Nigeria’s Economic Development Tax Incentive: A Shift Towards Performance-Based Investment Promotion
Introduction
Tax incentives are widely used by governments around the world as a tool to influence economic behavior and drive development objectives. These incentives can take various forms, including reduced tax rates, tax holidays, accelerated depreciation allowances, or tax credits. The purpose is often to attract foreign direct investment (FDI), stimulate domestic investment, promote economic growth, and diversify the economy.
Nigeria’s previous flagship incentive, the Pioneer Status Incentive (PSI), provided an initial tax holiday for three years, with the possibility of a two-year extension from Companies Income Tax (CIT) for approved activities. 1] The PSI’s policy motive was to encourage the growth of nascent businesses and start-ups, especially those involved in local raw material development and labor-intensive processing. However, despite its intentions, the Pioneer Status Incentive has faced criticism and challenges. Specifically, the PSI has been associated with issues such as minimal value addition from beneficiary companies, exploitation of loopholes, and a lack of transparency and measurability regarding its actual impact.
Responding to these challenges and as part of a broader tax reform efforts,[2] Nigeria has introduced the Economic Development Incentive (EDI) as a replacement for the PSI. The EDI represents a fundamental shift from a time-based tax holiday to a performance-based system that directly links tax relief to verifiable investments. This new framework is designed to be investment-driven, aiming to address the shortcomings of its predecessor.
Key Feature and Mechanism of the EDI
The Economic Development Tax Incentive (EDI) is a significant innovation introduced by the Nigeria Tax Act (the “Act”), 2025. It is aimed at fostering economic growth and attracting investment in specific areas tagged “priority sectors” like agriculture and food, energy, transportation, health among other sectors with sunset provisions ranging from ten years to twenty years.[3] The President has the power to amend this list, adding sectors that are not operating on a suitable scale or have favorable development prospects, or removing sectors deemed to have become sufficiently developed.
The Act aims to establish a more structured and transparent approach to providing incentives by linking them directly to verifiable capital investment and targeting key sectors perceived as critical for national development and diversification away from oil dependence. To be eligible for the EDI, a company must generally be incorporated in Nigeria, although companies exempted from incorporation and promoters of future companies can also apply. A crucial requirement is that the company must incur qualifying capital expenditure (QCE) on or before its “production day” that meets or exceeds a specified minimum threshold.[4]
The amount of this pre-production QCE must be certified by the Nigerian Revenue Service (NRS), and failure to meet the minimum threshold means the EDI certificate will not be granted. These minimum investment thresholds are introduced to target scalable and impactful projects.
The process for obtaining an EDI certificate involves an application to the Nigerian Investment Promotion Commission (NIPC). The application must include proof of commitment to invest, particulars of QCE, assets, proposed production date, expected output, and ownership structure. This shall be accompanied by a non-refundable fee of 0.1% of the QCE subject to a maximum of N5,000,000. The NIPC shall make recommendations to the Minister responsible for industry, trade, and investment, for onward approval from the President. Presidential approval is a mandatory step before the NIPC can issue the EDI certificate.
The most significant feature introduced by the EDI is the nature of the benefit. Instead of a tax holiday, EDI offers a tax credit. Eligible businesses in priority sectors would receive a tax credit on qualifying capital investments annually for five years to offset their corporate taxes. The incentive period can be extended for an additional five years if the company demonstrates that it has reinvested 100% of the profits generated from the priority product during the initial five-year period back into expanding the production of that same product. Although, this tax credit cannot be used to offset the additional tax payable under the minimum effective tax rate specified under the Act.[5]
Companies benefiting from the EDI are also required to maintain separate accounting records for their priority and non-priority businesses. This is essential for determining the income and profits attributable to the incentivized activities. Failure to comply with this separate accounting requirement can result in all of the company’s income being treated as non-priority, leading to the loss of the economic development tax credit.[6]
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