No. Free zone tax exemption in Nigeria is no longer automatic or unlimited. Under the Nigeria Tax Act 2025, effective 1 January 2026, a Free Zone Enterprise keeps its full profit exemption only if sales into Nigeria's customs territory stay at or below 25% of total sales; profit tied to anything above that share is taxable now, and the whole exemption is scheduled to sunset from 1 January 2028. Many operators in Onne, Lekki, Calabar and other zones are still running on the old assumption.
What was the old free zone tax myth?
For years, an approved licence in a Nigerian Export Processing Zone or Free Trade Zone came with a simple, widely repeated promise: total exemption from federal, state and local taxes, for as long as the licence lasted. Oil and gas servicing firms based in the Onne Oil and Gas Free Zone, manufacturers in Calabar and Lekki, and shipping and logistics operators built pricing and investment decisions around that blanket exemption, treating it as permanent and unconditional regardless of who actually bought their output.
What does the Nigeria Tax Act 2025 actually say about free zone taxation?
Sections 197(2) and (3) of the Nigeria Tax Act 2025 repealed that automatic exemption and replaced it with a conditional, performance-based incentive. A Free Zone Enterprise that exports more than 75% of what it produces retains full profit exemption. Once sales into the Nigerian customs territory pass 25% of total sales, taxable income arises on that domestic portion, and it is taxed like any onshore company's profit. Free Zone Enterprises must also register with the Nigeria Revenue Service, obtain a Tax Identification Number, and file Companies Income Tax and transfer pricing returns, even in years when every naira of profit remains exempt.
What happens to VAT and withholding tax on free zone transactions?
The exemption story doesn't stop at company profit. VAT now applies to services a Free Zone Enterprise consumes from a supplier based in the customs territory, and withholding tax applies on services that customs-territory businesses provide to zone entities. A zone company that assumed its "tax-free" status shielded every transaction with a mainland vendor is exposed here in ways many haven't yet reconciled in their books.
What changes from 1 January 2028?
The 25% domestic sales allowance is not permanent. From 1 January 2028, profit from any sale into Nigeria's customs territory becomes fully taxable, regardless of how small a share of total sales it represents, unless the President extends the deadline by gazette, a power reportedly available for up to ten years. Large groups should also note the Tax Act's minimum effective tax rules, which can impose a 15% floor on multinational enterprises and large Nigerian groups even where export-based exemptions would otherwise reduce the bill to zero.
Myth vs fact: what free zone operators keep getting wrong
- Myth: "Our free zone licence means we pay zero tax, on every sale, forever." Fact: exemption now covers only export-derived profit and domestic sales at or below 25% of the total, and it is scheduled to end entirely from 2028 without a presidential extension.
- Myth: "Because we're exempt, we don't need to file anything." Fact: Free Zone Enterprises must still register, hold a valid Tax Identification Number, and file Companies Income Tax and transfer pricing returns every year, whether or not any tax is actually due.
- Myth: "Exemption covers VAT and withholding tax too." Fact: VAT and withholding tax now attach to specific transactions between zone entities and customs-territory businesses, separately from the profit exemption itself.
What this means for your business
- Track your domestic-to-export sales ratio monthly, not annually. Crossing 25% partway through a year can convert a chunk of profit from exempt to taxable before your finance team notices, especially for oil and gas servicing companies and manufacturers whose Nigerian customer base fluctuates with contract cycles.
- Get transfer pricing documentation in order now. The Act specifically targets related-party arrangements that shift profit into zone entities to dodge tax, and that scrutiny applies whether or not you've crossed the domestic sales threshold, as we've covered in our guide on preparing for an NRS tax audit.
- Build a 2028 transition plan today. Whether that means renegotiating export contracts, restructuring customs-territory sales through a separate onshore entity, or simply budgeting for full taxation, the lead time to adjust shrinks every quarter this is left unplanned.
- Don't assume exemption removes your filing duty. Nigerian businesses of every size keep learning this lesson the hard way, as we detailed in our piece on the small company tax exemption and whether it excuses you from filing.
How should free zone operators respond right now?
- Audit your last twelve months of sales by destination to establish your true domestic sales percentage, not an estimate.
- Confirm your VAT and withholding tax treatment on every customs-territory transaction, both incoming and outgoing, since the exemption no longer covers these by default.
- Engage a tax advisor to model your exposure under the 2028 sunset and the minimum effective tax rules before they take effect, not after.
FAQ
Are free zone companies still tax-exempt in Nigeria? Only partially. Under the Nigeria Tax Act 2025, a Free Zone Enterprise keeps full profit exemption if its sales into Nigeria's customs territory stay at or below 25% of total sales; profit above that threshold is taxable, and the exemption ends entirely from 1 January 2028 unless extended.
Do free zone companies still need to file tax returns? Yes. Free Zone Enterprises must register with the Nigeria Revenue Service, hold a Tax Identification Number, and file Companies Income Tax and transfer pricing returns every year, regardless of whether their profit is currently exempt.
Does the free zone exemption cover VAT and withholding tax? No. VAT applies to services a free zone entity consumes from a customs-territory supplier, and withholding tax applies to services customs-territory businesses provide to free zone entities, separately from the corporate profit exemption.
If your business operates in a Nigerian free zone, don't wait for a Nigeria Revenue Service review to discover how much of your profit is actually exposed. VOG Global Consult can calculate your true domestic sales ratio, review your transfer pricing position, and build a compliance plan ahead of the 2028 sunset. To book a review, contact VOG Global at Suite 060 to 061, Orago Complex, Area 10, Garki, Abuja.