Nigeria’s Finance Act 2021 (FA 2021) has ushered in notable modifications to several provisions of the country’s tax statutes. One of the most significant is the reintroduction of capital gains tax on transfers of shares in Nigerian companies, a move by the Federal Government of Nigeria, which has been battling revenue shortfalls since 2014, to increase income.
Capital Gains Tax on Share Transfers
Immediately prior to the amendment of the Capital Gains Tax Act (CGTA) by the FA 2021, capital gains accruing to a person, whether a company or an individual, from the disposal of shares were not chargeable to tax.
The FA 2021 has altered that exemption in a significant way. With effect from Jan. 1, 2022, gains accruing to a person from the disposal of shares in a Nigerian company are now chargeable to tax at the rate of 10%, except for those falling within any of the following exceptions:
- First, gains accruing to a person upon disposal of his shares in any Nigerian company where the proceeds from such disposal are reinvested within the same year of assessment in the acquisition of shares in the same or other Nigerian companies. Where, however, a portion of the proceeds from such disposal is not reinvested in such a manner, capital gains tax is chargeable on that portion.
- Second, where the aggregate disposal proceeds are less than 100 million Nigerian naira ($240,600) in any 12 consecutive months. To benefit from this exception, the selling shareholder is required to file appropriate annual returns to the Federal Inland Revenue Service.
This exception raises some concerns. For example, what happens where there is a series of disposals during the course of the assessment year, and those disposals relate to shares in several companies rather than one company? What if the aggregate disposal proceeds are up to or more than the 100 million-naira threshold at the end of the assessment year? Are such transfers tax exempt until the threshold is reached?
The legal position seems unsettled in relation to these relevant questions.
- Third, gains realized from shares transferred between an approved borrower and lender in Regulated Securities Lending Transactions. The exemption applies only to “Securities Lending” (a) with an agent intermediating between the “lender” and the “borrower” (not to direct securities lending transaction), and (b) done under the rules of the Securities and Exchange Commission.
The amendment to the CGTA introduced by the FA 2021 applies to any Nigerian company registered under the Companies and Allied Matters Act 2020 (CAMA). Hence, gains realized from any disposals by Nigerian resident individuals or Nigerian companies of shares held in non-Nigerian companies are not taxable in Nigeria, even if the gains are brought into or received in Nigeria.
The same applies to transfers of shares in Nigerian companies that are not registered under CAMA. For example, shares of corporate entities registered to operate in any of Nigeria’s free trade zones pursuant to the Nigeria Export Processing Zones Act 1992 and the Oil and Gas Export Free Zone Act 1996. Presumably, gains realized from transfers of shares or ownership interests in limited liability partnerships or limited partnerships incorporated under CAMA are also exempt from capital gains tax.
The tax authorities may be tempted to argue otherwise and insist that capital gains tax must be paid on gains realized from transfers of shares in any company, whether registered under CAMA or not. Under section 4 of the CGTA, gains realized by Nigerian resident individuals from the disposal of any chargeable assets situate outside Nigeria, which are then brought into or received in Nigeria, are liable to capital gains tax. Thus, the argument would be that all share disposals are chargeable to capital gains tax irrespective of the country where the company whose shares are being transferred is registered.
In our opinion, such an argument is an incorrect interpretation of the amendment provisions of the FA 2021. By the established rules of statutory interpretation, the express mention in the amendment of “any Nigerian company registered under the Companies and Allied Matters Act” indicates that it will not apply to all companies generally but only to Nigerian companies that are “registered under the Companies and Allied Matters Act.” Any contrary reading of the amendment would surely be preposterous.
Moreover, tax statutes are to be construed strictly and in a manner that does not give room for presumption (see 7Up Bottling Co. Plc v. L.S.I.R.B (2000) 3 NWLR (Pt. 650) 565, 591). Thus, even if there is any inconsistency between section 4 of the CGTA and the amendment, the latter, being a specific provision, will prevail over the former (see Omini et al. v….
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