Intra-group Financing In Nigeria: Pertinent Points To Note

Introduction to Intra-group Financing

Intra-group financing arrangement, particularly interest-bearing loan arrangements, have long been one of the foremost tax planning strategies adopted by multinational enterprises to shift profits from one jurisdiction to another. As a result, tax authorities globally tend to scrutinize these arrangements under transfer pricing rules to ensure that the terms of these transactions are at arm’s length. Some examples of intra-group financing arrangements include transactions like loans, cash pooling, and guarantees involving connected persons.

In recent times, the Nigeria Revenue Service has also begun to scrutinize intra-group financing arrangements more keenly, going beyond merely considering whether taxpayers have complied with the withholding tax obligations that accompany such arrangements and interrogating the arm’s length nature of the interest rates to raising critical questions regarding the accurate characterization of such transactions. This article seeks to highlight some key points to note regarding intra-group financing arrangements with a view to ensuring that taxpayers are in a better position to respond to tax authority’s queries and minimize the risk of additional liabilities from transfer pricing adjustments.

Overview of Nigeria’s Transfer Pricing Regulations regarding Intra-Group Financing Arrangement

Regulation 3 (1) of the Income Tax (Transfer Pricing) Regulations, 2018 (the Regulations) includes transactions between connected persons involving the lending and borrowing of money under the scope of covered transactions for transfer pricing purposes in Nigeria. Also, as the Regulations apply to all transactions between connected persons whether cross-border or local, the scope of lending and borrowing activities covered by the Regulations is broad.

Further, the Regulations do not include any specific thresholds or pricing terms for such transactions that could be considered consistent with the arm’s length principle. The only additional specific guidance with respect to intra-group financing arrangements can be found in Regulation 8 (1) and refers to the financing activities of capital-rich, low-function companies. Regulation 8 (1) states that:

A Capital-rich, low-function company, that does not control the financial risks associated with its funding activities, for tax purposes, shall not be allocated the profits associated with those risks and will be entitled to no more than a risk-free return. The profits or losses associated with the financial risks would be allocated to the entity (or entities) that manage those risks and have the capacity to bear them.

Additionally, Regulation 27 (which contains definitions of key terms used in the Regulations) defines “capital-rich, low-function companies” as:

“Companies that are capitalised with a relatively high amount of equity (or equity-equivalent) capital, but which have limited capacity to carry out risk-management functions. Within multinational groups, such companies may, for example, provide debt funding to associated enterprises, or fund research and development programmes carried out by associated enterprises.”

Regulation 27 also goes ahead to provide the following example regarding the treatment of funding activities undertaken by a capital-rich, low-function companies:

“For example, where such a company funds a research and development programme conducted by an associated enterprise, but does not have the capacity to make the key decisions that manage the risks associated with the programme, it will be considered to be conducting a funding function only, and will be allocated a return on that funding on the assumption that the funding is risk-free.”

These sections of the Regulations are the only sections of the Regulations that specifically address intra-group financing activities. However, the general guidance regarding the process by which the tax authority would go about confirming that transactions between connected persons comply with the arm’s length principle as outlined in the other sections of the Regulations also apply in the case of intra-group financing arrangements.

Documentation and disclosure requirements for Intra-group financing arrangements

In addition to the general information requirements applicable to all transactions involving connected persons which is expected to be in the local file, the schedule to the Regulations which outlines the information expected to be maintained to satisfy the contemporaneous documentation requirements in Regulation 17, states that the following information is expected to be part of the master file:

1. A description of financing arrangements between members of the MNE group and important financing arrangements with unrelated parties.
2. The identification of any constituent entity of the MNE group that provides a central financing function for the group, including the country under whose laws the entity is organised and the state of tax residence of such entities.

• A description of the MNE’s general transfer pricing policies related to financing arrangements between connected persons.

Taxpayers are not only required to maintain contemporaneous documentation in respect of intra-group financing activities, but they are also required to disclose such transactions in their annual TP returns. Failure to comply with either the disclosure or documentation requirements may attract the stiff administrative penalties in the Regulations for acts of non-compliance.

