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TAX IMPLICATIONS OF REGULATED SECURITIES LENDING TRANSACTIONS IN NIGERIA

Regulated Securities Lending (SEC Lending) was formally introduced to the Nigerian capital market in 2015. By 2020, 7.38 million units of securities, worth 97.18 million naira, had been lent . The introduction of Pension Fund Administrators (PFAs) as institutional investors through the Business Facilitation Act of 2022 further expanded participation in this market .

The Nigeria Tax Act (NTA) 2025 and related tax regulations have significantly clarified the tax treatment of securities lending transactions. The reforms introduced specific exemptions and clarified the treatment of various income streams arising from these transactions . This comprehensive guide examines the tax implications of regulated securities lending transactions under Nigeria’s current tax framework.What Is a Regulated Securities Lending Transaction?

Definition

A “Regulated Securities Lending Transaction” is an arrangement where a lender enters into an agreement with an agent, for depositing securities for the purposes of lending, through the lending agent, in accordance with the SEC rules. The borrower enters into a separate agreement with the lending agent for the purposes of borrowing the securities .

Key Players

Lender: A person who deposits securities registered in his name or in the name of any other person duly authorised on his behalf with an agent .
Borrower: A person who borrows the securities under SEC rules and regulations through an agent .
Approved Agent/Lending Agent: A person approved by the Securities and Exchange Commission to function as an intermediary for the conduct of a Regulated Securities Lending Transaction .
Collateral: Acceptable forms of securities, cash, or a combination delivered by the borrower to the lender as security to support a loan .

Key Requirements

Any direct agreement between the lender and the borrower for lending and borrowing of securities will not qualify as a SEC Lending . The transaction must be conducted through an approved agent in accordance with SEC rules.

The Pain Points: Why Securities Lending Tax Matters

The Complexity of Tax Treatment

Securities lending transactions involve multiple parties and income streams, creating significant tax complexity. The transactions generate:

Compensating payments in lieu of dividends (manufactured dividends)
Compensating payments in lieu of interest (manufactured interest)
Potential capital gains on the transfer of securities
Interest on collateral deposited

Each of these income streams has different tax treatment under Nigerian law.

The Need for Regulatory Clarity

The Nigerian tax authorities have issued guidance to clarify the tax implications of securities lending. The FIRS Information Circular on Regulated Securities Lending Transactions (which replaced an earlier 2020 circular) provides detailed clarification on the application of various tax laws to SEC Lending .

The Market Development Goal

The tax exemptions for securities lending are designed to encourage liquidity and efficiency in capital markets. As noted, “securities lending and reinvestment relief encourage capital market activity” . The reforms aim to strike a balance between taxation and economic activity by retaining incentives on securities lending .

Income Tax Treatment

Compensating Payments

Under the Nigeria Tax Act, “dividends” now extend to include compensating payments arising from a Regulated Securities Lending Transaction . Similarly, “interest” includes compensating payments arising from a Regulated Securities Lending Transaction .

Income Tax Exemptions

Section 81 of the Companies Income Tax Act provides that compensating payments under a Registered Securities Lending Transaction are not subject to withholding tax . However, as noted in the WHT Regulations 2024, exemption from WHT deduction at source shall not be deemed as an exemption from the relevant income tax except as provided in the enabling law .

Taxable Income Streams

The following are subject to CIT in Nigeria:

Dividends (extended to include compensating payment arising from Regulated Securities Lending Transaction)
Interest (extended to include compensating payment arising from Regulated Securities Lending Transaction)
Royalties, discounts, charges, or annuities

Capital Gains Tax (CGT) Treatment

General CGT Framework

Under the NTA 2025, all forms of property are considered chargeable assets, whether located in Nigeria or abroad . The Act significantly expanded the scope of what constitutes a chargeable asset for capital gains tax purposes. Except for exemptions provided under Part I of Chapter Eight of the NTA, virtually all forms of property, whether located within or outside Nigeria, are now considered chargeable assets for capital gains tax purposes .

Securities Lending CGT Exemption

Transfers between approved borrowers and lenders in regulated securities lending transactions are exempt from CGT . This exemption is designed to encourage liquidity and efficiency in capital markets .

