The Nigeria Tax Act, 2025 has fundamentally changed the game for foreign companies doing business here. The new rules are clearer, more comprehensive and designed to ensure that businesses profiting from Nigerian customers contribute fairly to the country’s development.
Two Ways to Become Taxable: PE and SEP
The biggest change in the new law is how Nigeria determines whether a foreign company owes tax here. Previously, there was essentially one test: did you have a permanent establishment (PE) in Nigeria? If you had no physical presence, that is, no office, no staff, no fixed location, you could often avoid Nigerian taxes entirely.
The digital age has made this approach obsolete. That’s why the new 2025 Tax Act, signed into law by President Tinubu and effective January 1, 2026, introduces a second pathway to taxation: Significant Economic Presence (SEP).
Permanent Establishment (PE)
A company is said to have a Permanent Establishment under Section 112(1) of the Act when it maintains “a fixed place of business in Nigeria through which its operations are wholly or partly carried on.” This includes offices, branches, factories, workshops, warehouses, or construction sites that last beyond six months. If a Chinese construction firm builds federal highways in Abuja or a European bank maintains branches in Lagos and Port Harcourt, their profits directly or indirectly connected to those Nigerian operations are taxable under Section 113(2).
Significant Economic Presence (SEP)
The digital economy demanded new instruments of recognition, and so the Act introduced the concept of Significant Economic Presence (SEP), a legal construct under Section 114 that allows Nigeria to tax foreign companies without physical presence but with demonstrable digital or economic engagement. The Act deems a company as having a Significant Economic Presence if it earns substantial revenue from Nigerian users, clients, or subscribers through digital or remote transactions.
This encompasses: streaming platforms earning from Nigerian subscriptions, e-commerce platforms facilitating sales to Nigerian customers, online advertising companies targeting Nigerian audiences, and cloud computing or data storage providers serving local users.
While the quantitative thresholds for SEP will be determined by regulations issued by the Minister of Finance (expected to be set in the ₦25–₦50 million range of annual Nigerian-source revenue), the qualitative test, namely, “continuous and sustained digital interaction with Nigerian users,” ensures that the definition remains adaptive to new technologies.
Under Section 115(3) of the Act, once a company meets these criteria, a portion of its global profit “reasonably attributable to Nigerian activities” becomes taxable in Nigeria, even if the company has no physical footprint in the country.
What Profits Get Taxed?
Nigeria doesn’t tax a foreign company’s entire global income, it taxes only the portion that’s reasonably connected to its Nigerian activities.The law distinguishes between income that arises within Nigeria and that which does not. For a company with a Permanent Establishment, profits “directly or indirectly connected” with Nigerian activities are taxable. This provision covers contracts performed, services rendered or goods sold through that establishment.
For companies with a Significant Economic Presence but no physical base, Section 117 empowers the tax authority to estimate taxable profits “on a fair and reasonable basis.” This means often using turnover attributable to Nigerian customers, adjusted for sector-specific margins and costs.
In practice, this means that digital and service-based firms must now keep granular records of Nigerian-sourced revenue and be able to justify profit attribution with credible documentation.
The Special Case for Transport and Shipping
Few sectors highlight the complexity of cross-border taxation like shipping and aviation, where vessels and aircraft traverse multiple jurisdictions in a single operation. Recognizing this, Section 121 of the Act introduces a simplified, fixed-rate model.
- Foreign shipping companies are now taxed at 2% of their gross revenue derived from Nigerian sources.
- Foreign airlines pay 6% of gross revenue earned from passenger or cargo operations in or out of Nigerian airports.
This replaces complex profit allocation formulas with certainty, both for taxpayers and tax authorities. A shipping line that earns ₦10 billion annually from Lagos port operations, for instance, will now pay ₦200 million in tax, irrespective of its global profit margins.
The 4% Minimum Tax Floor
To prevent profit-shifting and ensure fair contribution, Section 125 of the Act introduces a 4% minimum tax floor on turnover for certain non-resident companies. For instance, if a foreign company reports very low or no taxable profit in Nigeria, despite significant Nigerian revenue, it may still be subject to this minimum tax. This prevents businesses from escaping taxation entirely through aggressive deductions or transfer pricing arrangements.
For example, if a foreign tech company earns ₦1 billion from Nigerian customers but reports only ₦10 million in taxable profit after deductions. Even if the regular corporate tax on ₦10 million is minimal, they would still pay the 4% minimum tax (₦40 million) on their Nigerian turnover.
New Compliance Requirements
The 2025 regime places significant emphasis on transparency. Under Sections 132–134 of the Act, every foreign company with either PE or SEP status must: register with the Federal Inland Revenue Service (FIRS), file annual tax returns declaring its Nigerian-sourced income, and maintain detailed documentation separating Nigerian activities from foreign operations.
Failure to comply attracts not only financial penalties and interest on unpaid tax, but also potential restrictions on profit repatriation and heightened audit scrutiny.
FIRS has also been granted expanded digital powers under Section 139 that allows it to exchange information with financial institutions, banks and foreign tax authorities in real time. This closes one of the most persistent gaps in enforcement.
What Foreign Companies Should Do Now
Immediate Actions
1. Assess your exposure: Review your Nigerian revenue and activities to determine if you have PE or SEP.
2. Register if required: If you meet the criteria, register with the Nigerian tax authority promptly.
3. Organize your records: Ensure you can clearly identify and document Nigerian-sourced income.
4. Review your structure: Consider whether your current business structure is tax-efficient under the new rules.
Ongoing Compliance
1. Maintain separation: Keep detailed records distinguishing Nigerian activities from other operations.
2. Monitor thresholds: Track your Nigerian revenue to know when you cross SEP thresholds.
3. Stay informed: Keep up with regulatory updates as specific thresholds and procedures are clarified.
4. Engage local expertise: Work with Nigerian tax advisors who understand both the new rules and local enforcement practices.
How Taxpal Can Help
Navigating Nigeria’s new tax landscape can be complex, especially for foreign companies unfamiliar with local requirements. Our partner, Taxpal provides comprehensive support for international businesses, including PE and SEP assessments, registration assistance, compliance monitoring and ongoing tax management.
Visit their website to explore their consultation services and portal access options. Whether you’re entering the Nigerian market or need to comply with new requirements, Taxpal will help you navigate the system efficiently and legally.
