Nigeria's new tax laws have given small companies a significant cushion.
Under the Nigeria Tax Act 2025, qualifying companies with annual turnover of not more than ₦100 million and fixed assets within the prescribed threshold are exempt from Companies Income Tax and the Development Levy.
That relief is important. Small businesses need room to survive, reinvest and grow.
But just above that threshold sits another important group: medium-sized businesses. These companies employ Nigerians, engage local suppliers, occupy commercial properties and contribute directly to state-level economic activity. Yet they do not enjoy the same broad tax relief.
For state governments searching for sustainable ways to grow Internally Generated Revenue, this gap presents an opportunity.
The answer may lie in a business structure that has received relatively little attention in Nigeria's public tax debate: the Limited Liability Partnership.
Why LLPs change the equation
The tax treatment of an LLP is fundamentally different from that of a private company limited by shares.
A conventional company pays Companies Income Tax on its profits. That tax is administered by the Nigeria Revenue Service and forms part of the revenues shared among the three tiers of government through the Federation Account.
The state in which the company operates benefits indirectly from this arrangement. It does not assess the company's profits, control the tax rate or determine how the revenue is distributed.
An LLP works differently.
Under the Nigeria Tax Act, the profits of an LLP are treated as distributed to its partners, whether or not the money is physically withdrawn from the business. Individual partners are assessed under Personal Income Tax, while corporate partners are taxed separately under Companies Income Tax.
For income-tax purposes, the LLP is transparent.
That does not make it invisible to the tax system. An LLP must still comply with Value Added Tax, Withholding Tax, PAYE and other filing obligations. The difference is that the income tax on its profits is borne by the partners according to their status.
This distinction creates an important opportunity for states.
Jurisdiction follows real activity
For an active individual partner, the relevant state for Personal Income Tax purposes is the state containing the office where that partner performs partnership duties. For a dormant partner, jurisdiction generally follows the state where the partner usually resides.
Jurisdiction follows real activity, not paper.
Where that substantive presence exists, the PIT assessed on each partner's allocated share falls directly within the relevant state tax jurisdiction rather than entering the nationally shared Companies Income Tax pool.
The state moves from being a passive beneficiary of federal revenue sharing to becoming the direct administrator of tax on the partner's business income.
That changes the fiscal relationship between states and medium-sized businesses.
The remission opportunity
The Nigeria Tax Administration Act 2025 gives states another important tool.
Section 77(2) allows a State Governor to remit tax wholly or partly where the Commissioner responsible for finance makes a recommendation based on the advice of the relevant tax authority, and the Governor is satisfied that the remission is just and equitable.
This is not permission for a Governor to announce an arbitrary tax holiday.
The process is structured. The State Internal Revenue Service advises. The Commissioner for Finance recommends. The Governor considers whether the remission is just and equitable before approving it.
The statutory PIT rates remain unchanged. What the Governor may reduce is the tax liability that would otherwise be payable.
States could use this power to create carefully structured incentive frameworks for LLP partners whose activities produce measurable economic benefits.
The conditions could include:
- new employment;
- full PAYE compliance;
- capital investment;
- local procurement;
- professional training;
- export earnings; and
- evidence of genuine business operations within the state.
The remission is the incentive. The economic contribution is the price of admission.
States may publish the criteria for accessing the programme, but each remission should still pass through the statutory advice, recommendation and approval process.
Avoiding a race to the bottom
The opportunity could become destructive if every state pursues it independently.
If states compete only by offering progressively larger remissions, the effective PIT burden could eventually approach zero. Businesses would move their registrations rather than their actual operations, and states would give up the revenue they intended to attract.
That outcome would benefit nobody.
The strategy therefore requires coordination through the Nigeria Governors' Forum, preferably in consultation with the Nigeria Revenue Service.
The NGF cannot change the tax law or bind every Governor by resolution. It can, however, develop a common framework that participating states adopt through their lawful processes.
That framework should address three major issues.
First, states should agree on a reasonable minimum effective PIT burden. Competition should focus on infrastructure, regulatory efficiency and the ease of doing business, not on which state can eliminate the most tax.
Second, incentives should reward additional economic activity. A newly registered LLP should not qualify simply because an existing business has changed its legal form. The state should require evidence of new jobs, increased payroll, new investment, professional development or expanded local procurement.
