“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”- Winston S. Churchill


It is undeniable that no matter how well a tax regime is structured, there will be vacuums and loopholes creating avenues for tax evasion and avoidance strategies – Tax leakages, which will ultimately reduce the revenue due to the government.


Therefore, it is not strange that a government may need to include certain provisions in its laws from time to time to help mitigate or totally eradicate the effect of tax leakages. These provisions should be drafted in a manner that will not impose an extra tax burden on the citizenry, especially in an economic downtime, else it may result in a counter-productive effect on the revenue of the government. Counter-productive in the sense that it may discourage industry and investment in the economy, thereby reducing the income and profits generated or distributed, which are the major sources of taxation.


Examples of such provisions in Nigerian laws are the Minimum Tax provision in Section 33 of the Companies Income Tax Act[1], the Excess Dividend Tax provision in Section 19 of the Companies Income Tax Act, the Withholding Tax provisions in Section 74 of the Personal Income Tax Act and Section 81 of the Companies Income Tax Act.


The provision for Excess Dividend Tax in Section 19 of the Companies Income Tax Act is of particular interest as it is obviously aimed at preventing tax avoidance strategies of companies. It imposes an Excess Dividend Tax on companies whose distributed dividends are higher than its declared profits.


Excess Dividend Tax – Section 19 of the Companies Income Tax


Where a company has received as income, dividend from another company as a result of its shareholding in that company, and tax has been withheld at 10%, such company will no longer be required to pay tax on the amount of dividend received, not even when it re-distributes such income[2]. This is known as Franked Investment Income.


The above is a foundation for a proper understanding of the principle of Excess Dividend Tax. Section 19 of the Companies Income Tax provides as follows:


“Where a dividend is paid out as profit on which tax is payable due to:

  • No total profits; or
  • Total profits which are less than amount of dividend which is paid, whether or not the recipient of the dividend is a Nigerian Company

is paid by a Nigerian company, the company paying the dividend shall be charged to tax at the rate prescribed in subsection (1) of section 40 of this Act as if the dividend is the total profits of the company for the year of assessment to which the accounts, out of which the dividend is declared, relates.


In essence, this provision is to the effect that where a company makes no taxable profit or taxable profit lesser than its declared dividend, its declared dividend will be deemed as its taxable profit for that year of assessment, and will be taxed 30%. Invariably, strict application of the above provision will amount to taxing a company on its:


  1. Retained earnings[3] (percentage of undistributed profits re-invested into business)


  1. Franked Investment Income (for which it should normally enjoy exemption from tax according to Section 80(3) of CITA)


This provision does appear to be a deliberate double taxation strategy intended as a punitive measure for the prevention of tax avoidance mechanisms. Subjecting the income/exempted income of a company to another round of taxation simply because the company declared dividend higher than its taxable profit dies not in any way exhibit the principle of fairness.


Excess Dividend Tax – Interpretation of the courts

A seeming attempt to rebut the above provision on excess dividend tax was made in Oando Plc v. Federal Inland Revenue Service[4], where the Federal High Court could not hold that Section 19 is not applicable to the Appellant’s case with respect to its 2004 retained earnings because the assessment of account presented by the Appellant, regarding the 2004 year of assessment, did not conclusively prove that the dividends were issued from retained earnings.


The Tax Appeal Tribunal (TAT) however dashed any hopes for the exclusion of retained earnings and franked investment income from the scope of Section 19 in the latter case of Oando Plc. v. Federal Inland Revenue Service[5]. In that case, Oando Plc declared and paid dividends to its shareholders in the 2005 – 2007 years of assessment. The FIRS invoked the provisions of section 19 and assessed the dividends to 30% corporate income tax on the basis that such dividends exceeded the company’s taxable profits for the relevant years of assessment. The FIRS rejected Oando’s objection to the assessment, following which Oando lodged an appeal with the Tax Appeal Tribunal (TAT).


The basis for Oando’s appeal was threefold: firstly, the dividends were paid out of retained earnings which had been subject to tax in previous years, secondly, if section 19 is considered to be ambiguous, it should be interpreted in favour of the taxpayer as per the contra fiscum rule, and, thirdly, as the company earned dividend income from its subsidiaries, the FIRS should have considered and applied section 80 of the CITA and the guidance provided by the “Explanatory Notes on the Critical Tax Issues for the operation of Bank Holding Company Structure in Nigeria” (the Explanatory Notes) issued in April 2012.


The FIRS clarifies in the Explanatory Notes that any dividend paid by subsidiary companies within a group to their holding company is franked investment income which would not form part of the holding company’s total profits for tax purposes, including the provisions of section 19. In addition, section 80(3) regards dividends received by a company after the deduction of withholding tax as franked investment income, which should not be subject to further tax, and by extension withholding tax. In light of the above, the Explanatory Notes conclude that to the extent that any holding company’s income consists of dividends received from its subsidiaries, such dividend will not be subject to any further tax.


The TAT held that, irrespective of whether earnings have been taxed previously, where there is no current year taxable profit or taxable profits are less than the amount of dividends declared, such dividends will be taxed at 30% in terms of section 19. In addition, section 19 is clear and unambiguous and should therefore be given its literal interpretation. Section 80(3) and the Explanatory Notes are not of relevance, as the source of the profits from which the dividend has been declared, is not franked investment income received from its subsidiaries[6].


