Royalty deductions in Nigeria: Navigating NTA and Transfer Pricing rules for non-resident companies

Royalty payments by related entities continue to attract significant scrutiny under the Nigerian tax law. It is important to understand how the Nigeria Tax Act 2025 (NTA) interacts with the Income Tax (Transfer Pricing) Regulations 2018, particularly as both tax laws impose different limitations on the deductibility of royalty expenses, specifically for non-resident companies. 

The analysis below highlights the interaction between Section 17 of the Nigeria Tax Act (NTA) and the current restriction under Regulation 7 of the Income Tax (Transfer Pricing) Regulations 2018, clarifying when royalty deductions may be allowed or disallowed.

Legal basis

Section 17 of the NTA, 2025 specifically addresses taxation of Non-resident Persons in Nigeria. Sub-section 5 (e) of same section provides that where a Permanent Establishment (PE) in Nigeria incur expenses such as royalties, fees, or similar payments in return for the use of patents or other rights, other than the reimbursement of actual expenses, such expenses shall not be deductible in computing the PE’s taxable profits. This provision is rooted in the principle that a PE cannot create deductible expenses by paying its own related entities for the use of intangible assets or services that effectively relate to the same economic unit.

However, Regulation 7 (5) of the Income Tax (Transfer Pricing) Regulations 2018 restricted such deductions to 5% of the earnings before interest, tax, depreciation, amortisation and the consideration (EBITDAC) derived from the commercial activity conducted by the person in which the rights transferred are exploited. This provision applies broadly to all companies paying royalties to related parties, not just PEs.

The Income Tax (Transfer Pricing) Regulations 2018 was neither repealed nor amended by the NTA, 2025 which means that it is still in effect. Additionally, Section 198 (b) of the NTA provides that  any notice, guideline, rule, order, regulation, circular or other subsidiary legislations made or issued under any provision of the repealed or amended enactments, shall continue to be in force as if they had been made or issued by the relevant authority or person under the NTA except to the extent that it is inconsistent with the provisions of the NTA.

Key concerns

The provision of section 17 of the NTA was specific to PEs of non-resident companies while Regulation 7 is broadly addressed to all companies with related parties. 

• Will section 17 of the NTA apply only to PEs of non-resident companies, i.e., royalty expenses paid by a PE to its related parties be totally disallowed for tax purposes except where it relates to reimbursement of actual expenses?
• Will the 30% EBITDAC restriction under the Transfer Pricing Regulations continue to apply to Nigerian companies paying royalties to their related parties?
• While the EBITDAC rule under the TP regulation sets a limit for all companies, Section 17 of the NTA completely disallows royalty deductions paid by PEs to non-resident companies. Is this a deliberate policy reform towards minimizing profit shifting by non‑resident entities?

We look forward to clarification guidelines from the NRS as it will provide certainty and clarity to taxpayers.