The concept of permanent establishment (PE) plays a significant role in international taxation, it is essential to determine whether a foreign entity or non-resident company (NRC), carrying on business within a jurisdiction, is subject to the tax laws of that jurisdiction. In Nigeria, like many other jurisdictions, the determination of a PE is crucial for the taxation of foreign businesses doing business in its jurisdiction. Nigeria’s tax system aligns with international principles outlined by the Organization for Economic Co-operation and Development (OECD) and treaties signed with other countries to define the conditions under which a foreign business must pay taxes in Nigeria. The PE taxation regime in Nigeria is primarily governed by the international principles laid down by various Double Taxation Treaties (DTTs) and the OECD Model Tax Convention, with complementary provisions in the Companies Income Tax Act (CITA). It is important to note that where a DTT exists, it prevails over the provisions of the CITA. This article aims to simplify the concept while highlighting some of the noteworthy considerations for establishing PEs in Nigeria.

THE PERMANENT CREDIT CONCEPT

A PE is generally understood as a fixed place of business through which a foreign enterprise conducts its business activities, in whole or in part, in another jurisdiction. Internationally, the EP concept is widely adopted in bilateral tax treaties, with the OECD model tax convention being a foundational document in its definition. According to Article 5(1) of the Convention, a PE refers to a “fixed place of business” through which the activity of an enterprise is carried on in whole or in part. This definition has been widely adopted in Nigerian DTTs with various countries. Significantly, an NRC would be deemed to have a PE in Nigeria if it carries on business through a fixed base or dependent agent in Nigeria. For example, a foreign company can establish a PE by establishing a head office, a branch, an office, establishing a factory, a workshop, or by using a dependent agent who typically enters into contracts on behalf of the foreign company. We have provided a brief overview of the different forms of PE below.

To establish a PE in Nigeria, a link with Nigeria must be established. This connection can be triggered by carrying on business activities at a physical/fixed place of business or through a dependent agent. In addition, the connection may take the form of the provision of digital services or technical, management, consulting or professional services resulting in a significant economic presence. In some cases, the length of time during which business activities are carried out may also be a trigger in determining whether a PE exists. In particular, the concept is closely related to the idea of ​​”taxable presence”, which is the requirement for a foreign company to pay taxes on income generated in the Nigerian jurisdiction.

FORMS OF PERMANENT ESTABLISHMENT IN NIGERIA

Permanent establishment in Nigeria can take different forms. The OECD Tax Convention and various DTTs make provisions to list several situations that constitute a PE and provide guidelines for taxation based on the form of establishment.

1. Fixed base – Place of business

First, a fixed place of business refers to a connection between the place of business and a certain geographical point. Where an NRC or foreign company carries on business at a fixed base or place, to the extent that the profit is attributable to such base, a PE will be triggered. This fixed base may take the form of an office, a place of management, a construction site, a construction or installation project, a factory, a branch, a workshop, a mine, oil and gas wells, a quarry or any other place. extraction of natural resources. In particular, the Supreme Court determined that a fixed base refers to a place where a company has conducted its business for an extended period, even though it does not own the place. Similarly, if a foreign company opens an office in Nigeria, for example for marketing, distribution or representation, it can establish a PE subject to taxation. However, a Nigerian PE does not include facilities used solely for the storage or display of goods or merchandise and the collection of information.

2. Construction or installation projects

Under the provisions of Article 5(3) of the OECD Model Convention, an NRC can trigger the establishment of a PE when it is involved in an installation or construction project for a specified period. However, the triggering period of a PE usually depends on the applicable convention or DTT. According to the UN Model Convention, a site, construction assembly or installation project constitutes a PE only if it lasts more than six (6) months and this extends to assembly projects and supervision activities in relation to any of these projects. In terms of the OECD model convention, an EP would be triggered when the project lasts more than twelve (12) months. However, it is worth noting that since a treaty is a matter of negotiation between two countries, the period can vary.

3. Dependent agent

In addition to the above, a PE would be said to have been established where the profit is attributable to the trade or business or activities carried on by a dependent agent, where the NRC has no fixed base in Nigeria. This is usually an individual or entity that habitually exercises the authority to enter into contracts on behalf of the NRC or on behalf of other companies it controls. If this agent is in Nigeria and acting on behalf of the foreign company, the NRC may be deemed to have a PE and the income generated from the contracts entered into by the agent would be taxable in Nigeria. Further, where NRC habitually maintains a stock of goods or commodities in Nigeria from which supplies are regularly made by the dependent agent and the profit is attributable to such activities, it would be said to have been triggered an PE.

However, an EP would not be triggered if the person acting on behalf of the NRC is considered to be independent agents or the activities performed are preparatory or ancillary.

4. PE service

A Service PE may be triggered for the provision of services, including consultancy services by an NRC, through employees or other personnel engaged by the NRC for such purposes. In particular, where activities of this nature continue in a Contracting State for a cumulative period or periods of more than 183 days in any 12-month period beginning or ending in the fiscal year in question, it would be said that a PE service has been created. It is worth noting that this replaces the permanence element of a PE with a minimum duration test, as is the case with construction PE.

In particular, where a TDT is not in place, the supply of digital services or technical, management, consultancy or professional (TMCP) services from outside Nigeria to a person resident in Nigeria so as to create a significant economic presence for NRC can trigger chargeable presence in Nigeria.

WHAT A PE IS NOT

It is important to note that a PE does not include the use of facilities solely for the storage, display or delivery of goods or merchandise. It is also not triggered merely by holding stock of goods solely for storage, display or delivery or solely for the purpose of processing by another undertaking. In the same sense, the maintenance of a fixed place of business is for the sole purpose of purchasing goods, collecting information or carrying out any other activity.

CONSIDERATIONS FOR PERMANENT SETTLEMENT IN NIGERIA

From the above, it is vital that NRCs establishing PEs consider some of the tax and transfer pricing compliance obligations that follow the triggering of a PE in Nigeria. In particular, in Nigeria, depending on the nature of the PE created, a PE would have significant reporting and tax compliance obligations. Ordinarily, except where withholding tax is the final tax, PEs are required to record and remit corporate income and value added taxes in Nigeria in accordance with CITA and the Value Added Tax Act by filing, also relevant tax returns and keeping records.

In addition, the establishment of a PE in Nigeria may result in additional transfer pricing (TP) compliance obligations for the NRC. Transfer pricing is another important issue that foreign companies with a PE in Nigeria must consider. In particular, upon initiation of a PE in Nigeria, an NRC should file its annual TP returns and disclosures as well as mandatory country-by-country report notifications.

CONCLUSION

Permanent establishment in Nigeria is an important concept for both the NRC and the Nigerian tax authority. The tax obligations arising from the existence of a PE require special attention to the form of business activities carried out within the country. While Nigeria’s tax laws are generally in line with international standards, the complexities and challenges of determining a PE can lead to confusion and disputes. Foreign companies must be vigilant in understanding when they have a PE and ensure compliance with Nigerian tax obligations to avoid penalties, double taxation and operational disruptions.

Nigeria’s tax landscape is continuously evolving, especially with the increasing globalization of business and the growth of digital economy sectors. As businesses explore new operating models, tax rules also evolve to accommodate these changes.

To learn more about the concept of PE, you can join our webinar on 29 November 2024 at 14:00 (WAT). Details are also provided.

Authors:

Oluwatobiloba Adekoya, an intermediate senior associate at WTS Blackwoodstone

John-Praise Eruanvae, Tax Associate at WTS Blackwoodstone