Companies Income Tax ("CIT") is a major source of revenue for the Nigerian government. To ensure continued inflow of revenue, the Companies Income Tax Act ("CITA") provides for a number of measures to curb tax evasion and tax avoidance, one of which includes the provision for excess dividend tax.

Excess dividend tax in practice, has resulted in the double taxation of some companies caught under the provision. To curb this menace, the Finance Act, 2019 has amended the provisions of the CITA by providing for exemptions to the excess dividend tax rule in Nigeria.

This newsletter considers the previous provision for excess dividend tax under the CITA and the exemptions provided for under the Finance Act 2019.

Excess Dividend Tax under the CITA

Under the CITA1, where a company pays dividends to its shareholders while declaring that: (i) it made no profit for the year; or (ii) its profit for that year is less than the dividend paid out to its shareholders, the company paying the dividend will be taxed as if the dividend paid out is the total profit of the company for that year.

The rationale for the provision is to prevent tax avoidance/ evasion by companies on the basis that only profit generating companies in a financial year are capable of declaring and paying dividends to its shareholders. While this provision indeed curbed tax evasion and other unethical practices of companies, the provision had negative effects on companies that did not actually generate profit or whose declared dividends exceeded their profit for legitimate reasons.

By virtue of Section 19(1) of the CITA, the dividends of holding companies not carrying on any business were subjected to both withholding tax and companies income tax despite the fact that the withholding tax paid on the dividend was franked investment income and as such, not subject to further taxation.

In addition, companies declaring dividends based on their retained earnings or who had postponed the payment of dividends to the present year were made to pay income tax on the dividends declared previously been subjected to income tax in the year the profit was actually made.

This in effect, discouraged many companies (local and foreign) from setting up holding company structures in Nigeria for fear of double taxation.

Exemptions to Excess Dividends Tax under the Finance Act 2019

Favouring the clamours for the review of this harsh provision, the National Assembly passed the Finance Act which created exemptions to excess dividend tax in Nigeria. Section 7(a) of the Finance Act amended Section 19 of CITA by providing for instances where the dividend of a company will not be subjected to income tax where the company does not declare profit for the year or where the profit of the company is less than the dividend declared. The exemptions are listed below.

1. Dividends paid out of the retained earnings of the Company– where the dividends of a company is paid out of its retained earnings which have been previously subjected to companies income tax, capital gains tax or petroleum profit tax, the company will not be required to pay CIT on it.

2. Dividends paid out of profits exempted from income tax– where a company pays dividends from its profit which has been exempted from tax by any law in Nigeria, the dividend paid will not be subject to excess dividend tax.

3. Franked investment income of the company– CITA2 defines franked investment income as the dividend received by a corporate shareholder after deduction of withholding tax. The implication of this is that companies (e.g. holding companies) are no longer required to pay excess dividend tax on declared dividends which originate from franked investment income.

4.Distributions made by a real estate investment company to its shareholders– where a Real Estate Investment Company distributes dividends to its shareholders from its profit made from rental income or dividend income, such dividend declared will be exempt from excess dividend tax. This based on the provision of the Finance Act3 which exempts the rental and dividend income of real estate investment companies from tax, provided that 75% of the dividend and rental income is distributed within 12 months after the end of the financial year in which it was earned.


The provision for exemption to excess dividend tax in Nigeria is and continues to be a welcome development in the Nigerian tax regime. It serves as an incentive for businesses intending to set up holding company structures in Nigeria and encourages corporate savings.


1. Section 19(1) of CITA

2. Section 80(3) of CITA

3. Section 9 of the Finance Act, 2019

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.