Are Nigerian Bank Holding Companies Taxable on Dividend?

Description

ABSTRACT

Are Nigerian Bank Holding Companies Taxable on Dividend?

Professor Taofeeq Abdulrazaq*

Holding Companies are parent companies having controlling shares in other companies often referred to as their subsidiaries. Bank Holding Companies are parent companies with controlling shares in subsidiary companies engaged in banking business.

Nigerian Banks have been declaring huge profits and it is expected that huge sums would be paid out as dividend. The question that needs to bother the bank holding companies is how the dividends received by them would be treated for tax purposes.

In an explanatory note on the critical tax issues for the operation of bank holding company structure in Nigeria, the Federal Inland Revenue Service under the authority of its Board issued an information circular PC – T12. 2.3. 027 dated April 2012.

The circular addresses issues arising in connection with the taxation of Bank Holding Companies and their subsidiaries pursuant to Section 61 of the Federal Inland Revenue Service (Establishment) Act, 2007. The circular applies to all Bank Holding Companies and their subsidiaries in Nigeria.

The circular explained that the Central Bank of Nigeria (CBN) recently issued its Regulations on Scope of Banking Activities & Ancillary Matters, No 3, 2010 (Regulation 3 of 2010), repealing the erstwhile Universal Banking Licence regime and modifying the scope and framework for banking business in Nigeria. In line with requirements of the CBN Regulations aforesaid, some banking groups in Nigeria restructured their business operations by incorporating one or more Holding Companies to aggregate shareholder capital and hold ownership interest in operating companies conducting Banking and other permitted businesses separately.

ISSUES IN THE FIRS CIRCULAR
The main thrust of the information circular is the clarification on relevant tax issues and avoidance of double taxation on dividends paid.

The FIRS clarified that any dividend paid by subsidiary companies within each Group to their parent Holding Company (HoldCo) is Franked Investment Income which would not form part of the said Holding Company’s total profits for tax purposes including consideration of total profits chargeable to tax in the contemplation of the anti-tax avoidance provisions in the Companies Income Tax Act (CITA), Cap C21, LFN, 2004 (as amended) particularly section 19 thereof.

It is however imperative to note that the above clarification given by the FIRS is merely re-stating the provisions of section 80 (1), (2) & (3) of CITA 2004.

* Professor of Taxation, Faculty of Law, Lagos State University, Ojo and Partner, Saffron Professional Services