INTRODUCTION
With effect from Thursday, January 1, 2026, Nigerian companies that control foreign companies (Nigerian-Controlled Foreign Companies (NCFCs)) will carry the additional obligation of paying income tax on their share of the undistributed profits of the NCFCs as well as pay up the shortfall of the NCFC’s compliance with the 15% (fifteen percent) global minimum tax (GMT) mandate expressed in Nigeria as the 15% minimum effective tax rate (METR). In this brief, we review the bases of these conclusions as well as throw light on the options open to Nigerian companies with NCFC exposure.
NIGERIAN COMPANIES AND THEIR NCFCS
The NTA is a 203-sectioned body of laws that effectively consolidates Nigeria’s tax legislation into a single, coherent framework, designed to simplify compliance, reduce ambiguities, and ensure that taxation is both fair and aligned with both domestic and international standards. Its Section 6 deals with the taxation of Nigerian companies and subsections (2) and (3) thereof focuses on the taxation of NCFCs. The provisions are:
(2) Where a foreign company which is controlled by a Nigerian company has not, in a year, distributed profits to its shareholders, the proportion of the profits of the controlled foreign company attributable to the Nigerian company, which could have been distributed without detriment to the company’s business shall be construed as distributed and included in the profits of the Nigerian company for the purposes of subsection (1).
(3) Where the income tax paid by a non-resident company which is a subsidiary of a Nigerian company or a member of a multinational group of a Nigerian company in any year yields less than the minimum effective tax rate prescribed by this Act, the Nigerian parent company shall pay an amount to make that non-resident subsidiary’s income tax equal to the minimum effective tax rate.
Before exploring these provisions further, we should get better clarity on the concept of NCFCs. Significant is that to qualify as a NCFC, the company must be owned and or controlled by a Nigerian company and not a Nigerian individual. Hence, foreign companies owned and or controlled by Nigerian natural citizens in their personal name or by a non-corporate trustee will not, for this purpose, qualify as NCFCs. The “N” in NCFCs stand for Nigerian company and not any Nigerian. Needless it be restated that a Nigerian company is a company that is incorporated in Nigeria with its Corporate Affairs Commission.
THE NTA AND NCFCS
Back to Section 6(2)(3) of the NTA. A Nigerian company that has a NCFC now has the obligation to account to the Nigerian federal tax authority, the profits of the NCFC regardless of whether the profits have been declared or distributed. The earlier Section 6(1) of NTA provides the basis of this rule when it states that the profits of a Nigerian company are deemed to accrue in Nigeria regardless of where the profits arise from and regardless of whether the profits have been brought into or received in Nigeria. Accordingly, and being a shareholder of the NCFC, the Nigerian company is due to be taxed on its share of the profits from its NCFC, regardless of whether the profits have been brought into or received in Nigeria.
Section 6(2) and (3) deal with dissimilar circumstances.
Section 6(2) references a NCFC that has not distributed its profits. Recall that our overriding Section 6(1) already makes it immaterial that profits of a Nigeria company is brought into or received in Nigeria. Whether brought into and or received in Nigeria, a Nigeria company will pay CIT on its taxable profits. Thus, Section 6(2) provides that the Nigerian company will be taxed on its portion of the NCFC’s undistributed profit, provided that the profits could have been distributed without detriment to the NCFC’s business. This subjective clause provides a wiggle room for the Nigerian taxpayer company to establish that its subsidiary, the NCFC, even though with recorded profit, is unable to distribute the profits as doing so will be disadvantageous to its business. We rationally conceive instances of cashflow management or critical investment/reinvestment plays here and advise that proactive management of the taxman’s expectations with preemptive disclosures and notifications may prove useful in the successful use of the wiggle room. A statutory mandate is imposed on Nigeria’s Federal tax authority to provide detailed rules on the implementation of this provision.
