Tax Compliance for Startups: All You Need to Know

One critical area startups in Nigeria must prioritise is compliance with tax laws. Beyond legal obligations, proper tax compliance enhances credibility, ensures business sustainability, and helps avoid penalties for non-compliance. Therefore, startups need to understand their tax obligations and take appropriate measures to meet them. In this article, we highlight tax compliance for startups within Nigerian regulations.

Key Tax Compliance for Startups In Nigeria

Understanding and complying with tax obligations is not only a matter of legal compliance but also a crucial step in building a sustainable and reputable business. Here is a look at some key tax obligations that startups operating in Nigeria must prioritise.

Company Income Tax (CIT)

CIT is a tax on the profits of companies operating in Nigeria, regulated by the Companies Income Tax Act (CITA) and administered by the Federal Inland Revenue Service (FIRS). The taxable amount is the company’s profit after deducting allowable expenses and applicable reliefs. CIT applies to income from trade, business, rental properties, investments, dividends, interest, royalties, fees, and any income earned or brought into Nigeria. Nigeria’s company income tax structure employs a tiered system based on annual turnover:

1. Companies with a turnover below N25 million (small companies) are exempt from company income tax (0%).
2. Companies with a turnover between N25 million and N100 million are taxed at a rate of 20% on assessable profit.
3. Companies with a turnover exceeding N100 million are taxed at a rate of 30% on assessable profit.

Newly incorporated companies are obligated to file income tax returns from their inaugural accounting period, accurately reflecting their income, expenses, and resulting profit or loss. A startup’s CIT return must be filed every year, not later than six months after the end of the accounting year. It is important to know that failure to file CIT returns attracts a penalty of N25,000 for the first month and NGN 5,000 for each subsequent month of default. Late payment of CIT attracts a 10% penalty and interest at the commercial rate.

Capital Gains Tax (CGT)‍

CGT is a levy imposed on the profit realised from the sale or disposal of capital assets. CGT is levied at a flat rate of 10% on chargeable gains. Allowable expenditures for CGT purposes include professional service fees, commissions, remunerations, and transfer costs. CGT returns are filed annually and payable by the company that realizes the gain.

Certain gains are explicitly exempted from CGT, and they include:

1. Gains derived from the disposal of decorations awarded for valor and gallant conduct.
2. Proceeds from life insurance policies.
3. Gains accruing from Nigerian government securities.
4. Gains realized from the disposal of stocks and shares.

Withholding Tax

It is an advance income tax payment deducted at source by the payer and remitted directly to the tax authority to prepay the recipient’s income tax liability. The law mandates withholding tax deductions from payments to resident and non-resident companies and individuals providing goods and services within Nigeria. Withholding tax is applicable but not limited to a range of transactions, including contracts for construction, professional fees, rental payments for property and assets, dividends, and royalty disbursements. Withholding tax is to be remitted within 30 days of the day the amount was deducted or the time the duty to deduct arose. The penalty for non-remittance is 10% of the tax not remitted plus interest at the prevailing rate of the Central Bank of Nigeria.

Value Added Tax

VAT is a consumption tax levied on goods and services at a standard rate of 7.5%. Startups are required to collect VAT charged on their invoices from their customers for filing and payment to the tax authority. Value Added Tax (VAT) returns are required to be filed monthly, specifically on or before the 21st day of the month following the transaction period. All VAT collected from customers must be remitted to the Federal Inland Revenue Service (FIRS) monthly.

Stamp Duties Tax

It is a tax levied on documents and some specific transactions. It is charged either according to value or at a fixed rate depending on the type of transaction to which the document relates. The tax is to be remitted to the FIRS if the transaction is between corporate bodies and the State Internal Revenue Service (SIRS) if the transaction is between individuals. The FIRS Establishment Act (FIRSEA) prescribes a 10% penalty and interest at the prevailing rate when a taxpayer fails to pay tax at the appropriate time.

Industrial Training Fund Deductions‍

The statutory obligation to remit contributions to the Industrial Training Fund (ITF) falls upon employers who meet the criteria below. Primarily, employers with 25 or more employees are mandated to contribute 1% of their total annual payroll to the ITF, which is due no later than March 31st of each year. For ITF purposes, the term “employees” includes both Nigerian and non-Nigerian individuals who have worked for the employer for more than 30 days within a calendar year, regardless of whether their employment is full-time or part-time, and who receive salary, wages, or other forms of compensation. Furthermore, “payroll” is defined as the aggregate of basic pay, allowances, and other entitlements payable to employees, whether these payments are made within or outside Nigeria and in both public and private establishments. Startups must file returns and pay the levy annually.

Personal Income Tax

‍Personal Income Tax (PIT) is a tax levied on the aggregate income of all taxpayers in Nigeria, regardless of whether that income is derived from within or outside the country. The relevant tax authority is the Federal Inland Revenue Service (FIRS) for residents of the Federal Capital Territory (FCT) and the State Board of Internal Revenue for residents of respective states. The minimum tax rate for PIT is 1% of gross income. Tax returns must be filed within 90 days of the commencement of each year. Failure to pay the tax results in a 10% per annum penalty of the tax payable. To ensure the effective implementation of PIT, the Act (Personal Income Tax (Amended) Act, 2011) provides mechanisms, primarily Pay As You Earn (PAYE) and Withholding Tax.

‍Conclusion

Tax compliance might seem overwhelming, but staying ahead of these obligations will save your startup from unnecessary fines and headaches. By keeping up with filings and payments, you’re not just avoiding penalties—you’re building a solid foundation for growth and credibility. If in doubt, consult a tax expert and stay compliant.

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