Scrapped tax breaks on foreign loans raise costs, threaten investment

Nigeria’s decision to scrap long-standing tax exemptions on interest paid on foreign loans is set to raise borrowing costs for companies, cloud existing financing arrangements, and potentially slow investment into infrastructure and other capital-intensive sectors at a time when the country is aggressively seeking private capital.

“Interest on foreign loans will no longer enjoy preferential treatment but will instead be subject to the general withholding tax rules,” Udo Udoma & Belo-Osagie (UUBO) wrote in their article titled Nigeria Tax Act 2025 Removes Tax Exemption on Interest Payable on Eligible Foreign Loans.

The law removes the tiered tax exemptions previously granted under the Companies Income Tax Act (CITA), where interest on long-term foreign loans enjoyed up to 70 percent tax relief depending on tenor and grace period.

Under the revised regime, such interest payments are now subject to a flat 10 percent withholding tax, unless reduced to 7.5 percent under applicable tax treaties.

Experts say the change effectively increases the cost of foreign borrowing for Nigerian firms, particularly in sectors that rely heavily on external financing.

“The removal will increase interest costs for borrowers as they will now have to bear the burden of grossing up interest payments to lenders,” the report noted, adding that the previous framework had helped position Nigeria as an attractive destination for long-term debt financing.

The move signals a clear shift from investment incentives to revenue mobilisation, with direct implications for capital flows.

The timing of the reform is significant. Nigeria is in the middle of a broad fiscal reset aimed at boosting non-oil revenue, with its tax-to-GDP ratio improving from below 10 percent in recent years to 13.5 percent by early 2026, according to official estimates.

At the same time, the government is leaning more heavily on private capital to close a massive infrastructure funding gap estimated at $2.3 trillion through 2043.

Yet, while capital importation has surged by the end of 2025, most inflows remain short-term. Portfolio investments account for roughly 85 percent of total inflows, while foreign direct investment lags at about 5 percent, highlighting Nigeria’s continued struggle to attract stable, long-term capital.

Analysts warn that removing tax incentives tied to long-term foreign loans could deepen that imbalance.

“There is a potential trade-off because it could reduce Nigeria’s attractiveness as an investment destination for long-term financing,” according to UUBO, which noted that infrastructure, manufacturing, and energy sectors, already constrained by high capital costs, could be hardest hit.

The concern is particularly acute given Nigeria’s structural challenges. The country requires between $100 billion and $120 billion annually to bridge its infrastructure deficit, while persistent power shortages and foreign exchange constraints continue to weigh on business operations.

A recent survey by the Central Bank of Nigeria showed that over 70 percent of firms cite inadequate electricity as a major constraint, while more than 60 percent struggle with FX-related pressures.

For many companies, foreign loans have been a critical lifeline, offering longer tenors and relatively cheaper funding compared to domestic borrowing. The previous tax regime was designed to support this, granting higher exemptions for longer repayment periods to encourage patient capital.

With that incentive now gone, lenders may demand higher returns to compensate for the tax hit, or shift focus to markets with more favourable conditions.

“Foreign lenders may see reduced net yields on Nigerian exposures unless gross-up provisions apply,” the firm added, warning that appetite for long-term lending could weaken, especially among investors without access to favourable tax treaty rates.

Beyond cost pressures, the reform has also introduced a layer of uncertainty that could complicate existing financing structures. The law does not clearly state whether loans that previously qualified for exemptions under the old regime will retain those benefits or be subject to the new rules.

“Until regulatory guidance is issued, this could create uncertainty for borrowers and lenders with long-dated financing arrangements,” UUBO said.

That ambiguity could expose companies to unexpected tax liabilities and trigger disputes, particularly for large infrastructure and energy projects structured around the earlier incentives.

Still, the government’s rationale is clear. With oil revenues volatile and debt pressures mounting despite an improvement in the debt service-to-revenue ratio to below 50 percent, authorities are pushing to broaden the tax base and strengthen fiscal sustainability.

The removal of exemptions aligns with a broader reform agenda that includes new levies and efforts to improve tax compliance.

For businesses, however, the shift marks the end of an era.

After decades of using tax incentives to attract foreign capital, Nigeria is now prioritising revenue generation, a shift that could reshape how companies finance projects and how investors assess the country’s risk-return profile.

The immediate challenge will be striking a balance between raising revenue and maintaining competitiveness in the race for global capital. Without that balance, the cost of closing Nigeria’s vast infrastructure gap and attracting the long-term funding it requires could rise even further.