There was no major segregation between small, medium, and large companies for tax purposes in Nigeria, prior to the introduction of the Finance Act (FA), 2019. All companies were subjected to income tax at the rate of 30% based on the provisions of the Companies Income Tax (CIT) Act, except, companies engaged in agriculture, mining, and manufacturing with a turnover of less than one million naira. The FA 2019, introduced an amendment to the CIT Act, classifying companies into small, medium, and large based on their turnover and introduced different income tax rates applicable to each company type.

Small and mid-size enterprises (SMEs) are generally defined as businesses that maintain revenue, assets, and employees below a certain threshold. The definition differs per country as each country has different criteria for a company to qualify as a small company. Small companies, irrespective of the criteria, are instrumental to the development of a country's economy. In Nigeria, the CIT Act (as amended by the FA 2019) defines a small company as a company with a turnover of less than twenty-five million naira in a year, a medium company; turnover between 25 million and 100 million naira and a large company, turnover above 100 million naira.

With the rising rate of unemployment in Nigeria, which was estimated at 37.7% in 20221, there has been a rise in the number of startups in different sectors of the Nigerian economy. These SMEs have been credited with reduced unemployment, innovation, and an overall boost in the country's economy. Specifically, the International Labour Organisation (ILO), a specialized agency of the United Nations stated that SMEs contribute 48 percent of Nigeria's Gross Domestic Product as they account for 96% of businesses and 84% of employments. This clearly shows that the number of small companies currently outweighs the large companies. However, small companies are also easily impacted by the changes in the micro and macro economy. For instance, according to the President/Chairman of the Governing Council of the Nigerian Association of Small and Medium Enterprises (NASME), about 10 percent of the 40 million Micro, Small and Medium Enterprises (MSMEs) in the country have shut down since the subsidy removal2.

As a result, the Federal Government of Nigeria (FGN) has prioritized the growth of SMEs by formulating policies that will enhance their growth and overall ease of doing business. This article is focused on the tax incentives introduced by the Finance Acts for small companies, the issues arising and our recommendations.

Tax Incentives Available to Small Companies in Nigeria

The FGN through the Finance Acts introduced some tax incentives to support the growth of SMEs by reducing their tax compliance and payment burden. Some of the tax incentives are enumerated below:

1. Exemption from payment of Companies Income Tax & Tertiary Education Tax (TET)

Section 55 of the CIT Act (as amended) requires every company (including a company granted exemption from incorporation) to submit its income tax returns, whether or not the company is liable to pay tax. However, by virtue of amendments introduced by the FA 2019 and 2020 to section 23 of the CIT Act and section 1 of the Tertiary Education Trust Fund Act, the profits of a small company have been exempted from CIT and TET. This implies that although small companies would submit their tax income tax returns as and when due (i.e., six months after the end of its accounting year), they would not be liable to any CIT and TET.

Notwithstanding, where a small company does not submit its income tax returns, it would be liable to a late filing penalty of ₦25,000 in the first month and ₦5,000 for every subsequent month in which the failure continues.

2. Exemption from payment of tax on Dividends from Small Manufacturing Companies

The dividends received by a small company from another small company in the manufacturing sector in the paying company's first five years of operation is exempt from tax, as per Section 23(1)(o)(ii) of the CIT Act.

3. Exemption from payment of Minimum Tax

Minimum tax is an anti-tax avoidance provision in the CIT Act to ensure that companies pay some tax in a given year of assessment. It is payable in an assessment year where a company has no taxable profit or when the income tax calculated is lower than the minimum tax (calculated as 0.5% of a company's gross turnover). Small companies are exempted from the payment of minimum tax, based on the provisions of Section 33 of the CIT Act, as amended by the FA 2019. The exemption aligns with the incentive stated in (1) above to ensure that no form of income tax is paid by small companies.

