Some parts of the Nigeria Tax Act sound complicated until you put them into real life situations. The rules for foreign airlines, foreign shipping companies and business deductions all belong to that category.

This section is a good example.

It covers three very different things: foreign airlines and shipping companies doing business through Nigeria, dividends paid to foreign investors, and the business deductions companies are allowed to claim before tax is calculated.

They may not seem connected at first, but they all answer the same basic question. When money is made in or through Nigeria, how much of it should actually be taxed?

What happens when a Foreign Ship or Plane Picks Up Business in Nigeria?

A foreign shipping company’s vessel stops at Lagos Port.

Simply entering Nigeria is not enough to create a tax charge on everything the ship is carrying. The key question is what the ship or aircraft actually picks up here.

If a non-resident company operates ships or aircraft, and one of them calls at a Nigerian port, Nigeria can tax the company on profits it earns from passengers, mail, livestock or goods loaded here. So if a Nigerian exporter loads goods onto a foreign vessel in Lagos for delivery overseas, the income connected to carrying those goods can fall within the Nigerian tax net.

But there is an important exception. The Act excludes goods or passengers that simply pass through Nigeria for trans-shipment.

For example, a container arrives in Lagos from another country, and dock workers only transfer it onto another ship heading somewhere else. That container isn’t treated the same way as goods that actually started their journey from Nigeria. The same applies when carriers simply transfer passengers, mail, livestock or goods from one aircraft to another, or between an aircraft and a ship.

The basic idea is fairly sensible. Nigeria taxes genuine transport business that starts here, but it doesn’t automatically tax traffic that is only passing through.

How Do You Work Out Nigerian Profit for Foreign Airlines?

This is where things get more technical. An international airline or shipping company obviously doesn’t make all its money in Nigeria. It may operate across dozens of countries. So the Act needs a way to work out what portion of its overall profit should be connected to Nigeria.

Where the tax authority is satisfied that the company’s home country calculates profits on a basis that is not materially different from Nigeria’s approach, the Act uses two global ratios.

The first is called the global adjusted profit ratio. This compares the company’s worldwide profit or loss before depreciation with its total global revenue from transporting passengers and goods.

The second is the global depreciation ratio. This compares the company’s depreciation allowances with that same global transport revenue.

The Act then applies those percentages to the revenue the company earns from passengers, mail, livestock and goods loaded in Nigeria. The adjusted profit ratio is used to work out the company’s assessable Nigerian profit. The depreciation ratio replaces the capital allowances the company would otherwise claim under the First Schedule.

It sounds technical, but the idea is simple. Nigeria looks at how profitable the transport company is globally and uses that pattern to estimate the profit connected to its Nigerian business, whether the operator is one of the world’s biggest foreign airlines or a niche cargo carrier.

What Happens If That Formula Can’t Be Used?

The Act also provides a backup. If the normal calculation cannot be applied properly when the tax assessment is being made, the tax authority can calculate the profit using the company’s Nigerian turnover multiplied by the profit margin provided under Section 17.

The Service may also apply what it considers a fair percentage of the company’s Nigerian gross revenue.

There is also a minimum amount of tax. No matter what the other calculations produce, the tax payable for the year cannot be less than 2 per cent of the gross revenue earned from transport out of Nigeria. The company calculates, assesses and pays that minimum tax monthly.

So even where a carrier’s profit calculation produces a very small amount, the law still creates a floor.

More Records May Be Required

Some foreign airlines and shipping lines do not prepare separate financial statements for their Nigerian operations. Where that happens, they must provide detailed statements showing the gross revenue they earn from Nigeria. Those statements must be certified by a director and the company’s external auditors. The company must also provide the relevant contracts.

In other words, saying “our Nigerian operation isn’t separately accounted for” doesn’t mean the tax authority simply has to accept an estimate. The company still needs to show where the figures came from.

Not Every Foreign Airlines Income Falls Under This Rule

There is another distinction worth knowing. Income from leasing ships, aircraft related assets or containers does not automatically fall under these special transport rules. Neither do non-freight activities or other incidental sources of income. The Act taxes those amounts under its ordinary provisions.

So the special calculation mainly covers the actual business of carrying passengers, mail, livestock and goods.

Tax Compliance Can Affect Permits Too

The law also gives shipping and aviation regulators a role. Before regulators grant certain approvals or permits, the relevant agencies must request evidence that the operator filed its tax return for the previous year. They must also request evidence that the operator declared and paid tax on the intended shipment.

That turns tax compliance into more than an accounting issue. For some operators, it can directly affect whether a shipment gets the approval it needs.

What Happens When a Foreign Investor Receives a Nigerian Dividend?

The Act then moves to dividends paid to non-resident shareholders. This rule is much simpler. If a person living outside Nigeria receives a dividend from a Nigerian company, the Act treats the tax deducted at source under the Nigeria Tax Administration Act as the final Nigerian tax on that dividend.

