By THO Partners  |  Tax, Advisory & Assurance  |  April 2026

ABSTRACT
The Nigeria Tax Act 2025, signed into law on 26 June 2025 and effective from 1 January 2026, introduces a formal research and development (R&D) deduction regime — allowing companies to deduct up to 5% of annual turnover on qualifying R&D expenditure. This article examines the significance of that provision, analyses what it signals about the Nigerian government’s developmental ambitions, and draws lessons from five global case studies — the United States, South Korea, Israel, China, and Germany. The article argues that while Nigeria’s 5% deduction is a commendable first step, achieving a genuine R&D-driven economy will require a more expansive, better-defined, and institutionally reinforced incentive architecture.

1. Introduction: Why Research and Development is a National Priority

In the modern global economy, a country’s capacity to generate, apply, and commercialise new knowledge is arguably the single most decisive driver of long-term prosperity. Nations that invest consistently in research and development produce the innovations that create industries, attract foreign capital, generate high-quality employment, and build the strategic autonomy that protects economic sovereignty. This is not an abstract proposition — it is an empirically observable pattern across the world’s most successful economies.

According to WIPO estimates, global R&D expenditure rose to approximately USD 2.87 trillion in 2024, approaching triple its real value of two decades ago. The OECD reports that R&D intensity — measured as R&D expenditure as a share of GDP — has grown from 1.48% in 2000 to approximately 2% globally in 2024. Countries at the frontier of this movement — Israel at 6.33% of GDP, South Korea at 5.32%, the United States at 3.45%, Germany at 3.11% — are not merely spending more on science. They are making a strategic wager that knowledge is the most durable form of competitive advantage.

For Nigeria, a country with one of Africa’s largest economies, most educated populations, and youngest demographics, the question is whether its fiscal architecture can be engineered to catalyse the same virtuous cycle. The Nigeria Tax Act 2025, for the first time in recent legislative history, signals an intention to answer that question seriously.

2. The Nigeria Tax Act 2025: What the Law Says About R&D

2.1  The R&D Deduction Provision

Section 165 of the Nigeria Tax Act 2025 introduces a formal deduction regime for research and development expenditure. Companies are permitted to deduct up to

5% of their annual turnover on qualifying R&D expenses when computing taxable profits. This provision replaces a more fragmented and ambiguous treatment of R&D costs under the repealed Companies Income Tax Act, under which R&D deductibility was largely dependent on interpretive positions adopted by the Federal Inland Revenue Service (FIRS).

The intent, as stated in the legislative framework, is to encourage local innovation and product development — particularly in manufacturing, agribusiness, technology, and other priority sectors. Manufacturers benefit from a related provision that exempts them from withholding tax on the sale of locally manufactured goods, further easing the cash flow environment within which R&D investment decisions are made.

2.2  The Economic Development Tax Incentive (EDTI)

Complementing the R&D deduction is the Economic Development Tax Incentive (EDTI), which replaces the Pioneer Status Incentive (PSI) that had governed investment incentives for decades. Under the EDTI framework (Sections 164–172 of the Act), eligible companies in designated priority sectors can claim a 5% tax credit annually on qualifying capital expenditure over a five-year period, with unused credits carried forward for up to ten years.

While the EDTI is primarily a capital investment incentive rather than an R&D incentive per se, its effect on innovation-adjacent investment is significant. Companies investing in new machinery, technology infrastructure, laboratory equipment, and industrial facilities — the physical underpinnings of commercial R&D — will receive tax relief that directly reduces the cost of building research capacity.

2.3  The Significance of Codification

The Nigeria Tax Act consolidates over sixty previously fragmented tax statutes into a single unified framework. Within that framework, R&D is no longer a matter of taxpayer negotiation or regulatory interpretation — it is a defined and recognised category of deductible business expenditure. This legal clarity is itself a form of incentive. Businesses can now model the after-tax cost of R&D investment with greater certainty, which is a prerequisite for rational long-term capital allocation.

2.4  Limitations and Gaps

That said, the current R&D provision has significant limitations that must be acknowledged. First, the 5% of turnover cap is a relatively conservative ceiling. More ambitious R&D tax regimes elsewhere in the world offer deductions exceeding 100% of expenditure, or tax credits that directly reduce tax liability rather than merely reducing the taxable base. Second, the Act does not yet define with sufficient precision what constitutes “qualifying” R&D expenditure. Third, there is no provision for refundable R&D tax credits — a design feature that allows loss-making companies, including early-stage startups, to receive direct cash support. Despite these limitations, the direction of travel is unmistakable.