4. Exemption from compliance with the provisions of the Value Added Tax Act:

A compliance threshold for taxable persons, similar to the provisions in the CIT Act, was introduced to the VAT Act, by an amendment of Section 15 via FA 2019. The provision requires only companies that have made or expects to make taxable supplies of ₦25,000,000 (either singularly or cumulatively in any calendar year) or more to render VAT returns on a monthly basis to the Federal Inland Revenue Service (FIRS). Furthermore, taxable persons who do not fall within the threshold (which is in essence small companies) are exempted from registering for VAT, issuing tax invoices, remitting and rendering a monthly return and from the penalties prescribed by the Act for non-compliance with the administrative provisions. This incentive is very germane, as it relieves small companies of the administrative burden associated with rendering monthly VAT returns.

Issues Arising from the tax exemption granted to Small Companies under the CIT Act

We have highlighted some issues arising from the tax exemptions granted and other provisions:

1. Identification of a small company

The CIT Act defines a company that will qualify as a small company for income tax purposes, and the definition is based on its gross turnover per annum. A literal interpretation of the definition provided by the CIT Act connotes that where any company has a turnover of less than ₦25,000,000 in any given year, it would qualify as a small company. However, the CIT Act does not elucidate how these companies will be identified during the year, since the threshold is per annum. The identification criteria are critical because all companies are required to withhold taxes from qualifying transactions, when payments are being made to other companies. Thus, the ease of identification of small companies would enhance compliance with relevant provisions of the CIT Act.

Furthermore, there are concerns on the treatment to be accorded to companies that exceed the stipulated threshold (for a small company), in a particular year based on the execution of one-off contracts. For instance, where a company wins and executes a contract in a particular year that leads to a turnover of above N25million, but subsequently reverts to turnover of less than N25million in the next financial year. Has it lost the ability to be categorized as a small company or does its status change depending on its turnover in each financial year? Similarly, if a company that used to qualify as a medium/large company, is experiencing a business downturn that leads to lower revenues, should such company not also be able to partake in the tax incentive (especially for CIT) pending when its business activities are back on track? Thus, it is important that the definition is clarified as this will be instrumental for business planning purposes.

To aid the identification of small companies during a financial year, the authors are of the view that the FIRS may leverage its online platform – Tax Pro Max to issue monthly or quarterly clearance certificates to qualifying companies. The small companies may be required to upload their bank statements to the platform to justify the gross turnover for the period under review. This certificate may be provided to other stakeholders that the small companies would transact with during the year. Proactively identifying small companies would reduce the administrative burden and cost of subsequently regularizing the small companies records through tax refund processes.

2. Deduction of Withholding Taxes from Payments to Small Companies

Section 23(n) of the CIT Act (as amended by the FA 2021) is the section that provides for the exemption of the profits of small companies from income tax under the Act. The concluding subsection i.e., S23(1A) provides that

"Nothing in this section shall be construed to exempt from deduction at source, the tax which a company making payments is to deduct under sections 78, 79 or 80 of this Act, such that the provisions of sections 78, 79 and 80 of this Act shall apply to a dividend, interest, rent or royalty paid by a company exempted from tax under subsection (1) (a) to (e), (h) to (l), (n), (p) to (s) and (v)."

The above provision clarifies that the tax-exempt status of a company does not preclude it from complying with the relevant provisions of the CIT Act regarding the deduction of withholding tax (WHT) tax from payment of dividends, interest, rent or royalty. Thus, small companies are still required to deduct taxes from the payment of these categories of income.

However, Section 23 (1A) does not reference Section 81 of the CIT Act (which governs WHT deduction on other forms of income) and thus, it can be inferred that the CIT Act seeks to exclude the companies exempted from income tax under Section 23 of the CIT Act, from deduction at source. Notwithstanding, the FIRS in its Information Circular 2020/04 on Clarification on Sundry Provisions of the Finance Act 2019, stated that the income of small companies is subject to WHT deduction by medium and large companies, as the tax exemption status of the companies would not impact the obligations of other companies transacting with them. In our view, the requirement to deduct WHT from the income of small companies is not consistent with the provisions of the law, especially since WHT is an advance payment of income tax. Furthermore, the amendment introduced by the law does not indicate that WHT deductions are still applicable irrespective of the tax exemption. While it is clear that the requirement for WHT deduction is in a bid to resolve the administrative conundrum with identifying these companies during a financial year, subjecting the income of small companies to WHT defeats the purpose of the income tax exemption. In addition, it will affect the liquidity of these companies, as the deducted amounts can only be recovered via a refund from the FIRS.

