Talk about the three certainties in life and you will have tax come right after death and change.
Irrespective of the industry, legal system or jurisdiction under examination, there is always a place for taxation, principally because it remains an important medium for the government to generate revenue to fund their expenditure and cater for the welfare of the general populace. This article briefly discusses some taxes imposed by Nigerian legislations in the real estate and property transactions.
Before delving into this discourse, it is important to mention that the Land Use Act 1978 is the first point of reference with regards to the ownership, transfer, possession, and other matters concerning land in Nigeria. However, with respect to taxation on real estate and property transactions, recourse must be made to other legislations for a sufficient analysis. Furthermore, the term “real estate” means landed assets and permanent building structures affixed to land having economic value, such as residential buildings, commercial development, and industrial buildings. It is necessary to be aquintated with the relevant taxes and levies applicable to real estate transactions because ignorance is not an excuse “Ignorantia legis neminem excusat”.
- Capital Gains Tax (CGT): Where the real estate is disposed as a capital asset, gains realised from its disposal attract a capital gain tax rate of 10%. In Lagos State, this tax is charged at a flat rate of 2% of the property consideration when applying for governor’s consent on the transfer of interest in that property. The Capital Gains Tax Act exempts the gain from the disposal of a person’s principal private residence, and from a compulsory acquisition of property under the Land Use Act 1978 where the owner had not demonstrated his intention to dispose of it such as through advertisement. Furthermore, it does not apply to transfer by way of security, redemption of security, disposal by way of gift, and disposal by charitable organisations, public educational institution, trade unions, and cooperative society.
2. Stamp Duty: Instruments that record the transfer of an interest in landed property, such as a deed of conveyance, will, contract to transfer, real estate mortgage, and so on are required to be stamped under the Stamp Duties Act. This is a requirement before they can be admitted as evidence under the Evidence Act 2014, unless penalty from failure to pay stamp duties has been previously made.In Lagos State, this tax is also charged at a flat rate of 2% of the property consideration when applying for governor’s consent on the transfer of interest in that property.
3. Consent and Registration Fee: The Land Use Act 1978 confers the control and management of urban land on the Governor and that of other land on the local government depending on the area the land is situate. Furthermore, neither a customary nor a statutory right of occupancy can be alienated by way of assignment or transfer of possession without the consent of the Governor. Obtaining this consent and registering the transferred interest requires payment of some fees, and this rate is fixed by individual states. However, registration is mostly based on an assessment of the value of the property at the time it was purchased. In Lagos, 3% and 8% of the consideration of the property transaction are charged as registration and consent fee respectively, and this is expected to be paid by the buyer.
4. Value Added Tax (VAT): Whether real estate and property transactions are subject to VAT has been a subject of controversy. Ordinarily, VAT is payable on the supply of goods and services except those exempted by virtue of their inclusion in the First Schedule to the Value Added Tax (Amendment Act) 2007[i]. However, not only has the Federal Inland Revenue Service (FIRS) taken them to be liable to tax because of their exemption under the First Schedule but the Tax Tribunal has also held that transfer of ownership in landed property amounts to supply of goods, hence subject to VAT. However, if the decision of the Federal High Court in CNOOC Exploration Production v. AG Federation that a right in an oil mining licence (OML) is not subject to VAT because it is a chose in action (not goods) is to be followed, the transfer of a right of ownership in landed property ought not to attract VAT. In this regards, the Federal Executive Council approved an executive order to remove VAT on residential properties through the Value Added Tax Act (Modification) Order.[ii]Nonetheless, whether commercial or industrial properties should be subject to VAT is still a grey area.
5. Withholding Tax: A withholding tax rate of 10% is paid on income gained from the lease of real estate properties, and this rate is same for resident or non-resident companies and individuals. However, this rate is reduced to 7.5% for individuals resident in countries Nigeria has concluded double taxation treaty with[iii], subject to the ratification of the treaty as required by section 12(1) of the Constitution of the Federal Republic of Nigeria 1999 (as amended). This rate is to be withheld from the rent by a lessee and remitted to the tax authority, after which a tax credit note in favour of the owner is issued.