Interest Expense Limitation rules under Finance Act 2019 and the Nigeria Tax Act

Prior to Finance Act, 2019, interest on loans were deductible in their entirety if the funds obtained were used to generate taxable income. However, Finance Act, 2019, introduced an interest deductibility threshold by limiting the tax deductibility of interest on loans from foreign connected persons to 30% of Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). Excess interest above this threshold can be carried forward for a period of no more than five years. Therefore, to the extent that the interest expense is consistent with the arm’s length principle, taxpayers may be able to fully deduct the charge over the defined period where they are not in a loss-making position.

Under the Nigeria Tax Act, 2025, the scope of transactions subject to the deductibility limitation was further expanded to include local transactions between connected persons. In addition, the definition of debt includes loans, financial instruments, finance leases, and derivatives.

BEPS and International Standards

Interest on loans between connected persons and independent parties has since been one of the simplest profit-shifting strategies adopted for international tax planning purposes. As a result, the Organization for Economic Cooperation and Development (OECD) recommended the introduction of rules that place a cap on the amount of interest and other financial payments made to connected persons in respect of intra-group financing arrangements. Therefore, the restriction on interest deductibility introduced by Finance Act, 2019, is generally consistent with the recommendations of the OECD’s BEPS Action 4 aimed at limiting base erosion involving interest deductions and other financial payments.

Several countries including India, the United Kingdom and South Africa have adopted similar rules with variations regarding the threshold of interest on which the rules would apply, the number of years for which any excess interest above the threshold can be recovered, amongst others.

Challenges in Applying Arm’s-length Principle to Loan Arrangements

Beyond the limited availability of truly comparable financing arrangements needed to accurately apply the CUP method and minimize subjectivity when determining an arm’s length interest rate (particularly for intra‑group loans denominated in foreign currencies), taxpayers must also be ready to show that each intra‑group financing arrangement has been correctly characterized. This is becoming important because the Nigeria Revenue Service has increasingly challenged whether arrangements initially treated as loans should instead be reclassified as equity contributions during transfer pricing audits.

Taxpayers must demonstrate that the economically relevant characteristics of intra-group financing arrangements in Chapter X of the 2022 OECD Transfer Pricing Guidelines (the Guidelines) have been appropriately considered and supported with adequate documentation. This is needed to substantiate that intra‑group financing arrangements have been correctly characterized. The economically relevant characteristics as stated in Paragraph 10.12 of the Guidelines include:

“the presence or absence of a fixed repayment date; the obligation to pay interest; the right to enforce payment of principal and interest; the status of the funder in comparison to regular corporate creditors; the existence of financial covenants and security; the source of interest payments; the ability of the recipient of the funds to obtain loans from unrelated lending institutions; the extent to which the advance is used to acquire capital assets; and the failure of the purported debtor to repay on the due date or to seek a postponement.”

Conclusion

Intra-group financing remains a valuable tool for corporate groups operating in Nigeria, enabling efficient allocation of capital, liquidity management, and strategic funding of subsidiaries and affiliates. However, while such arrangements can provide operational and financial flexibility, they must be structured with careful regard to the Nigerian regulatory and tax environment.

Companies engaging in intra-group financing should pay close attention to applicable transfer pricing rules, thin capitalization considerations foreign exchange regulations, withholding tax implications, and documentation requirements. Ensuring that intra-group loans and related financial arrangements reflect arm’s length principles is essential to mitigate the risk of tax adjustments, penalties, or regulatory scrutiny.

Furthermore, clear intercompany agreements, proper interest rate benchmarking, and robust compliance processes are critical to demonstrating transparency and commercial rationale. As regulatory oversight continues to evolve in Nigeria, proactive planning and regular review of intra-group financing structures will help corporate groups remain compliant while maximizing the benefits of internal funding arrangements.

Ultimately, organizations that approach intra-group financing with both strategic foresight and regulatory awareness will be better positioned to leverage internal capital efficiently while minimizing legal and tax risks within the Nigerian business landscape.

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.