Section 81(7) of the CIT Act provides that excess payments shall be refunded within 90 days, but in practice, such refund requests are characterized by lengthy verification processes that may be very expensive for small companies. Thus, it begs the question whether the tax exemption of small companies is fully being enjoyed and whether the withheld sum should attract interest for the period that it is in the FIRS' coffers?

Rather than seeking to subject small companies' revenue to WHT and refunding it, the FIRS should proactively adopt measures to aid the identification of these companies, either by relying on the tax clearance certificates issued for the prior year based on the tax returns submitted (which the small companies can present to other companies they are transacting with) or by leveraging the Tax Pro Max for online real time verification. Furthermore, the VAT Act as amended has exempted small companies from issuing VAT invoices and submission of monthly VAT returns. The basis for verifying the small companies' status for VAT compliance exemption purposes (suggested in (1) above) may also be extended to the WHT deduction requirements.

3. Loss of Capital Allowance on Qualifying Expenditure

Capital allowance (CA) is typically granted to companies for any qualifying capital expenditure incurred for a trade or business. The CA is granted to ensure that a company is able to claim a portion of the cost of assets employed for its trade or business, over a period of time, in line with the applicable rates stated in the CIT Act. The FA 2021, however introduced a new Section 31(1)(c) of the CIT Act, which provides that the CA calculated in any year, together with any unabsorbed CA brought forward from prior years for a small company (and medium company) will be deemed to have been claimed in that year and only the residue, will be carried forward. This means that the CA due to the company based on its assessable profit for the year it qualifies as a small company will be deemed utilized and only the portion of the CA carried forward (if any) can be subsequently claimed. This provision bears similarity to Section 27(h) of the CIT Act which provides that the expense incurred in generating any tax-exempt income should be disallowed for tax purposes. Thus, it seems that the FGN may be trying to ensure that small companies do not enjoy a double incentive.

However, the provision may have a counterproductive effect as it may dissuade small companies from investing in capital expenditure during the period that they qualify as a small company. Similarly, there are school of thoughts which believe that the provision is not equitable as it is possible for a company who is still setting up its activities in Nigeria (or has a reduction in its activities), to qualify as a small company based on the definition in the CIT Act. Where these categories of companies have incurred significant capital costs in setting up their activities, the CA arising from the investments may be lost.

The authors are of the view that the treatment of CA as codified in the Industrial Development (Income Tax Relief) Act (IDA) should also be extended to small companies. Section 14(2) of the IDA stipulates that any capital expenditure incurred by a pioneer company on assets before the end of its tax relief period shall for the purposes of the second schedule to the CIT Act, be deemed to have been incurred on the day following the end of the tax relief period. Thus, it is unclear why there is a difference between the treatment of CA claimable by small companies during the tax exemption period, especially as such company may only qualify as a small company for a limited period of time, all things being equal. Standardizing the treatment of CA during the tax exemption period would serve as another incentive for small companies, as they would be able to utilize the available CA once there is a transition to a medium or large company.