Global R&D Investment Comparison (2024)

Country	R&D / GDP	Total Spend	Key Incentive	Private Share
Israel	6.33%	USD 28.3bn	Direct grants (20–50% of R&D cost)	92%
South Korea	5.32%	USD 105bn	Up to 50% tax credit for SMEs	79%
United States	3.45%	USD 823bn	20% R&D tax credit (permanent)	78%
Germany	3.11%	USD 132bn	25% credit on R&D wages (est. 2020)	67%
China	2.65%	USD 723bn	200% super-deduction on R&D spend	78%
South Africa	0.6%	~USD 6bn	150% deduction (Section 11D, until 2033)	~55%
Rwanda	~0.3%	~USD 75m	Innovation park tax holidays; angel investor CGT exemption	< 30%
Nigeria	< 0.3%	~USD 1bn	5% of turnover deduction (NTA 2025)	< 20%

Source: WIPO Global Innovation Index 2024; OECD Main Science and Technology Indicators; THO Partners analysis.

3. Global Case Studies: Lessons from R&D Nations

Case Study 1: United States — Scale, Breadth, and the R&D Tax Credit

The United States is the world’s largest absolute R&D spender, with gross domestic expenditure on R&D reaching approximately USD 823 billion in 2023 — approximately 3.45% of GDP. The private sector funds roughly 78% of this investment, reflecting a tax and regulatory environment that has consistently rewarded innovation.

The US R&D tax credit — permanent since 2015 — allows companies to claim a credit of 20% of qualified research expenditure. Small businesses and startups can offset up to USD 500,000 annually against payroll taxes even before they become profitable.

The US system’s strength lies in its breadth and accessibility. The credit is available to companies of all sizes across virtually all sectors. The lesson for Nigeria is structural: R&D tax incentives gain their full power when they are available to a wide range of companies, clearly defined, and accessible even to pre-profit entities. Nigeria’s startup community would benefit enormously from a similar payroll tax offset mechanism for qualifying R&D wages.

Case Study 2: South Korea — Industrial Policy and the R&D-Tax Nexus

South Korea spent approximately 5.32% of GDP on R&D in 2024, the second-highest R&D intensity in the world. The private sector — dominated by conglomerates such as Samsung, LG, SK, and Hyundai — accounts for approximately 79% of national R&D spending. The Korean R&D tax credit system offers up to 25% tax credit for large firms and up to 50% for SMEs on incremental R&D expenditure above the prior year’s baseline.

South Korea demonstrates a critical insight: the connection between manufacturing and R&D is not incidental, it is architectural. Samsung’s dominance in semiconductors, OLED displays, and memory chips is built on an R&D infrastructure physically embedded in its manufacturing facilities. The Nigerian government’s decision to exempt manufacturers from withholding tax on locally manufactured goods, while simultaneously offering R&D deductions, reflects an implicit awareness of this connection.

Case Study 3: Israel — R&D as Existential Economic Strategy

A country of approximately 9 million people with limited natural resources has positioned itself as the world’s most innovation-intensive economy, spending 6.33% of GDP on R&D in 2024. Israel’s innovation ecosystem is undergirded by the Israel Innovation Authority, which provides direct grants and matching funding covering 20–50% of approved R&D project costs, alongside the celebrated Yozma programme — which seeded ten venture capital funds in 1993 and catalysed Israel’s venture capital industry to USD 12 billion by 2023.

The lesson for Nigeria is that R&D tax incentives are necessary but not sufficient. Israel’s success is built on a three-legged stool of tax support, direct grants, and university-industry technology transfer.

Nigeria has the universities. What is missing is the institutional connective tissue that links academic research to commercial application and backs that link with aligned fiscal incentives.

Case Study 4: China — Ambition, Scale, and the State as Catalyst

In 2000, China accounted for approximately 4% of global R&D spending. By 2023, that share had grown to approximately 26% of global R&D, with gross domestic expenditure reaching USD 723 billion. China’s R&D expenditure has grown nearly eighteenfold since 2000. The Chinese system allows companies to deduct 200% of qualifying R&D expenditure — an “enhanced deduction” or “super-deduction” that means every yuan spent on R&D produces two yuan of tax deduction.

