period. However, the period for triggering a PE usually depends on the applicable convention or DTT. Per the UN Model Convention, a building site, construction assembly or installation project constitutes a PE only if it lasts for more than six (6) months and this extends to assembly projects and supervisory activities in relation to any of these projects. With respect to the OECD Model Convention, a PE would be triggered where the project lasts for more than twelve (12) months. It is however worthy of note that as a treaty is a matter of negotiation between two countries, the period may vary.

3. Dependent Agent

Further to the above, a PE would be said to have been established where profit is attributable to trade or business, or activities being carried on by a dependent agent, where the NRC does not have a fixed base in Nigeria. This is typically an individual or entity that habitually exercises authority to conclude contracts on behalf of the NRC or on behalf of other companies which it controls. If this agent is in Nigeria and acts on behalf of the foreign company, the NRC may be deemed to have a PE, and the income generated from the contracts concluded by the agent would be taxable in Nigeria. Further, where the NRC habitually maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by the dependent agent, and profit can be attributed to such activities, a PE would be said to have been triggered.

However, a PE would not be triggered if the person acting on behalf of the NRC are deemed to be independent agents or the activities being carried on are preparatory or auxiliary.

4. Service PE

A Service PE may be triggered for the provision of services including consultancy services by an NRC, through employees or other personnel engaged by the NRC for such purposes. Notably, where activities of that nature continue within a contracting state for a period or periods aggregating more than 183days in any 12-month period commencing or ending in the fiscal year concerned, a service PE would be said to have been created. It is worth noting that this replaces the permanence element of a PE with a test of minimum length of time, as is the case with construction PE.

Notably, where a DTT is not in force, the provision of digital services or technical, management, consultancy, or professional (TMCP) services from outside Nigeria to a person resident in Nigeria in such a manner that a significant economic presence is created for the NRC may trigger taxable presence in Nigeria.

WHAT IS NOT A PE

It is important to note that a PE does not include the use of facilities solely for storage, display or delivery of goods or merchandise. It also is not triggered merely by the maintenance of stock off goods solely for storage, display or delivery or solely for purpose of processing by another enterprise. In the same vein, the maintenance of a fixed place of business is solely for the purpose of purchasing goods, collecting information or carrying on, any other activity.

CONSIDERATIONS FOR PERMANENT ESTABLISHMENTS IN NIGERIA

Flowing from the above, it is vital for NRCs which establish PEs to consider some of the tax and transfer pricing compliance obligations which follows the triggering of a PE in Nigeria. Notably, in Nigeria, depending on the nature of the PE created, a PE would have significant tax compliance and reporting obligations. Typically, except cases where withholding tax is the final tax, PEs are required to register and remit corporate income and value added taxes in Nigeria in compliance with the CITA, and Value Added Tax Act, while also filing relevant tax returns and maintaining records.

Further, the establishment of a PE in Nigeria may result in additional transfer pricing (TP) compliance obligations for the NRC. Transfer pricing is another significant issue that foreign companies with a PE in Nigeria must consider. Notably, upon triggering a PE in Nigeria, an NRC would be required to file its annual TP returns, and disclosures as well as its mandatory country by country report notifications.

CONCLUSION

Permanent Establishment in Nigeria is an important concept to both NRCs and the Nigerian tax authority. The tax obligations arising from the existence of a PE require careful attention to the form of business activities conducted within the country. While Nigeria’s tax laws are generally in line with international standards, the complexities and challenges of determining a PE can lead to confusion and disputes. Foreign companies must be vigilant in understanding when they have a PE and ensure compliance with Nigerian tax obligations to avoid penalties, double taxation, and operational disruptions.

The tax landscape in Nigeria is continuously evolving, particularly with the increasing globalization of business and the growth of digital economy sectors. As businesses explore new models of operation, tax rules are also evolving to accommodate these changes.

To learn more about the concept of PEs, you may join our webinar on 29th November 2024 at 2pm (WAT). The details are also provided.

Authors:

Oluwatobiloba Adekoya, an Intermediate Senior Associate at WTS Blackwoodstone

John-Praise Eruanvae, a Tax Associate at WTS Blackwoodstone