Tax Implications of Business Transfers by Companies in Nigeria – Jacob Dipo Famodimu

Introduction

In the contemporary business environment, companies often undergo structural changes such as mergers, acquisitions, takeovers, and reorganizations. These transactions, while strategic from a business standpoint, carry significant tax implications. This article explores the key tax considerations applicable to the transfer of a company’s business and assets under Nigerian law. It will examine general applications as well as specific considerations relevant to companies engaged in upstream petroleum operations.

Generally Applicable Taxes to Companies

When a company transfers its business or assets, several taxes come into play. These include:

Capital Gains Tax (CGT)

Value Added Tax (VAT)

Stamp Duties

Companies Income Tax (CIT)

Capital Gains Tax (CGT)

CGT is charged at a flat rate of 10% on profits realized from the disposal of chargeable assets. These include options, debts, incorporeal property, foreign currencies, cryptocurrencies, shares, and qualifying capital expenditures, as defined in Section 3 of the Capital Gains Tax Act (CGTA) as amended.

Under the Finance Act 2021, Section 30 of the CGTA was amended to extend CGT to gains arising from the disposal of shares in Nigerian companies, subject to the following exemptions:

Disposals below ₦100 million within a 12-month period;

Reinvestment of proceeds in shares of the same or other Nigerian companies within the same assessment year;

Securities lending transactions between approved borrowers and lenders.

Additionally, the Finance Act 2023 further amended Section 3(a) of the CGTA by including “digital assets” among chargeable assets.

Importantly, Section 32 of the CGTA (as amended by the Finance Act 2019) exempts CGT on the transfer of business assets during group restructurings, provided that:

The parties are related and have maintained that relationship for at least 365 days prior to the transaction;

They continue to maintain the relationship for at least 365 days after the reorganization.

Value Added Tax (VAT)

VAT is chargeable at 7.5% on all taxable supplies of goods and services, including intangible assets (excluding interests in land, buildings, money, and securities). However, transfers between related parties during business reorganization are exempt from VAT if:

The parties maintain a continuous relationship for 365 days before the transfer; and

The asset is not disposed of within 365 days after the transfer.

Stamp Duty

Documents executed during restructuring—such as share transfer forms—are typically subject to stamp duty. Nevertheless, exemptions apply:

Transfers made pursuant to mergers or reconstructions;

Transfers of property between associated entities.

Companies Income Tax (CIT)

For group reorganizations involving the sale or transfer of assets:

The Federal Inland Revenue Service (FIRS) may suspend the commencement and cessation rules at its discretion;

Asset transfers are treated at their tax written-down value;

The related-party relationship must exist for 365 days before and persist for 365 days after the transaction;

Transferred assets must not be disposed of to third parties within that period.

Application to Upstream Petroleum Operations

Companies engaged in upstream petroleum operations are subject to the general tax rules above, along with specific provisions under the Petroleum Industry Act and related tax laws.

Hydrocarbon Tax Considerations

Pursuant to Section 271 of the Petroleum Industry Act (PIA) 2021, in the case of a transfer of business assets between related parties in upstream petroleum operations, the following apply—provided the parties have been related for at least three consecutive years prior to the transfer, and the transfer occurs after the selling company has commenced sales of chargeable oil but before the acquiring company has:

The acquiring company’s first accounting period commences from the date of transfer to December 31 of that same year;

Capital assets are deemed sold at their tax written-down value;

The acquiring company assumes allowances previously granted to the selling company.

To enjoy these concessions:

Either the seller or buyer may be required to guarantee tax payments due from the selling company;

Failure of the selling company to fulfill its tax obligations may result in revocation of concessions, additional tax assessments, or repayment demands.

If the acquiring company disposes of the transferred assets within three years of the reorganization, all tax concessions previously granted will be rescinded.

Transfers Between Unrelated Parties

Where the transfer of business assets occurs between unrelated parties:

The value of the petroleum rights and the value of assets must be separately reported to the FIRS;

Petroleum rights qualify for a 20% annual allowance;

Tangible assets are depreciated based on applicable rates, with 1% retained until final disposal.

Conclusion

The transfer of a company’s business and assets involves a complex interplay of tax obligations and reliefs. Understanding and complying with these tax rules is crucial to achieving regulatory efficiency and avoiding unintended liabilities. Whether dealing with a general corporate restructuring or specific upstream petroleum asset transfers, the applicable tax framework must be carefully navigated with the benefit of professional legal and tax advice.

Prepared by:
Jacob Dipo Famodimu – LLM, ABR, GCTI, ACTI, and Notary Public

Professional Credentials

Jacob Dipo Famodimu holds a Master’s degree in Law and is a Notary Public of the Supreme Court of Nigeria. He is a graduate and Associate of both the Chartered Institute of Taxation of Nigeria (ACTI) and the Business Recovery and Insolvency Practitioners Association of Nigeria (ABR). In addition, he serves as an ICAN students’ tutor at Topclass Tutors Ltd.