Other CGT Exemptions for Shares

The NTA 2025 also provides additional exemptions designed to encourage investment and capital market activity:

Where total disposal proceeds within any 12-month period are less than ₦150 million, and the chargeable gain does not exceed ₦10 million
Where the proceeds from disposal are reinvested within the same year of assessment in acquiring shares of the same or another Nigerian company. In this case, tax applies only proportionally to the portion of proceeds not reinvested

Withholding Tax (WHT) Treatment

WHT Exemption for Compensating Payments

The Deduction of Tax at Source (Withholding) Regulations, 2024 explicitly exempts compensating payments under a Registered Securities Lending Transaction from WHT deduction at source in line with section 81(8) of the Companies Income Tax Act .

What This Means for Parties

For Borrowers: No WHT is required to be deducted on compensating payments made to lenders for dividends or interest forgone.

For Lenders: While WHT is not deducted at source, the compensating payments may still be subject to income tax as part of the lender’s overall taxable income .

Stamp Duty Treatment

Exemptions Under Stamp Duty Law

The following documents and transactions are exempt from stamp duties :

All documents issued by the SEC in relation to a SEC Lending
Shares, stocks, or securities returned to a lender or its recognised agent by a borrower in accordance with the rules of SEC Lending
Receipts given by any person under a SEC Lending
Shares, stocks, or securities transferred by a lender to its agent or borrower in furtherance of a SEC Lending

Income Tax Treatment of Securities Lending Income

Compensating Payments as Dividends

Under the NTA 2025, dividend income (which now includes compensating payments in lieu of dividends) is subject to corporate income tax at the applicable rate, with 10% withheld at source as a credit against the final tax liability .

Compensating Payments as Interest

Interest received by a Nigerian company is subject to corporate income tax at the applicable rate, with 10% withheld at source as a credit against the final tax liability .

Interest on Government Securities

Interest earned on State or Federal Government bonds is exempt from tax .

Non-Resident Investors

Interest payable to non-resident investors is subject to a final withholding tax of 10%. However, recipients who reside in countries with double taxation treaties (DTT) with Nigeria may benefit from a reduced withholding rate of 7.5%, if explicitly provided for in the treaty .

Reporting and Documentation Requirements

Record-Keeping

The need for entities engaged in securities lending or portfolio rebalancing to maintain detailed transaction records to substantiate claims for exemption or reinvestment relief cannot be overstated .

Key Documentation

Transaction agreements with SEC-approved agents
Records of securities lent and borrowed
Records of compensating payments made and received
Records of collateral deposited and returned
Evidence of SEC approval for the transaction

Recent Developments

Pension Fund Administrators as Institutional Investors

Pension Fund Administrators, who were previously restricted from using pension assets for securities lending, have recently been introduced as institutional investors. This allows them to use pension assets for securities lending by virtue of the Business Facilitation Act of 2022 .

The Expansion of Securities Lending

The introduction of PFAs as institutional investors is expected to significantly expand the securities lending market in Nigeria, increasing liquidity and providing new investment opportunities .

The 2025 Tax Reforms

The NTA 2025 has made important clarifications to the tax treatment of securities lending, including the exemption of securities lending transfers from CGT . The reforms also expanded the definition of dividends and interest to include compensating payments arising from regulated securities lending transactions .

Top view of white vintage light box with TAXES inscription placed on stack of USA dollar bills on white surface

How Qeeva Advisory Helps with Securities Lending Tax Compliance

At Qeeva Advisory, we understand that navigating the tax implications of securities lending can be complex. Our team of experienced professionals helps financial institutions, investors, and other market participants understand their tax obligations and maximise available exemptions.

Our Core Services

Advisory Services Nigeria – Our advisory professionals help you understand the tax implications of securities lending, determine eligibility for exemptions, and structure transactions efficiently.

Tax Strategies and Planning – We help you develop tax-efficient strategies for securities lending transactions, including optimising the use of CGT exemptions and WHT relief.

Regulatory Compliance – We ensure your securities lending transactions meet all regulatory requirements and tax filing obligations.

Bookkeeping Services – Accurate records are essential for substantiating claims for exemption and relief. Our bookkeeping services ensure your transaction records are accurate and complete.

Risk Management – We help you identify and manage risks associated with securities lending, including tax exposure and compliance risks.

Frequently Asked Questions

Q: What is a regulated securities lending transaction?
A: A regulated securities lending transaction is an arrangement conducted through a SEC-approved agent where a lender deposits securities for lending to a borrower, with collateral provided, in accordance with SEC rules .