China’s model operates through three simultaneous levers: generous tax incentives for private sector R&D, massive direct state investment in strategic research (artificial intelligence, semiconductors, biotechnology, space), and a state-backed venture ecosystem. The result is an innovation machine whose gross domestic R&D expenditure now stands at approximately 96% of US levels in purchasing power parity terms.

The lesson for Nigeria is one of deliberate ambition. China did not arrive at 200% super-deductions overnight — it arrived there through a two-decade journey of progressive policy reform. Nigeria’s 5% deduction, introduced in 2025, could be the equivalent of China’s starting position in 2000 — but only if accompanied by a commitment to progressively deepen the incentive over time.

Case Study 5: Germany — Precision, Quality, and Institutional Complementarity

Germany spent 3.11% of GDP on R&D in 2024, with the private sector contributing approximately 67% of the total. Unlike most advanced economies, Germany was late to formal R&D tax incentives — only introducing its first expenditure-based R&D tax credit in 2020, under the Research Allowances Act (Forschungslagengesetz). The credit allows companies to claim 25% of eligible R&D wage costs, up to EUR 1 million per year.

Before 2020, Germany’s innovation ecosystem was sustained through a dense network of applied research institutions — the Fraunhofer Society (76 institutes), the Max Planck Society (84 institutes), and the Helmholtz Association. These institutions bridge the gap between university-based basic research and commercially deployable technology, producing breakthroughs ranging from the MP3 format to Pfizer-BioNTech’s mRNA vaccine platform.

The lesson Germany offers Nigeria is one of institutional complementarity. Tax incentives work best when they exist within a broader ecosystem of publicly funded research infrastructure. Nigeria’s National Agency for Science and Engineering Infrastructure (NASENI) was conceived for this purpose but has never been adequately resourced. A reimagined NASENI, mandated to operate as a technology transfer institution, could begin to play in Nigeria the role that Fraunhofer plays in Germany.

Case Study 6: South Africa — Africa’s Most Advanced R&D Tax Regime

South Africa is the most R&D-intensive economy on the African continent, spending approximately 0.6% of GDP on research and development — roughly USD 6 billion annually. South Africa’s R&D tax incentive is codified in Section 11D of the Income Tax Act, 1962, and has been a strategic policy instrument since its introduction in 2006.

The centrepiece is a 150% deduction on qualifying R&D expenditure — meaning for every rand spent on approved scientific or technological research, a company deducts one rand and fifty cents from its taxable income. This is thirty times more generous than Nigeria’s 5%-of-turnover provision. Reformed from 1 January 2024 and aligned to the OECD Frascati Manual’s definitions, the incentive now includes a six-month grace period and runs until 31 December 2033, providing long-term policy certainty to multi-year research programmes.

South Africa’s Section 11D is complemented by an accelerated capital allowance on R&D assets — a 50:30:20 depreciation schedule over three years — and a pre-approval process in which scientific experts verify that claimed expenditure represents genuine innovation activity. Nigeria’s NRS should consider a similar mechanism as its R&D regime matures.

South Africa’s experience carries a cautionary note. Despite the generosity of the incentive, private sector R&D spending has remained modest relative to GDP, constrained by unreliable power supply, STEM skills shortages, and the high cost of importing scientific equipment. Tax incentives, however well designed, cannot substitute for foundational infrastructure. They amplify a healthy innovation ecosystem — they cannot build one in its absence.

Case Study 7: Rwanda — Leapfrogging Through Smart Incentive Design

Rwanda’s inclusion may surprise those accustomed to benchmarking Africa’s innovation economy against its larger economies. A landlocked country of approximately 14 million people with GDP of around USD 15 billion, Rwanda does not yet register meaningfully in global R&D expenditure statistics. Yet its approach offers one of the most instructive policy stories on the continent — demonstrating what is achievable through strategic institutional design in the absence of natural resource revenues.

Rwanda’s R&D and innovation incentive framework is administered by the Rwanda Development Board (RDB). Key instruments include: a five-year tax holiday for innovation park developers; a preferential 10% withholding tax rate for qualifying innovation sector investors; a capital gains tax exemption for angel investors who invest a minimum of USD 500,000 in qualifying startups (applicable for the first five dividend issuances); and a reduced 15% corporate income tax rate for companies in Kigali Innovation City, compared to Rwanda’s standard 30%. GDP has grown at approximately 7% per year over the past decade.

