The Companies Income Tax Act, Cap C2, LFN 2004 (“CITA”) serves as the overarching income-tax administrative framework for companies operating in Nigeria. Notably, Section 16 of CITA is specifically tailored to address the unique income-tax administrative requirements of companies within the insurance sector.

In a significant revision brought about by the Finance Act 2021 (“The Amendment Act”), the entire Section 16 of CITA underwent modifications. Here are the key highlights of these amendments:

Classification of Insurance Companies:

The Amendment Act categorizes insurance business into “Life insurance company” and “General insurance company.” The tax treatment of hybrid companies engaged in both types of businesses is further discussed below.

Basis of Determining Taxable Profit:

For General Insurance Companies, taxable profit comprises gross premium and other receivables, reduced by reinsurance and unexpired risk. Conversely, for Life Insurance business, taxable profit is derived from investment income generated by the investment of shareholder’s fund, less management expenses, including commission.

Taxation of Dividend Distribution Arising from Revaluation:

Dividend distribution resulting from revaluation, including actuarial valuation of unexpired risks, is taxable and forms part of taxable profit. The insurance company is mandated to provide details of revaluation and revaluation certificates within three months of such valuation.

Treatment of Hybrid Insurance Company:

Hybrid insurance companies conducting both life and non-life insurance businesses must maintain separate accounting records and file distinct Companies Income Tax (“CIT”) returns for each line of business. Moreover, unrelieved losses from one line of business cannot be offset against the other line of business.

Allowable Deductions for Life and General Insurance Company:

In alignment with the ‘Basis of Determining Taxable Profit,’ apportioned reserves for unexpired risk and all utilized outgoing claims are allowable deductions against premiums for General insurance business. For life insurance, deductions include revaluations on ‘reserve, funds, and liabilities on policies’ against investment income. Regular allowable deductions and the higher of ‘1% of gross premium’ or ‘10% of the profit of any special reserve fund’ are also permitted deductions for a life insurance business.

Allowable Deduction for Reinsurance Company:

Reinsurance companies can deduct ‘up to 50% of annual profit’ if the general reserve fund is less than the initial statutory minimum authorized share capital. For funds not less than the initial statutory minimum authorized share capital, a deduction ‘up to 25% of annual gross profit’ is allowed, provided it was credited to the general reserve.

Taxation of Services Rendered by Insurance Agent, Broker, and Loss Adjuster:

Companies utilizing insurance agents, loss adjusters, or insurance brokers must include a schedule disclosing relevant services in their annual tax return. Required information comprises names, addresses, service commencement and termination dates, and payments for such services.

Minimum Tax:

Calculated on Gross turnover according to Section 33 of CITA, the minimum tax for general insurance business is based on ‘gross premium’ and other income excluding frank investment income. For life insurance business, gross income encompasses all income, excluding frank investment income and premiums received/claims paid by reinsurers.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.