27 February 2018 Global Tax Alert Nigeria ratifies double tax agreement with Spain EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: www.ey.com/taxalerts Executive summary The Federal Government of Nigeria (Nigeria), on 26 January, 2018, ratified the double tax agreement (the Treaty) between the Federal Republic of Nigeria and the Kingdom of Spain making it a part of the country s domestic law. The ratification of the treaty legalizes it under the provisions of the Nigerian Constitution which precludes treaties from having the force of law until they have been enacted by the National Assembly. The Treaty includes a limitation of benefits provision in the tax treaty protocol which provides that where the provisions of the Treaty limits the right of any Contracting State to tax income, and according to the internal tax laws of the other Contracting State, such income is exempted from tax, the other Contracting State is allowed to tax such income as if the double tax agreement does not exist. Unlike the treaties signed with countries in other jurisdictions, the Treaty is silent on the deductibility of head office expenses in the determination of the profits of a permanent establishment. The Treaty is expected to enter into force three months after the exchange of notifications by the parties to the Treaty.
2 Global Tax Alert Detailed discussion Taxes covered The Treaty applies to all taxes imposed on total income; elements of income and capital gains, including taxes on gains from the alienation of movable or immovable property. As such, in Nigeria, the Treaty is expected to cover taxes such as: Personal income tax Companies income tax Petroleum profits tax Capital gains tax Tertiary education tax Other taxes on income and capital Permanent establishment definition According to the Treaty, the term permanent establishment (PE) includes specifically: a place of management; a branch; an office; a factory; a workshop; and a mine, an oil or gas well, a quarry or any other place of exploitation of natural resources. A PE also encompasses the following: Any place used for any activity relating to the exploration of natural resources, provided that such activity exists for a period or periods aggregating more than 2 months within any 12-month period. A building site, a construction, assembly or installation project or supervisory activities provided that such site, project or activities last more than six months, or where such project or activity being incidental to the sale of machinery or equipment continues for a period not exceeding six months and the charges payable for the project or activities exceeds 10% of the sale price of the machinery or equipment free-on board. The furnishing of services, including technical, management or consultancy services, by an enterprise of a Contracting State through employees or other personnel engaged by the enterprise for such purpose, if the service activities continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 6 months within any 12-month period. A fixed place of business used as a sales outlet notwithstanding the fact that such fixed place of business is otherwise maintained for any of the activities mentioned in paragraph 4 of the Treaty between Spain and Nigeria. Business profits Similar to the provisions in other signed treaties, the Treaty provides that the profits of a Contracting State is taxable in the other Contracting State if it carries on business in that other Contracting State through a PE. In determining the profits of the PE subject to tax, the Treaty provides an allowance for the deduction of expenses which are incurred for the purposes of the business of the PE which includes executive and general administrative expenses incurred in the other Contracting State or elsewhere. The Treaty, unlike treaties signed with other countries, is silent on the non-deductibility of head office expenses which may include royalties, patents, rights, and interest, paid to the head office of the enterprise or any of its other offices. Taxation of dividends, interest and royalties The Treaty provides a reduced withholding tax rate on dividends, interest and royalties of 7.5% if the recipient is the beneficial owner of such income. The reduced dividends rate applies only when the beneficial owner has a minimum of 10% of the company making the distribution. For royalties, payments to all non-corporate beneficial owners are subject to tax at a maximum rate of 3.75%. The Treaty includes a clause in the Protocol whereby an exemption or lower withholding tax rate (as the case may be) would automatically apply should Nigeria s agreements or conventions with any other member of the Organisation for Economic Cooperation and Development provide an exemption or withholding tax rate lower than 7.5% on dividends, interest and royalties. Exemption of profits from operation of ships or aircraft in international traffic The Treaty allows for the taxing rights on profits derived from the operation of ships or aircraft in international traffic to be allocated to the country of residence where the effective management of the enterprise is situated. It further provides that if the place of effective management is aboard the ship, the profits from the operation of the ship will be deemed to be generated from the country of residence where the home harbor of the ship is situated and where there is no such home harbor, the Contracting State where the ship operator is resident is considered as the place of effective management.
