Top five transactions that attract withholding tax in Nigeria

Businesses and individuals in Nigeria are required to deduct Withholding Tax (WHT) from certain payments and remit the amount to the relevant tax authority, with failure to comply potentially attracting penalties and other sanctions.

Withholding Tax is not a separate tax but an advance payment of income tax deducted at source by the payer. The amount withheld is generally treated as a tax credit against the recipient’s final tax liability.

Under the relevant tax laws, five major categories of transactions commonly attract WHT.

Dividends paid by companies to shareholders are subject to WHT. Although dividend income forms part of the recipient’s income, it is subsequently treated as Franked Investment Income, helping to prevent the same income from being taxed twice.

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Rent paid for the use of residential or commercial property is another transaction covered by WHT. Landlords and other property owners may therefore have tax deducted from rental payments made by tenants, agents or other payers.

Professional and consultancy fees also attract WHT. Payments to lawyers, accountants, consultants and other professionals are subject to deduction at source, requiring businesses that engage such service providers to withhold the applicable amount before making payment.

Construction contracts fall within the WHT regime as well. Payments made under building, construction and related contracts require the appropriate deduction, making compliance important for both contractors and their clients.

The fifth category is interest and royalties. Interest payments on loans and royalties paid for the use of intellectual property rights are generally subject to WHT, meaning lenders and intellectual property owners may receive payments net of the applicable tax deduction.

Tax experts advise businesses and individuals making these payments to maintain proper records, deduct the correct amounts and remit them within the prescribed timelines. Recipients, meanwhile, are encouraged to keep evidence of WHT deductions to ensure the amounts are properly credited against their eventual tax liabilities.

Understanding the transactions covered by WHT can help taxpayers avoid compliance failures, penalties and disputes with tax authorities while ensuring that taxes deducted at source are properly accounted for.