The recently signed Finance Act, 2021 (“Act”), which took effect on 1 January 2022, contains provisions that potentially increase the cost of a merger/acquisition transaction. Before the Act, Capital Gains Tax (“CGT”) was not payable upon the disposal of shares.
The tax liability of persons holding shares in Nigerian companies was limited to the payment of withholding tax on dividend payments.
NIGERIA’S 10% TAX ON DISPOSAL OF SHARES
The recently signed Finance Act, 2021 (“Act”), which took effect on 1 January 2022, contains provisions that potentially increase the cost of a merger/acquisition transaction. Before the Act, Capital Gains Tax (“CGT”) was not payable upon the disposal of shares. The tax liability of persons holding shares in Nigerian companies was limited to the payment of withholding tax on dividend payments.
The Act has now amended Section 30 of the Capital Gains Tax Act by providing that Capital Gains Tax (“CGT”) at the rate of 10% will now be payable in respect of gains made on the disposal of shares of a Nigerian company. The only exceptions to the requirement to pay CGT are:
- where in the year of disposal, the proceeds are utilized to acquire the shares of a Nigerian company, provided that the portion that is not so utilized will remain subject to CGT;
- where the disposal proceeds, in aggregate, are less than N100 million in any 12 consecutive months, provided that the person making the disposal must render annual returns to the relevant tax authority; and
- share transfers between an approved borrower and lender in a securities lending transaction conducted according to rules by the Securities and Exchange Commission.
The effect of this amendment is that a seller who does not utilize the proceeds to acquire shares of a Nigerian company in the year of disposal will have to pay CGT at the rate of 10% on the gains. The tax might be particularly harsh in some cases, such as where shares are sold at a price that is more reflective of inflation and currency devaluation than real value accretion.