Tax Implication of Investing In The Nigerian Stock Exchange

Investing in the NSE might come with certain tax implications. Here's all you need to know.

Nigeria is no doubt the giant of Africa. The country boasts of over $376.284bn in GDP, making Nigeria the country with the highest GDP in Africa. This amazing potential is what has made the Nigerian stock exchange as lucrative as it is today as the NSE powers the growth of the Nigerian economy.

As such, by investing in it, you have set yourself on a course that leads to wealth and development. However, because the primary way the country makes its money is through Taxation, by becoming an owner of a share/company, you take on a few tax obligations as well. Here are all the things you need to know about the tax implications of investing in the NSE:

How Gains From The Stock Market Are Taxed

There are two principal ways people make money from investments in the stock market. The first is by disposing shares and the other is through dividends earned. By disposing shares, there is a capital gain element. But you have nothing to worry about because there are no capital gains taxes on buying and selling of equities in Nigeria.

Dividends, on the other hand, are regarded as gains or profits made by individuals and businesses while doing business or trading in the country. Dividends can either be paid in cash, stocks, or a combination of cash and stocks.

Script dividends are also credited to your CSCS account by the registrars. In fact, when you trade online, dividends can also be paid electronically into your bank account. As a result of this, dividends are taxable just as a company’s profits are taxable.

For one, there is a withholding tax (WHT) of 10% that is applicable to dividend payments in Nigeria and it is deducted at source by the investee company before remitting the dividends to shareholders. This is, of course, in line with the applicable law.

Interest earned from bond investments are also liable to a WHT of 10%. However, there is currently an exemption from income tax on all bond interest by the Exemption of Bonds and Short Term Government Securities Order of 2011 and it is for a period of 10 years. This period ends in the year 2021 so it is important that you make the best out of this grace period before it lapses.

After receiving your dividends, you are not required to file for tax returns again. This is because dividends are regarded as Franked Investment Income in Nigeria. As such, there is no additional tax due other than the tax deducted at source by the investee company.

Do You Pay Taxes When The Value Of Your Shares Increase On The Stock Market?

No you don’t! Income taxes are only payable on taxable profit and increases in share value do not qualify as taxable profit according to applicable laws. Therefore, there is no additional tax.

Double Taxation Implication

Double taxation is a taxation principle that refers to income taxes that are paid twice on the same source of earned income. Double taxation typically occurs in international trade when the same income is taxed in two different countries.

As such, generally, if you are in a foreign country and investing in Nigeria, then you might face double taxation issues. However, there are reliefs available to treaties. Nigeria’s double taxation avoidance treaties reduces the WHT payable on dividends and interest to 7.5% for investors from treaty nations.

The countries with which Nigeria has executed double tax avoidance treaties currently includes: Belgium, Canada, China, France, Italy (transport only), Netherlands, Pakistan, Philippines, Romania, South Africa, and United Kingdom. When investing in foreign equities listed on the Exchange, dividends from foreign entities are also tax free in Nigeria.

Written by Lawretta Egba.