Spring 2020 Issue
The difference in law, and in practise, creates inequity in the taxation of different REICs and uncertainty around using such a vehicle to attract investments in the real estate sector. The proposed changes to the taxation of REICs seek to align the tax treatments with global best practices. DEFINITION OF AN REIC The Act defines an REIC as a company approved by the SEC to operate as a Real Estate Investment Scheme in Nigeria. The SEC rules have a clear definition of the scope and regulatory requirements for an REIC. DIVIDENDS AND INCOME NOW EXEMPT The Act exempts dividend and rental income received by REICs on behalf of unit-holders from income tax, provided that a minimum of 75 percent of the dividend or rent earned is distributed within 12 months of the end of the financial year in which the income was earned. Should the REIC fail to distribute the dividend or rental income within the stipulated 12-month period, the income would be subject to income tax and TET. However, the Act does not exempt the income (such management fees, profits or any other income) of the REIC from income tax and TET. As an additional safeguard, the Act treats dividends and mandatory distributions by REICs as tax-deductible expenses. This would not create a double dip since the Act also has a general rule that expenses would be tax deductible only to the extent that they relate to the production of taxable profit. Also, as mentioned earlier, dividends paid by REICs are excluded from the ambit of Excess Dividend tax. DISTRIBUTIONS TO REICS TO BE EXEMPT Under the Act, dividends or distributions to a REIC would not be subject to WHT. Therefore, where a REIC is a shareholder in a company, the company must pay gross dividends to the REIC without deducting WHT. However, the Act assumes that the REIC would then be responsible for deducting WHT when distributions are made to its unit-holders. This ensures that there is only one layer of WHT on investments made through REICs and such taxes are remitted to the appropriate authorities especially for individual unitholders liable to State’s Internal Revenue Services. The proposed tax changes are geared towards making REICs tax-transparent investment vehicles in respect of dividends and rental income, placing the obligation for tax on the respective shareholders subject to meeting the minimum distribution threshold and timing. This would make REICs even more attractive than REITs. TAXATION OF PROFITS Before now, Nigerian tax laws did not recognise or impose any tax on income earned from regulated securities lending transactions, even though the 109