In arriving at its decision, the TAT highlighted 4 steps to be considered in applying the concept of excess dividend tax, viz:


  1. ascertain why there is no tax payable on the profits of the company;


  1. treat the dividend paid as the total profits of the company for the relevant year of assessment;


  1. deduct from the said dividend any amount computed as total profits by the company in order to arrive at the Excess Dividends Paid over Total Profit; and


  1. apply the income tax rate (30%) to the Excess Dividend Paid over Total Profits.


The decision of the TAT did more than to contradict the earlier decision of the Federal High Court (FHC), it has literally placed a figurative seal on the matter, and it will take a further clarification of a superior court, that is, the FHC, Court of Appeal to reverse the impact of the decision on future disputes relating to excess dividend tax.


In a more recent decision of the Court of Appeal (CA) in a matter between the same parties, Oando Plc. v. Federal Inland Revenue Service[7], the CA also sustained an assessment of Excess Dividend Tax on the basis that the dividends in question were paid out of profits which had not been subjected to tax, that is, there was no evidence that the dividends in question were paid out of retained earnings.


Exemption for Banks – An Unfair Advantage

Perhaps a way of admitting that the provisions on Excess Dividend Tax was imposed intentionally, it is interesting to know that the Federal Inland Revenue Service (FIRS) released a circular in 2012 exempting Holding Corporation Banks from the scope of this tax[8].


One of the implications of Section 19 as mentioned earlier is that Franked Investment Income, which are normally tax exempt (save for Withholding taxes) income in the hands of a company, will be subject where such income is distributed, this is more especially the case of Holding companies.


A Holding company is a member of another company controlling the composition of the board of such other company, and which holds more than half in the nominal value of its equity share capital[9].


It is not uncommon for a holding company to receive dividends from its subsidiary/subsidiaries, in fact dividends received sometime may be the only income accruing to such holding company in a year of assessment, thereby resulting into zero taxable income (Franked Investment Income are tax exempt). However, where such dividends are declared and distributed, such holding company will be liable to pay Excess Divided Tax, because its dividends would have become more than its taxable profit, thereby attracting the applicability of Section 19.


This provision posed a major problem for the Nigerian banks that have decided to retain their subsidiaries under a Holding company structure as mandated by the CBN. It means that they will be subjected to heavy tax on their incomes when distributed as dividends by their banks, asset management companies etc.[10] Hence, the FIRS Circular exempting them from Excess Dividend Tax.


The FIRS has to realize that other companies are also suffering from the weight of this deliberate tax burden, and there is an urgent need to review the law generally to relieve this burden across board, a case of preferential treatment just won’t cut it, it rather portrays the government as unfair and insensitive to the needs of its citizens.


Going forward

Critics of the Excess Dividend Tax have on several occasions shared their thoughts on the preposterous and insensitive nature of Section 19, and have even clamoured for the complete deletion of this provision from the Company Income Tax Act. Others are of the opinion that an amendment will help remedy its effect of double taxation on the profits of a company.


A more pragmatic approach to solving this legal dilemma will be to align with recommendations for amendment of Section 19. The National Assembly should live up to its responsibility as the arm of government with the power to make laws and amend this provision to suit present economic realities.


One of such recommendations is provided in the National Tax Policy[11]. The policy recommends that Section 19 of the CITA on Excess Dividend Tax should be re-drafted to specifically exempt franked investment income, capital gains, income from bonds, already taxed retained earnings, and dividends received from foreign subsidiaries.

The National Tax Policy listed the justifications for the recommendation as follows:


  1. to make Nigeria a favourable jurisdiction for incorporating Holding Companies, and to place Nigeria in a favourable position to be considered as the West African Hub for investments in the ECOWAS region;


  1. preventing double taxation; and


  1. most companies in Nigeria are already moving to neighbouring countries with favourable tax legislation for Holding Companies.



The boosting effect of income generated from taxable revenue in a country cannot be underestimated, and it is indeed the prerogative of a government to determine the income, profits or services transferred within its economy that will attract tax liabilities. However, there is a need to tread cautiously, especially when the resultant effect of these decisions will impose higher tax liabilities.


The tax laws must be flexible enough to respond to the current situations in an economy, it is only reasonable that the burden of taxation will not be increased when an economy is facing a downtime, and particularly hangs on the hope of continuous investment, both by its citizenry and foreigners, through their business activities.


Implementing the recommendations of the National Tax Policy will help to rectify the anomalies in the provision of Section 19 on Excess Dividend Tax in order to arrive at a more balanced tax law.


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This publication only provides general information about the law and does not constitute legal advice.

[1] CAP C21, Laws of the Federation of Nigeria (LFN), 2004.

[2] Section 80(3) of CITA

[3] Dividends are paid from retained earnings. Section 380 of the Companies and Allied Matters Act, LFN 2004


[4] (2009) 1 TLRN 61

[5] (2014) 16 TLRN 99 at pg. 109-112

[6] http://www.mondaq.com/Nigeria/x/356296/Corporate+Tax/Recent+Nigeria+Tax+Tribunal+Judgements


[7] Appeal No. CA/L/409/2008 decided 24th March, 2015

[8] http://pwcnigeria.typepad.com/files/firs-circular_bank-holding-structure_2013.pdf

[9] Section 338 of CAMA

[10] https://nairametrics.com/preferential-treatment-holdco-banks-are-now-exempt-from-excess-dividend-tax-while-other-nigerian-companies-are-not/


[11] Compiled by the Federal Ministry of Finance in November, 2016 under the administration of Mrs. Kemi Adeosun