Nigeria is tightening its rules on royalty payments, a move that could raise the tax bills of foreign companies operating through local branches.
Under the Nigeria Tax Act (NTA) 2025, permanent establishments (PEs) of non-resident companies may no longer be able to deduct royalty payments made to their head offices or related parties, except where those payments represent reimbursement of actual expenses.
The change, contained in Section 17(5)(e) of the Act, has become a key concern for multinational groups as authorities step up efforts to curb profit shifting and boost revenue.
The provision appears stricter than the existing cap under the Income Tax (Transfer Pricing) Regulations 2018, which limits related-party royalty deductions to 5 percent of earnings before interest, tax, depreciation, amortisation and the consideration (EBITDAC) derived from the relevant commercial activity.
This means what was once a limited deduction for some could become no deduction at all for others.
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In its recent article “Royalty deductions in Nigeria: Navigating NTA and Transfer Pricing Regulations for non-resident companies, Forvis Mazars said that while the EBITDAC rule sets a limit for all companies, Section 17 of the NTA “completely disallows royalty deductions paid by PEs to non-resident companies.”
The firm questioned whether this signals a deliberate policy shift aimed at reducing profit shifting by non-resident entities.
For affected companies, the difference between the old rule and the new one is the difference between a reduced tax bill and no deduction at all, a shift that could run into millions of dollars for groups with significant royalty payments.
According to Forvis Mazars, a key issue is whether Section 17 will apply strictly to permanent establishments, meaning royalty expenses paid by a PE to related parties would be fully disallowed for tax purposes, except for reimbursements.
At the same time, the 5 percent EBITDAC cap would continue to apply to Nigerian resident companies paying royalties to related parties.
This uncertainty is heightened by the fact that the NTA did not repeal the 2018 Transfer Pricing Regulations. Section 198 of the Act preserves existing subsidiary legislation except where it is inconsistent with the new law, creating the possibility of disputes until further guidance is issued by the tax authority.
The stricter approach comes as the government pushes to increase revenue collections. Oil and gas royalties rose to N6.99 trillion in 2024, up 179 percent from the previous year, largely due to naira depreciation.
Total upstream revenue reached N12 trillion in the same year, while the mining sector generated more than N16 billion in royalties in 2025. Authorities are targeting N40.7 trillion in total taxes and royalties in 2026.
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Transfer pricing enforcement is central to that drive. In its “2026 Outlook,” Andersen Nigeria said implementation of the NTA, alongside changes in the transfer pricing space, is expected to “highly elevate tax risks” for affected companies this year.
The firm noted that the NTA aligns Nigeria’s tax rules more closely with global Base Erosion and Profit Shifting standards. It introduces a 15 percent minimum effective tax rate for multinational groups with aggregate turnover above N20 billion and provides for top-up tax where foreign subsidiaries fall below the threshold.
Andersen also pointed to the reorganisation of the International Tax Department’s transfer pricing audit teams into more specialised units, including teams focused on fintech and telecommunications, as well as increased hiring of transfer pricing staff. These steps are expected to result in more audits in 2026.
Nigeria’s transfer pricing regime requires companies to maintain contemporaneous documentation, file annual disclosures and, where applicable, submit Country-by-Country Reports.
Penalties are significant. Failure to file attracts a N10 million penalty in the first instance and N10,000 for each day of default. Incorrect disclosures may attract a penalty of the higher of N10 million or 1 percent of the value of the misstated transaction.
Royalty payments are common in oil and gas, telecommunications and technology licensing, where companies often pay for the use of intellectual property or technical services from foreign affiliates.
Oil remains the dominant sector, accounting for about 95 percent of foreign exchange earnings, making cross-border charges a focus area for audits.
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In addition to transfer pricing rules, royalty agreements must be registered with the National Office for Technology Acquisition and Promotion before funds can be repatriated and treated as deductible for tax purposes, adding another compliance requirement for multinational groups.
Tax advisers say the combined effect of withholding tax deductibility restrictions and increased audit activity could change the tax position of non-resident companies operating through Nigerian branches.
For now, companies are awaiting clarification on how Section 17 of the NTA will interact with the existing 5 percent EBITDAC limit. Until guidance is issued, advisers recommend that multinationals review their royalty structures, ensure pricing is at arm’s length and prepare for possible audits, as royalty deductions move to the centre of Nigeria’s tax enforcement agenda.
