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This Article discusses the meaning of “substantial economic presence” under Nigeria’s Finance Act 2020

Introduction: The Finance Act 2020 was an executive bill packaged by the Ministry for Finance, Budget and National Planning. It was presented along with the 2020 Budget proposals on 14 October 2019 to a joint sitting of the National Assembly. The Bill was later passed by the National Assembly, and assented to by the President, Mohammadu Buhari. Following the directive of the Honourable Minister for Finance, Budget and National Planning, the Act became effective on 1st February, 2020.

The National Assembly through a single legislation – the Finance Act 2020- amended the provisions of:

  • The Companies Income Tax Act;
  • Value Added Tax Act;
  • Petroleum Profits Tax Act;
  • Personal Income Tax Act;
  • Capital Gains Tax Act;
  • Customs and Excise Tariff Etc. (Consolidation) Act, and;
  • Stamp Duties Act.

This was an innovative move to improve the country’s tax laws and modernize them to meet the revenue demands of the 2020 National Budget. It is safe to say that the amendments to the seven (7) tax legislations mentioned above could have taken time and money had the National Assembly embarked on a piecemeal amendment of those legislations.

The Finance Act 2020 amended section 13 of the Companies Income Tax Act 2007 (“CITA”) by the introduction of an additional tax basis targeted at non-resident companies who participate in the digital economy of Nigeria and derive income therefrom without a physical or fixed base.

A non-resident company (also referred to as a ‘foreign company’ in CITA 2007) is “any company or corporation (other than a corporation sole) established by or under any law in force in any territory or country outside Nigeria”. In contrast, a company incorporated in under the Companies and Allied Matters Act 2004 is a Nigerian Company and liable to tax in Nigeria on its worldwide income.

In the present time, non-resident companies who have no physical presence in Nigeria have huge impact in, and derive profit from the local market. To rein-in such non-resident companies into the national tax net, section 13(2) C and E of CITA (as amended) provides for the “substantial economic presence” basis for tax assessment. This article’s scope is to therefore consider the import of the phrase “substantial economic presence”.

Physical Presence as a Nexus for Companies Income Tax:

Before the amendment, the income of any company is liable to tax in Nigeria if the income accrued in, is derived from, is brought into and received in Nigeria. In this regard, the trade or business income of non-resident will be deemed to have been ‘derived from’ Nigeria if;

  1. It has a fixed place of business in Nigeria;
  2. It habitually trades in Nigeria through an agent or maintains a stock of goods which are sold through an agent; I
  3. It carries on a trade or business or activities involving a single contract for surveys, deliveries, installations or construction (e.g. EPC and turnkey projects), and;
  4. It carries on business with a connected Nigerian company where the transactions are not at arm’s length or are artificial or fictitious.


The above is the basis (or nexus) for tax liability of a non-resident company and it is based on the concept of permanent establishment, i.e. a fixed base, place of business or agent in Nigeria through which the business of the non-resident company is wholly or partly carried on such as an office, branch, or place of management, either by the enterprise itself or by an agent. The fixed based concept was appropriate in the era before the advent of information technology and digitalization. In that era, a company must have to meet with their customers in a physical location where all or part of the transaction is consummated. Non-resident companies were liable to income tax only where they fall under Subsection A to D above.

The CITA 2007 was framed on this understanding, with the unfortunate implication that a non-resident company which does not have a physical presence in Nigeria is not liable for income tax. This is irrespective of whether such company is heavily involved in the economic life of the country through the internet or digitalization of its services. The insufficiency of the physical presence basis was that it cannot deal with the changes brought about by the way business is conducted in the digital economy. It is a truism that most of the companies in the world today either operate solely on a digital platform or have digitalized their operations1, thereby operating remotely and changing the mode of relationship with their customers. Some of these companies also provide digital services2 which is sold on the internet beyond national boundaries3. This specie of non-resident companies relies heavily on intangibles, software applications, mobility of people, use of machines, automation and the ability to transact with customers without a physical presence.

In view of the above, it was necessary to amend and/or modernize our tax laws to minimize tax avoidance opportunities, increase tax revenues, ensure social fairness and level playing fields for businesses. The Finance Act 2020 seeks to achieve the foregoing by supplementing the “physical presence” basis with a “significant economic presence” nexus for non-resident companies.