Section 6(3) on the other hand deals with the minimum tax payable by a NCFC and the consequence on the Nigerian parent company if the NCFC pays less than the minimum tax. Effectively, Nigeria’s METR Rule which sets 15% (fifteen percent) as METR applies to NCFCs. This means that, subject to some exceptions, all NCFCs must pay a 15% minimum effective tax on their profits in their relevant jurisdictions. Failure to do this, that is, where the minimum effective tax paid by the NCFC is less than 15%, the Nigerian parent company will pay to Nigeria’s Federal tax authority, whatever payments that are needed to make up the 15% METR. We shall dwell more on this in the next section of this brief. Meantime and similar to Section 6(2) on undistributed profits, a statutory mandate is also imposed on Nigeria’s Federal tax authority to provide detailed rules on the implementation of this provision.
THE GLOBAL MINIMUM TAX RATE + NIGERIA’S MINIMUM EFFECTIVE TAX RATE
A major pillar of global tax reforms in the 38 member countries of the Organisation for Economic Co-operation and Development (OECD) is the concept of the global minimum tax (GMT). Known as the second of the twin pillars of the OECD’s Pillar Two framework, the principles of the GMT are that multinational enterprises (MNEs) should pay a minimum 15% corporate tax on the profits they earn in each jurisdiction in which they operate, thereby reducing the incentive for profit shifting and placing a floor for tax competition among countries. It needs restating that a MNE is a company that carries on business in more than one jurisdiction through subsidiary companies, associated companies, permanent establishments or any other business units located in the other jurisdiction(s).
Nigeria has duly domesticated the GMT Rule in the NTA’s Section 57(1) and (2) with its 15% METR. Nigeria’s METR applies to only to (1) MNEs with group turnover of a minimum 750million Euros; and (ii) other Nigerian companies with a minimum N50billion (circa 28million Euros). Section 57(3) exempts, with exceptions, approved enterprises (FZEs) operating in Nigeria’s free trade zones (FTZs) from the application of METR. The exceptions are FZEs that are part of an MNE with group turnover of a minimum 750million Euros; and the FZEs income from sales to the Nigeria Customs Territory provided they meet with the minimum N50billion (circa 28million Euros) turnover threshold.
It is relevant that in Section 6(3) subjecting NCFCs to the METR Rule, it does not reference the qualifications in Section 57(2). Accordingly, an NCFC, that is a subsidiary of a Nigerian company, even though it does not meet the threshold imposed by Section 57(2), will be subject to the METR Rule. Section 6(3)’s use of the disjunctive “or” in the expression “… a non-resident company which is a subsidiary of a Nigerian company or a member of a multinational group of a Nigerian company …” is instructive in this regard.
The 15% METR is calculated as the overall percentages of the following taxes relative to the company’s net income: CIT, Petroleum Profit Tax, Hydrocarbon Tax, Development Levy and Priority Sector Tax Credit. “Net income” is calculated as the Company’s profit before tax as reported in its Audited Financial Statements (AFS) less franked investment income (for example, taxed distributed profits from NCFCs) and unrealised gains or losses. For life insurance companies, their net income will not include premiums and investment income of policyholders.
OUR FINAL THOUGHTS:
The existence of NCFCs logically presupposes the existence of an MNE, howbeit an MNE without a group turnover of a minimum 750million Euros. More relevant is that the NCFC is a subsidiary of a Nigerian company and makes the discourse in this brief relevant to every Nigerian company with an NCFC. It is advisable for them to check the discourse in this brief with their tax advisors. They should deftly consider the implications of the new regime imposed by such provisions as Sections 6(2)(3), 57(1)(2), and 202 of the NTA. Options following the review of such group portfolios may include winding down unnecessary NCFCs or making them more tax-agnostic; this time, not just in relation to the tax regime of their jurisdiction, but the overarching principles of Nigeria’s nascent law on the taxation of NCFCs.
ABOUT AO2LAW:
At AO2LAW, we maintain a foremost Tax Practice. Situated within our Commercial and Criminal Law Practice Group (CCLP), our Practice brings to bear our expertise in core tax advisory, representation and management. We routinely assist organisations and individuals in Nigeria or whose commerce interacts with Nigeria, in their compliance efforts and preservation of their global tax rights.
For further information on the foregoing or related matters, please contact us at info@ao2law.com; +234 807 776 5149, or any of the key contact details.
Please do not treat the foregoing as legal advice as it only represents the public commentary views of the authors. All enquiries on this should please be directed at the authors.