Third, remission programmes should be transparent and time-bound. They should include annual reviews, information sharing, performance conditions and safeguards against multiple claims in different states.
Professional services offer an early opportunity
Professional services firms may provide the most practical starting point.
Accounting practices, law firms, engineering consultancies, medical groups and advisory firms often operate as partnerships in substance. Their value comes mainly from working partners and professional employees rather than factories, machinery or heavy infrastructure.
For medium-sized professional firms, the LLP structure may produce a more favourable overall income-tax position than the conventional company structure. The actual outcome will depend on the number and type of partners, their profit allocations and their individual tax positions.
For states, these firms are attractive because they generate professional employment, recurring PAYE, business-to-business spending and demand for commercial services.
They also need less physical infrastructure than large manufacturing businesses, making them suitable targets for states seeking to build service-sector clusters.
A state that creates the right environment for professional firms can attract high-quality taxpayers without relying only on aggressive enforcement.
Conversion is not free
Existing companies should not assume that moving into an LLP is a simple administrative exercise.
Where a company transfers its business to an LLP, cessation rules may apply. The company may lose unabsorbed tax losses, unused capital allowances and accumulated Withholding Tax credits. Asset transfers may also create Capital Gains Tax and stamp-duty consequences.
Qualifying transfers of a business as a going concern may receive VAT protection, but every restructuring requires its own legal and financial analysis.
A company-to-LLP transfer is not automatically objectionable merely because it reduces tax. Businesses are generally entitled to choose lawful structures that are commercially suitable.
The transaction becomes vulnerable where it is artificial, fictitious, lacks commercial substance or abuses the purpose of the law.
This means the most immediate candidates for the strategy may not be long-established companies with significant assets and accumulated tax attributes.
The better starting points may be:
- new enterprises;
- existing ordinary partnerships;
- professional firms already operating as partnerships; and
- informal businesses owned by several people who are seeking formalisation and limited liability.
For existing companies, conversion should follow careful transaction-specific modelling.
Compliance cannot be ignored
The Nigeria Tax Administration Act also imposes disclosure obligations for reportable tax-planning arrangements.
In Lagos, the LIRS Guidelines on the Obligation of Taxpayers to Declare Tax Planning Arrangements explain how those obligations will be administered.
A company-to-LLP restructuring is not automatically reportable. However, arrangements involving artificial income shifting, non-arm's-length dealings or a lack of genuine economic substance may attract disclosure and anti-avoidance scrutiny.
The objective should not be to create paper structures that exist only to obtain a tax advantage.
The objective should be to use a lawful business structure to attract real investment, employment and commercial activity.
Infrastructure still comes first
Tax incentives alone do not determine where businesses choose to operate.
Businesses need reliable power, good roads, security, digital connectivity, skilled workers and an efficient public service.
This is especially important under the LLP strategy because the state's tax jurisdiction depends on genuine partner activity. Without functional offices and actual business operations, there is no credible basis for claiming that partners perform their duties within the state.
Infrastructure-ready states can begin by targeting professional services, digital businesses and other knowledge-based sectors. States with wider infrastructure gaps should either address those constraints or focus on sectors that can operate effectively within their existing environment.
In the long run, the competition will not be won by the state offering the largest remission.
It will be won by the state in which businesses can operate most successfully.
What states should do now
Three actions should follow.
First, the Nigeria Governors' Forum should establish a working group to develop a coordinated framework covering effective-rate floors, eligibility requirements, information sharing and safeguards against interstate poaching.
Second, individual states should commission feasibility studies based on their actual business populations, infrastructure, professional-services clusters and administrative capacity. A policy that works for Lagos may not work in exactly the same way for Ekiti, Bayelsa, Kano or Anambra.
Third, states should design transparent and time-bound remission frameworks through the statutory process. The State Internal Revenue Service should advise, the Commissioner for Finance should recommend and the Governor should approve.
The conditions should be clear. The application process should be predictable. The economic benefits should be measurable.
Federal policy has provided broad relief for qualifying small companies. States now have an opportunity to attract medium-sized enterprises and partnership profits into their direct PIT jurisdiction.
But the objective should not be to move registrations from one state to another.
It should be to attract real offices, working partners, employees, investment and economic activity.
Reduced tax does not mean reduced accountability.
Competitive federalism only works when the competition is structured.