The Amendments:

The Finance Act 2020 introduced the “substantial economic presence” nexus for company income tax liability. This was done by amending Section 13(2) of the Companies Income Tax Act 2007 by introducing a new paragraphs C and E as follows;

“The profits of a company other than a Nigeria company from any trade or business shall be deemed to be derived from Nigeria

  1. if it transmits, emits or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity;
  2. if the trade or business comprises the furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident in Nigeria to the extent that the company has significant economic presence in Nigeria;

PROVIDED that the withholding tax applicable to income under this paragraph shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of subsection 2 (a) to (e).”

A conceptual distinction can be made between the scope of paragraphs (c) and (e) of subsection 13(2) of CITA (as amended). While paragraph (c) deals with the digital non-resident companies (the ‘digital natives’ which are companies that came into existence with and as a result of the new technologies and are characterized by a fundamentally different form of work organization); paragraph (e) deals with the digitalization of the traditional non-resident companies, (i.e. existing non-resident companies that seek to adapt to the new technologies (teleworking, mobile working, community buildings). In view of development in the digital sector, the gap between the two divides is shrinking daily.


Significant Economic Presence”

Following the amendment, where a non-resident company derives its profit or income from Nigeria either as a digital company or through digitalization of its services, a determination of its income tax liability is based on whether it has a “substantial economic presence” in Nigeria. The Finance Act 2020 did not provide a definition in the Interpretation section for this phrase. However, it empowers the Minister of Finance in section 13(4) of CITA (as amended) to determine by order “what constitutes the significant economic presence of a company other than a Nigerian Company”. Consequently, the burden of defining the phrase falls on the Minister according to Section 13(4) of CITA (as amended) and the Tax Appeal Tribunal (or the Courts). However, we will attempt to find meaning to the phrase, drawing inference from similar concept on the liability of non-resident companies to Value Added Tax and foreign jurisdictions where the phrase has been applied.

In Vodacom Business Nigeria Limited v. FIRS,4 the Court of Appeal displaced physical presence as a condition for subjecting non-resident companies and its services in Nigeria to value added tax. The Court held that the requirement of physical presence will be unnecessary where a service rendered by a non-resident company can be utilized in Nigeria by means of digitalization. The Court held that the Appellant – Vodacom Business Nigeria Limited carried on business in Nigeria, even though it is not resident therein. Thus, in deciding the physical presence of a company for value added tax purposes, the Court acknowledged the fact of non-resident companies doing business in Nigeria without a physical presence. This understanding is replicated in section 13(2)C and E of the CITA (as amended).

In the United States of America, non-resident companies are subject to tax where they have a ‘significant economic presence’. This similar phrase has been interpreted by the US Courts and tax experts in their bid to justify State tax on non-resident companies under Article I, Section 8, Clause 3 of the United States Constitution (the Commerce Clause). To justify a State’s tax under the said Commerce Clause, the taxable activity must have a substantial nexus with the taxing state.5 Physical presence and economic presence are factors used to determine whether the activity of a company has such substantial nexus.6 Thus a non-resident company is “generally economically present in a State if it derives income from a State’s local market, e.g., from customers or intangible property, located in that State”.7

In MBNA v. West Virginia,8 it was held that the determinants of ‘significant economic presence’ in a State are “whether the taxpayer purposefully directs its activities toward [West Virginia] and the extent to which the taxpayer has exploited the States local market”. In that case, the West Virginia Supreme Court of Appeals held that MBNA’s solicitation and maintenance of its West Virginia customers’ credit cards amounted to economic exploitation of the local market and thus a ‘significant economic presence’. Moreover, a non-resident company is liable to income tax where it conducts any activity in-State for financial profit or gain, derives income from in-State intangible property, exploited the State’s local market, enjoys certain State services.9

India is another country that has introduced changes to its tax laws similar to that of Nigeria. Clause 4 of the Indian Finance Act of 2018 amended section 9(1)I of the Income Tax Act 1961 to introduce the ‘significant economic presence’ nexus for digital non-resident companies. According to that Clause, ‘significant economic presence’ means:

  1. “transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or
  2. systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.

Provided that the transactions or activities shall constitute significant economic presence in India, whether or not,

  • the agreement for such transactions or activities is entered in India; or
  • the non-resident renders services in India ;

the non-resident renders services in India”


  • the non-resident has a residence or place of business in India;.