Global Tax Alert 3 Furthermore, where the operation of ships or aircrafts in international traffic are carried on by an enterprise of only one of the Contracting States, then the enterprise concerned will be subject to tax in the other State and at a rate not exceeding 1% of the earnings of the enterprise from that State. Capital gains tax exemption The Treaty provides an) exemption on gains derived from the disposal of investments except for immovable property situated in the other Contracting State and shares/interest in a non-listed company, partnership, trust or estate deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State. Other income The Treaty states that other income except income from immovable property not covered in the Treaty should be taxed based on the domestic laws where the income was derived. However, the taxation of other income based on domestic law will not apply if the party resident of a Contracting State, carries on business in the other Contracting State through a PE or performs independent personal services from a fixed based situated therein. Taxation of capital The Treaty provides that capital represented from movable property attributable to a PE or fixed base in another Contracting State may be taxed in the other Contracting State. Capital represented by ships and aircraft are only taxable in the place where the effective management of the enterprise is situated. All other elements of capital of a resident of a Contracting State are only taxable in that state. Assistance in the collection of taxes The Treaty allows for the tax authorities of the Contracting States to provide assistance with the collection of revenue claims. A revenue claim is an amount owed in respect of all tax types on behalf of the Contracting States. The mode of assistance to be provided can be mutually agreed by the tax authorities of each Contracting State. Interestingly, the revenue claim is not subject to the time limitation under the laws of the other Contracting State, and proceedings with respect to the existence, validity or the amount of revenue claim of a Contracting State shall not be brought before the courts of the other Contracting State. Time limit for seeking resolution under the mutual agreement procedure The Treaty also provides a statutory period of three years within which a resident of a Contracting State can seek resolution under the mutual agreement procedure against an action resulting in taxation not in accordance with the provisions of the Treaty. Limitation of benefits A limitation of benefits section is included in the Treaty s protocol which provides that where the provisions of the treaty limits the right of any Contracting State to tax income, and according to the internal tax laws of the other Contracting State, such income is regarded as income from foreign sources, or paid abroad, and therefore exempted from tax, the other Contracting State may tax such income as if the double tax agreement does not exist. However, where the income is remitted to Nigeria (the Contracting State of residence of the payee) within the term of four years from the date it was paid, upon prior petition by the taxpayer, the mechanisms to avoid double taxation provided for in the Agreement could be applied. Where the income is remitted to Spain within the term of six years from the date it was paid, the mechanisms to avoid double taxation provided for in the Agreement could be applied upon prior petition by the taxpayer. Implications The ratification of The Treaty is a positive development between the two countries. The Treaty is expected to increase investments into Nigeria given the key treaty benefit of mitigating and avoiding double taxation between the two contracting countries.
4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young Nigeria, Lagos Abass Adeniji Akinbiyi Abudu Temitope Samagbeyi Chinyere Ike Oluwatumininu Familusi Ngozi Agwu abass.adeniji@ng.ey.com akinbiyi.abudu@ng.ey.com temitope.samagbeyi@ng.ey.com chinyere.ike@ng.ey.com oluwatumininu.familusi@ng.ey.com ngozi.agwu@ng.ey.com Ernst & Young Advisory Services (Pty) Ltd., Africa ITS Leader, Johannesburg Marius Leivestad marius.leivestad@za.ey.com Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London Rendani Neluvhalani rendani.mabel.neluvhalani@uk.ey.com Byron Thomas bthomas4@uk.ey.com Ernst & Young LLP, Pan African Tax Desk, New York Silke Mattern silke.mattern@ey.com Dele A. Olaogun dele.olaogun@ey.com Jacob Shipalane jacob.shipalane1@ey.com Ernst & Young LLP, Pan African Tax Desk, Houston Elvis Ngwa elvis.ngwa@ey.com
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