Cessation rule in Nigeria

The going concern principle states that an entity will continue operations in perpetuity. In other words, the entity will not stop operations or liquidate its assets in the short term. Still, certain factors could force a company to stop operations. Constant losses, unfavorable government policy, fall in share price, insolvency, bankruptcy, and dormancy are common examples. Let’s define insolvency, bankruptcy, dormancy and liquidation.
Insolvency: It is the inability of a business to repay its debts due to creditors. Continuous cash flow deficit or negative net assets could result in insolvency. 
Bankruptcy: Where a court of law issues orders intended to determine insolvency, this is called bankruptcy. It is a legal term for an organization that cannot repay its debts.
Dormancy: Dormancy is a period of inactivity in a company. There is no statutory definition of a dormant company in Nigeria. In practice, it is a company which is not carrying on business or trade. 

Any of these factors could drive a company into liquidation. The Companies and Allied Matters Act (CAMA), C.59, LFN 1990, guides the winding-up of companies. Liquidation, or winding-up, is when a business stops activities and its assets are shared among creditors in order of priority. Debts due to the Federal Inland Revenue Service (FIRS) rank as a preferential creditor. Hence, a company pays tax liabilities immediately after settling the receiver’s fee and charges. Furthermore, the basis period in a final tax return differs from the basis period of companies still in business. It must be in line with the cessation rule. 

Cessation rule for companies in Nigeria

Basis period is the accounting period for calculating the assessable profits. It could be either a preceding year basis (PYB) or an actual year basis (AYB). A preceding year basis means the assessable profits of the previous twelve-month accounting period is subject to income tax. Existing companies in Nigeria file income tax returns on PYB. On the other hand, an actual year basis is when a company pays tax on assessable profits from January to December.

Companies in Nigeria file their tax returns on a preceding year basis except in “abnormal” casesAbnormal situations arise for companies with basis period that is greater than or less than twelve (12) monthsFor instance, when a company starts business or changes accounting date or stops business

The Companies Income Tax (CITA), Cap C.21, LFN 2007 governs taxation of companies in Nigeria while the Petroleum Profits Tax Act (PPTA), Cap P.13, LFN, 2007 deals with taxation on the income of companies engaged in the exploration and production of oil and/or gas in Nigeria.  Section 29 (4) of CITA has rules for preparing the tax returns of a company that has permanently ceased to carry on trade or business in Nigeria. At cessation, the two basis periods for determining the assessable profits are the ultimate year and penultimate year. Ultimate year is also known as the year of cessation. Here, the assessable profits covers 1st January in the year of cessation to the actual date of cessation. Penultimate year, on the other hand, is the year before a business ends. The assessable profits is the higher of profits on a preceding year basis or profits on an actual year basis.   

What happens to unutilised withholding tax (WHT) credit at cessation?

Unused WHT credit is applied on the income tax payable in the relevant years of assessment. Any remaining credit is then carried forward as far as possible. The Federal Inland Revenue Service (FIRS) shall refund any credit balance.


XYZ Limited has an accounting year end of 30 June. The company later ceased operations on 30 September 2018 and reported assessable profits in the last 4 years as;

First: July 2014 – June 2015   NGN600,000

Second: July 2015 – June 2016   NGN450,000

Third: July 2016 – June 2017    NGN180,000

Last: July 2017 – September 2018  NGN50,000

Determine the cessation returns due to FIRS.


Illustration cessation rule

Penultimate and ultimate years, according to the cessation rule, are 2017 and 2018 respectively. FIRS will assess XYZ Limited to tax using the higher assessable profits of NGN450,000 under PYB rather than NGN110,000 in 2017. Also, the six (6) months gap in basis period, that is, July to December 2016, escapes income tax. In the ultimate year, assessable profits of NGN30,000 will result in the same tax exposure for XYZ Limited and FIRS.

If your company is facing liquidation, it is important to speak with a liquidation expert early. You may be able to know what to do so as to clear all obligations, including tax debt. Getting the right advice at this point could make a big difference, and help you achieve that desired outcome. You can also check FAQs on companies income tax (CIT) returns.

Effective 13 January 2020, cessation rule will no longer apply to companies that close operations in Nigeria. This is in line with the Finance Act 2019. Such companies will file their returns using the preceding the year basis. Where the date of cessation falls after the financial year end, the CIT returns will be filed from the beginning of the financial year end to the date the company stops operating.

Updated: 23 March 2024 

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