Tax Incentives for Small & Medium Enterprises in other jurisdictions

We have reviewed the practice in other jurisdictions to determine the applicable provisions relating to taxation of small companies and have detailed them below:

  1. The Australian Government through the Australian Taxation Office (ATO) provides a series of tax concessions, offsets and rebates for small companies. The ATO via its website3 enumerates how the concession for capital gains tax will work for small companies, the eligibility criteria, and the conditions for applying for the claim of the concessions.
    For a small company to qualify for a CGT concession of up to 15years, such company should have an aggregated turnover of less than $2million. Such company is to submit its income tax returns to the ATO, indicating the concession adopted which is automatically granted. Small business owners can also reduce the income tax payable in a tax year by up to $1,000 each year, based on an aggregate turnover threshold of $5million. The eligibility and offset basis are duly provided on the ATO's website4.
  2. Similar to Nigeria, the Netherlands has a small business scheme (kleineondernemersregeling, KOR) that relieves small companies from VAT compliance and submission of returns (such companies are not required to charge nor deduct VAT, and are not required to file VAT declarations, save for a one-off VAT return, where applicable). To qualify for the exemption, such company's turnover is at most €20,0005 per calendar year and the Dutch Tax and Customs Administration provides a Dutch-language KOR tool that enables companies to evaluate whether they qualify for the scheme, for a period of three (3) years. The tool requires intending applicants to declare their VAT status and estimate the proposed revenue for the year, based on services to be provided in one calendar year. They also run a graduated tax scale starting with the rate of 9.45% on income less than £35,129 (N16.7million6)
  3. In India, there is a three-year tax holiday for companies with a turnover of less than RS100 crore (N5billion7). Also, companies with turnover of less than RS5 Crore (N278 million) are exempted from tax audits.
  4. Small business corporations in South Africa have a graduated scale for calculating their corporate income taxes, starting from 0% for taxable income of ZAR 87,300 (N2.3million8) to 28% for taxable income exceeding ZAR 550,000 (N14.8million)9

Based on the above, the incentives introduced by the FGN are laudable as they are similar in most instances, to what is being done in other jurisdictions. However, there is a need to continue to introduce incentives (which may not be restricted to tax) to ensure continuous ease of doing business and growth of these small companies to improve the likelihood of their transition to medium and large companies.


The unemployment rate in Nigeria continues to increase as a result of dwindling investments in the real sector, amidst other economic challenges. Data has shown that SMEs currently play a huge role in the countries' economic development. While there are arguments to support the fact that most SMEs who operate in the informal sector are yet to be captured in the tax net, it is still crucial to acknowledge the contribution of SMEs to the overall growth of the Nigerian economy. Like every greenfield, the FGN's support is necessary to boost the capacity of SMEs, as these are the large companies of the future who will invariably contribute their share of taxes, as and when due.

Although the tax incentives introduced for this category of companies are laudable, it is pertinent that the FGN in conjunction with the tax authorities ensure clarity and ease in the administration of these incentives to ensure that these SMEs can fully benefit from them. In line with the Canons of taxation of fairness and certainty, SMEs need to be fully aware of their exact obligations and how best to fulfill them. These obligations also have to be reasonable, to allow these SMEs to focus on developing their business. One of the major objectives of the Presidential Enabling Business Environment Council (PEBEC) is to remove bureaucratic constraints to doing business in Nigeria, as evidenced in the introduction of the Business Facilitation (Miscellaneous Provision) Act, 2022. However, there needs to be continual process improvements for the actualization of the PEBEC objectives.

For small companies, concerted efforts should be made to propose and review various options to manage the issues arising from identifying the companies that fall into this category for tax purposes, including those recommended in this article, rather than the current tortuous approach of subjecting the income of small companies to WHT, and subsequently refunding it. This would reduce tax administration cost and enhance the transparency of the Nigerian tax system. It will also improve the liquidity and growth opportunities of small business which will aid their transition into medium and ultimately large companies.


1. KPMG Global Economic Outlook - H1 2023 report

2. Job losses rise as 4m small businesses shut in two months - Business day NG

3. CGT concessions eligibility overview | Australian Taxation Office (

4. Eligibility | Australian Taxation Office (

5. Dutch small businesses scheme (KOR) |

6. 1 EUR: N476.74

7. 1 RS Crore = N55, 759,146

8. 1 ZAR: N26.93


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.