From the above provision, the benchmark to determine ‘significant economic presence’ is to be based on duration of transaction and number of users/subscribers. However, the Indian government is yet to prescribe a definite duration or number of users to satisfy the ‘significant economic presence’ of a non-resident digital company in India.

From the above, it can be deduced that a non-resident company can be said to have an ‘economic presence’ when it engages in a country’s local market, maintains a platform for its customers within that country, or solicits/engage in business transaction with users resident in-country. It can also be deduced that the income liable to tax is that part of the income generated from the country of the tax authority (from the local market) and not its worldwide income.

However, there is need to determine when such economic presence is ‘substantial’ (or significant) as to warrant income tax liability. What are the indices10 – number of customers, duration of use, income generation, etc. that will determine substantial economic presence? It will be necessary for the Ministry of Finance, Budget and National Planning to engage stakeholders from relevant sectors to determine this benchmark. There is also a need for Nigeria to define ‘substantial economic presence’ and adopt a benchmark congruous to practices in other countries and Action 1 of the OECD BEPS Project.11

Like the European Commission, Press Release on Digital Taxation (Mar. 21, 2018) proposed that a significant digital presence would exist if a company has either revenues from digital services in excess of €7 million, more than 100,000 users, or more than 3,000 online business contracts.


The reason behind the ‘substantial economic presence’ basis is glaring in view of digital business practices. It provides an opportunity for Non-resident companies to bear their fair share of the country’s burden in providing basic amenities, social services, and transportation facilities which create and maintain the consumer market and economic climate that fosters demand for their products and services.12 It will also maintain a level playing field amongst the companies that participate in the country’s economic space, and ensure that non-resident digital businesses pay their fair share of tax in Nigeria for value generated therein.

It is hoped that the Minister, in consultation with relevant stakeholders, will immediately deliberate upon and determine a workable meaning and/or benchmark for “substantial economic presence” in order to ensure that the basic principles of taxation – fairness, certainty, convenience and efficiency, are in play for taxation of non-resident digital companies.



  1. As of 2015, the global IT Market was estimated to be over $3.8 Trillion US Dollars. The US accounted for over 25% of that total. There were over 100,000 software and IT services companies in the US, with 99% of them having 500 or fewer employees. As at 2018, nine of the world’s top 20 companies by market capitalization are now digital, in contrast to what obtains 15 years ago. Approximately 40,500 tech start-ups were established in 2018 alone. See https://www.selectusa.gov/software-and-information-technology-services-industry-united-states accessed on 13th February, 2020
  2. Digital services include online advertising, digital intermediary activities that allow users to interact with each other to facilitate the sale of goods, and the sale of data collected from users generated from users’ activities on digital interfaces.
  3. The 2018 UNCTAD Report estimates that the Business to Consumer e-commerce market in Africa was worth about $5.7 billion in 2017, given a population of about 200m, 13m Nigerians are patronizing online commercial platforms.
  4. Appeal No. CA/L/556/2018 (Court of Appeal, Unreported)
  5. Complete Auto Transit v. Brady, 430 U.S. 274, 279 (19)
  6. Other criteria are that the tax must be fairly apportioned to the activities carried on by a taxpayer in the state; it must not discriminate against interstate commerce, and it must be fairly related to the services and benefits provided by the state.
  7. Chris Atkins, Does the Commerce Clause Protect Commerce or State Coffers? Tax Foundation (Dec. 12, 2006), http://www.taxfoundation.org/blog/show/2083
  8. MBNA Am. Bank NA v. Tax Commissioner, 640 S.E.2d at 234
  9. Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C. 1993)
  10. Like the European Commission, Press Release on Digital Taxation (Mar. 21, 2018) proposed that a significant digital presence would exist if a company has either revenues from digital services in excess of €7 million, more than 100,000 users, or more than 3,000 online business contracts.
  11. https://read.oecd-ilibrary.org/taxation/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report_9789264241046-en#page18
  12. D.H. Holmes Co. v. McNamara, 486 U.S. 24, 31 (1998)


This document is intended only as a general discussion on the subject of this article. Please do not regard it as legal advice. We would be delighted to provide additional details or advice about specific queries, if required.
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