So once the required tax has been deducted before the dividend is paid, the foreign shareholder isn’t supposed to face another Nigerian tax assessment on that same dividend. For an overseas investor, that gives some certainty. If the Nigerian company pays a dividend and deducts the required tax first, Nigeria does not then hit the shareholder with another income tax bill on the same dividend.

There is another side to the rule. The Act does not let anyone claim back the tax the payer already deducted. The Act specifically denies both the non-resident shareholder and the Nigerian company paying the dividend any right to a refund of the tax paid under Section 50 of the Nigeria Tax Administration Act. So the deduction really is final. No extra charge afterwards, but no automatic clawback either.

Now to the Part Most Businesses Care About: Business Deductions

Every business owner eventually asks the same question. “What expenses can I take away from my income before my tax is calculated?”

The general rule for business deductions is that a business can deduct an expense when it incurs the cost wholly and exclusively for the purpose of producing the income. In plainer terms, the expense should genuinely relate to making money for the business.

The Act then gives examples of expenses that can qualify. A business can deduct interest paid on money it borrowed for the business, subject to the rules in the Third Schedule. Rent and premiums for land or buildings the business uses can also qualify. Salaries, wages and other employee payments also qualify. That includes the cost of certain allowances and benefits the business provides to employees. A business can also deduct repairs to premises, machinery, plant and fixtures, together with certain costs of renewing or altering equipment and tools.

Protecting a Business Asset Can Count Too

The Act also allows certain costs connected with establishing, preserving or defending ownership of an asset. For example, if a business spends money protecting its legal title to an asset it uses to generate income, that expense may qualify.

Approved contributions to employee pension and retirement benefit schemes are also common business deductions. The same applies to proven losses of stock or inventory. The Act also covers research and development expenditure for the relevant period. There are also provisions covering certain distributions made by real estate investment companies approved by the Securities and Exchange Commission, as well as certain payments connected with regulated securities lending transactions.

Easy to Miss Business Deductions

There is also an interesting provision relating to disability support. Business spending on assistive devices and disability related products can qualify. That can include things such as hearing aids, wheelchairs and braille materials.

Readers could easily miss this kind of provision in a long tax law, but it can matter for businesses supporting employees or others who need those products.

What About Customers Who Never Pay?

A business can also deduct bad debts in certain circumstances. Say your business supplied goods worth ₦2 million to a customer. You recorded the sale as income, but after genuine attempts to collect the money, it becomes clear that the customer will not pay.

The Act can allow the business to deduct that bad debt, provided it genuinely arose from the business and the parties did not create it through a related party arrangement.

There are safeguards. You cannot claim the same amount twice if the Act already allowed it in an earlier period. And if the customer eventually pays after the debt has already been deducted, the money recovered must be added back to the business’s profits for the period in which it is received. So you don’t get to claim the loss and later keep the recovery outside the tax calculation.

Business Deductions Before the Business Even Opens

Another useful rule deals with money spent before a business officially starts trading. A business often spends money before earning its first naira. You may be paying for professional services, preparing premises or setting up systems before opening.

Under the Act, the tax authority treats qualifying expenditure the business incurred within six years before it began trading as though the business incurred it on the first day of trading. The key point is that the expense must have been something that would normally qualify for a deduction if the business had incurred it after starting.

This gives new businesses some recognition for genuine setup costs the owners paid before trading began, and treats those costs as valid business deductions.

And What If You Paid the Expense in Dollars, Pounds or Euros?

There is one final rule that matters for businesses dealing internationally. If an expense is paid in a currency other than naira, the business cannot simply choose whatever exchange rate suits its accounts.

The Act limits the deductible amount to the naira equivalent, which the business calculates using the official exchange rate published by the Central Bank of Nigeria for the relevant date or period. So if your Nigerian business pays a supplier in dollars, the tax deduction rests on the official naira value under the rule, not necessarily the amount you would get using an informal or alternative exchange rate.

What Business Deductions and Carrier Rules Mean in Real Life

There are really three big lessons from this part of the Act.

Foreign shipping and airline companies can face Nigerian tax when they earn money from passengers or goods loaded here, but simply passing through Nigeria does not automatically create the same tax charge.

Foreign shareholders receiving dividends from Nigerian companies generally settle their Nigerian tax through the amount the payer deducts at source.

And for businesses operating in Nigeria, expenses can reduce taxable income, but only where they meet the rules and genuinely connect to producing that income.

For business owners, that last point is probably the one worth remembering most. Spending money doesn’t automatically make something a business deduction. The real question is what the money went toward, why the business spent it, and whether the business can prove all of that. For context on how the same Act treats company profits and dividends more broadly, see our earlier posts on the Nigeria Tax Act 2025, Nigerian dividend and foreign earnings rules, and hoarded profits.

Feeling overwhelmed?

We know the terminology can feel dense, and it’s easy to read something like this and still not be sure where your own situation lands. If you’d like to talk it through, someone on our team would be genuinely happy to sit with you. Book a consultation and we’ll go through your specific circumstances, what applies to you, and what your next step looks like.

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