Rwanda’s angel investor CGT exemption directly targets the venture capital gap — the chronic under-funding of early-stage innovation businesses — that constrains commercial R&D across most African economies. This incentive does not yet exist in Nigeria’s framework and represents a meaningful gap in the NTA 2025.

The lesson Rwanda offers Nigeria is one of intentionality and sequencing. Rwanda recognised that without natural resources, the only path to sustained prosperity was knowledge — and built its tax, regulatory, and institutional architecture around that conviction. Its Kigali Innovation City, Vision 2050 agenda, and angel investor incentives are not isolated measures; they are components of a coherent innovation strategy. The Nigeria Tax Act 2025’s R&D provision is a step in the same direction. The question Rwanda’s example poses is whether Nigeria is prepared to follow it with the same institutional seriousness.

4. What Nigeria Must Do Next: A Policy Agenda

Drawing on the seven case studies above, the following policy directions emerge as priorities for Nigeria’s R&D tax strategy in the medium term.

• Deepen the deduction rate progressively. The 5% of turnover ceiling is a starting point, not an endpoint. The government should set out a multi-year roadmap toward a more generous regime — ideally an enhanced deduction model (150% or 200% of qualifying R&D expenditure) or a tax credit model that directly reduces tax liability. This progression should be tied to measurable outcomes: growth in patent registrations, university-industry research partnerships, and R&D employment.
• Define qualifying expenditure with precision. The NRS should issue detailed guidance distinguishing between basic research, applied research, and experimental development, and specifying the documentation required to substantiate a claim. This clarity will give companies the confidence to claim what they are entitled to, and give the NRS the tools to audit effectively.
• Introduce refundable credits for startups and SMEs. A pre-profit startup conducting genuine R&D cannot benefit from a deduction against income it does not yet have. The government should consider a mechanism modelled on the US payroll tax offset or the UK’s SME R&D Tax Relief, under which qualifying startups receive cash credits or payroll tax reductions in respect of R&D wages.
• Rebuild NASENI as a technology transfer institution. The absorption of the NASENI levy into the Development Levy should not mean the end of Nigeria’s ambition for an applied research institution. A reconstituted NASENI — funded from Development Levy revenues and direct appropriation — with a mandate to commercialise university research outputs for private sector deployment, would anchor Nigeria’s applied research ecosystem.
• Build university-industry R&D partnerships into the incentive framework. Companies that partner with Nigerian universities on qualifying research projects should receive enhanced deductions — for example, 150% rather than 100% of expenditure incurred in partnership with accredited research institutions. This would create a direct fiscal incentive for the private sector to fund academic research.

5. Conclusion: A First Step in the Right Direction

The Nigeria Tax Act 2025’s R&D deduction provision is best understood as an act of institutional recognition — a formal acknowledgment by the Nigerian state that innovation matters, that the tax system can be used to encourage it, and that the country’s competitive future is not exclusively tied to the extraction and export of natural resources. This recognition is significant.

But recognition alone does not build research laboratories, attract venture capital, commercialise university inventions, or train the next generation of research scientists. For that, Nigeria will need to learn from the economies that have used tax policy as a lever within a broader, coherent innovation strategy. The US leveraged its credit system to democratise R&D across sectors. South Korea used industrial policy to embed R&D within manufacturing. Israel created an ecosystem of grants, venture capital, and university commercialisation. China set an ambition and pursued it systematically. Germany built institutions that bridge the gap between discovery and commercialisation.

Nigeria has the human capital, the market scale, and now the legislative foundation to build something comparable on its own terms. The 5% deduction marks the beginning of that journey.

The destination is an economy in which Nigerian companies innovate, Nigerian universities publish and commercialise, and Nigerian-made products compete not on price alone but on the quality of the ideas embedded within them. That economy is achievable. But it requires the institutional patience and policy continuity to deepen the framework over the decade ahead.

About THO Partners

THO Partners is a Nigerian professional services firm specialising in Tax, Advisory, and Assurance services. We assist businesses, multinationals, and public sector entities navigate Nigeria’s evolving regulatory and tax environment.

19/21 Oritshe Street, Ikeja, Lagos  |  +234 813 096 6998  |  olanrewaju.ogunrinde@thopartners.com

This article is prepared for informational purposes only and does not constitute legal, tax, or investment advice. © 2026 THO Partners. All rights reserved.