Q: Are securities lending transfers subject to capital gains tax?
A: No. Transfers between approved borrowers and lenders in regulated securities lending transactions are exempt from CGT .

Q: Are compensating payments under securities lending subject to withholding tax?
A: No. Compensating payments under a Registered Securities Lending Transaction are exempt from WHT deduction at source .

Q: Are compensating payments subject to income tax?
A: Yes. While WHT is not deducted at source, compensating payments may still be subject to income tax as part of the recipient’s overall taxable income .

Q: What is the definition of a compensating payment?
A: A compensating payment is any payment made in lieu of interest or dividend pursuant to a Regulated Securities Lending Transaction .

Q: Is stamp duty payable on securities lending documents?
A: No. Documents issued by the SEC, securities returned to lenders, receipts given under SEC Lending, and securities transferred in furtherance of a SEC Lending are all exempt from stamp duties .

Q: Who are the key players in a securities lending transaction?
A: The key players are the lender (who deposits securities), the borrower (who borrows securities), the approved lending agent (who acts as intermediary), and the collateral provider .

Q: What is the benefit of the CGT exemption for securities lending?
A: The CGT exemption encourages liquidity and efficiency in capital markets by removing tax barriers to securities lending .

The Bottom Line

The Nigeria Tax Act 2025 and related regulations have provided significant clarity on the tax treatment of regulated securities lending transactions. The reforms have created a favourable tax environment for securities lending, with specific exemptions designed to encourage capital market activity.

Key Takeaways:

Understand the Definition: A regulated securities lending transaction must be conducted through a SEC-approved agent. Direct agreements between lender and borrower do not qualify .

CGT Exemption: Transfers in regulated securities lending transactions are exempt from CGT, encouraging market liquidity and efficiency .

WHT Exemption: Compensating payments are exempt from WHT deduction at source .

Income Tax Applies: While WHT is not deducted, compensating payments may still be subject to income tax .

Stamp Duty Exemption: Documents related to SEC Lending are exempt from stamp duties .

Maintain Proper Documentation: Detailed records must be maintained to substantiate claims for exemption or relief .

Your job is to be prepared. Understand the tax implications of securities lending. Structure transactions through SEC-approved agents. Maintain proper documentation. Claim available exemptions. Seek professional guidance.

With the right approach and the right partner, you can turn securities lending from a tax compliance challenge into a strategic advantage for capital market participation.

Reference Links / Sources

PwC – Tax credits and incentives Nigeria – Compensating payments in regulated securities lending transactions exempt from income tax or CGT

LinkedIn – NTA 2025 Chargeable Assets Definition Expanded – Securities lending transfers between approved borrowers and lenders exempt from CGT

Balogun Harold – New Capital Gains Tax Rules for Nigerian M&A – CGT exemptions for securities lending, reinvestment relief, and detailed record-keeping requirements

Forvis Mazars – WHT Regulation 2024 – WHT exemption for compensating payments under registered securities lending

PwC – Income determination Nigeria – Compensating payments treated as dividends and interest for CIT purposes

ICAN Advanced Taxation Study Text – Stamp duty exemptions for SEC lending documents

FIRS Information Circular – Tax Implications of Regulated Securities Lending – Comprehensive definitions and tax treatment of SEC lending

Kreston Pedabo Newsletter April 2026 – Reinvestment exemptions and securities lending incentives

LinkedIn – WHT Exemptions 2024 – Compensating payments exempt from WHT

G Elias – PFAs as Securities Lending Investors – PFA participation in securities lending market and Business Facilitation Act 2022

BusinessDay – Nigerian investors get full CGT relief – CGT exemptions for shares and securities lending

TheCable – CGT exemptions for securities lending – CGT exemptions for securities lending and reorganisations

Let’s Talk About Your Securities Lending Tax Needs

Navigating the tax implications of securities lending can be complex. At Qeeva Advisory, we understand the challenges faced by financial institutions, investors, and market participants in understanding their tax obligations and maximising available exemptions.

Whether you need help with transaction structuring, tax planning, or compliance support, we are here to support you.

📞 Call us: (+234) 802 320 0801, (+234) 807 576 5799

📧 Email: info@qeeva.com

📍 Visit us: 5, Ishola Bello Close, Off Iyalla Street, Alausa, Ikeja, Lagos, Nigeria

Contact us today to schedule a consultation. Let us help you navigate securities lending tax with confidence.

Your journey to tax-efficient securities lending starts with a conversation. Let’s talk

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