6. Tenement Rate: This is charged by the local government authorities on occupied and developed property used by private individuals. Thus, properties used exclusively for religious activities, non-profit making public institutions, cemeteries or burial grounds, and palaces of traditional rulers are exempted. This charge is primarily to be paid by the occupier or persons in actual possession of the property. Several legislations and judicial decision support the collection of this tax by the local government authorities, namely sections 7(5) and 1(f) of the 4th Schedule to the Constitution of the Federal Republic of Nigeria, 1999; the Taxes and Levies (Approved List of Collection) Act; the Tenement Rate Laws of Lagos State 2020; Next Level Resort v. Abuja Municipal Area Council & Anor, and so on. Particular mention must however be made of the decision in The Planned Shelter Case Suit No. FCT/HC/CV/2625/16.
Although the facts in The Planned Shelter Case is dissimilar to the early decision by the same court in Next Level Resort Case, the court still held that the local authorities had power to levy and collect tenement rate. The only dissonance is the legislation that should fix this tenement rate. While the Planned Shelter Case held that the tenement rate should be fixed by an Act of the National Assembly (not by the Bye-Laws of the Area Councils in Abuja), the Next Level Resort Case held that it would be a duplication of effort to have the National Assembly prescribe tenement rate under a legislation since the Niger State Local Government Edict which operates in Abuja as an Act of the National Assembly empowers the Area Councils to prescribe tenement rates under their Bye-Laws.
However, in states like Lagos and Enugu, the land use Charge has been made to replace all forms of tenement rates and land based charges. The rate to be paid is determined by an assessment of the building structure and its usage. Hence, they can either be characterized as commercial, industrial and residential, all of which have their differing rates. In Lagos, commercial and industrial properties attract 0.394% and 0.132%of the assessed value respectively, while residential properties attract 0.0394% (where it is occupied by the owner), 0.132% (where it is jointly occupied by the owner and tenant), and 0.394% (where it is an investment property fully occupied by tenants).
7. Companies Income Tax (CIT) and Education Tax: Incorporated entities engaged in the business of property transaction are required to pay 30% of their annual profit as CIT and 2% of their annual profit as education tax remitted to the Education Trust Fund. Both of these taxes are collected by the Federal Inland Revenue Service (FIRS).
8. Mansion Tax: This luxury tax attaches to residential properties worth at least ₦300 million and situate in the Federal Capital Territory Abuja a flat tax rate of 1%.
In conclusion, while it is a constitutional right to acquire and own immovable property in Nigeria (section 43 of CFRN 1999), taxes are attached to not only the acquisition of property, but also to ownership and possession of property, as well as the transfer of interest in property.
[i] They are medical and pharmaceutical products as well as medical services; books and educational materials; essential food items; baby products; export goods and services; plant, machinery and goods imported for use in the export processing zone or free zone area; plant, machinery and goods purchased for utilization of gas in the down-stream petroleum operations; tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes; baby products; fertilizer, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment; services rendered by community banks, people’s bank and mortgage institutions; and plays and performance conducted by educational institutions as part of learning.
[ii] FG to remove VAT on residential properties, amends company income tax law (The Cable, June 7 2018) https://www.thecable.ng/fg-remove-vat-residential-properties-company-income-tax
[iii] Belgium, Canada, China, Czech Republic, France, Netherlands, Pakistan, Philippines, Romania, Singapore, Slovakia, South Africa, South Korea, Spain, Sweden, United Kingdom.
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They are medical and pharmaceutical products as well as medical services; books and educational materials; essential food items; baby products; export goods and services; plant, machinery and goods imported for use in the export processing zone or free zone area; plant, machinery and goods purchased for utilization of gas in the down-stream petroleum operations; tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes; baby products; fertilizer, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment; services rendered by community banks, people’s bank and mortgage institutions; and plays and performance conducted by educational institutions as part of learning.
[1] FG to remove VAT on residential properties, amends company income tax law (The Cable, June 7 2018) https://www.thecable.ng/fg-remove-vat-residential-properties-company-income-tax
[1] Belgium, Canada, China, Czech Republic, France, Netherlands, Pakistan, Philippines, Romania, Singapore, Slovakia, South Africa, South Korea, Spain, Sweden, United Kingdom.