A not-for-profit organization is an entity incorporated as a company limited by guarantee under PART A of the Companies and Allied Matters Act (CAMA) 2004 or registered under PART C of the Act, or under any other law in force in Nigeria, or registered under the laws of a foreign jurisdiction and approved as such in Nigeria.
As their name suggests, not-for-profit organizations (NPOs) are established to provide public goods and services or research in areas of altruistic value to society. They are not to carry on business to make profits for distribution to their members.
For tax purposes, these organizations include institutions and companies engaged in ecclesiastical, charitable, benevolent, literary, scientific, social-cultural, sporting, or educational activities of a public character.
Based on their charitable objectives and the benefits they portend to the general public or a marginalized sector, certain conditions and requirements must be met before they are qualified and eligible for certain tax benefits and reliefs and obligations that will be highlighted in this article.
Conditions to be met
Section 105 of the Company Income Tax Act (CITA) (as amended), coupled with Finance Act 2020 defines the public character concerning any organization or institution means an organization or institution that:
a. is registered by the relevant law in Nigeria; and
b. does not distribute or share its profit in any manner with its members or promoters.
From the aforementioned, it is clarified that for an organization to be tagged as a not-for-profit organization it must be duly registered in Nigeria and must not distribute or share its profit in any manner.
4.0 Tax Obligations
The legal basis for the taxation of NPOs in Nigeria and other obligations and exemptions are specified under the relevant tax legislation. These obligations are stated below:
i. Registration with FIRS for tax purposes;
ii. In line with Section 55(1) of CITA, it is mandatory for every NGO to file tax returns every year and such returns shall contain: audited accounts, tax, and capital allowances computations.
iii. Pay all tax liability on incomes and gains derived from commercial activities, or on incomes and gains not exclusively applicable to NPOs.
iv. deduct at source, and remit to the relevant tax authority WHT deducted at the applicable rate.
v. Files VAT within stipulated time with FIRS on all services consumed by them except those purchased exclusively for its humanitarian donor-funded projects or activities;
vi. Deduct and remit PAYE to the relevant tax authority.
vii. Maintain accurate record of employees; and
viii. Maintain proper books of accounts;
Failure to comply with the above requirements will attract appropriate
penalties under the extant tax law
Tax Benefit & Exempt
Section 23(1)(c) of CITA, exempts the profits of any statutory, charitable, ecclesiastical, educational, or other similar associations from Companies Income Tax, provided that such profits are not derived from any trade or business carried on by such organization or association.
In line with Section 26 of the Capital Gains Tax Act (CGTA), Cap. C1 LFN 2004 (as amended), gains from the disposal of chargeable assets of NPOs is exempted from tax, where the two conditions below are jointly fulfilled:
(a) the gains are not derived from the disposal of any assets acquired in connection with any trade or business carried on by the organization; and
(b) the gains are applied purely for the activities of the organization.
As underscored in this article, registration of a not-for-profit organization under the relevant legal regime is vital and serves as one of the prerequisites for qualification for exemptions. NPOs are advised to take reasonable measures to familiarize themselves with all the tax laws guiding their operations.