Gains from disposal of shares are now subject to Capital Gains Tax in Nigeria. Capital Gains Tax ("CGT") is a tax charged on the disposal of chargeable assets. Prior to 1 January 2022,1 shares and stocks were not considered "chargeable assets". Hence, the sale of shares by a company whether undergoing restructuring or not was not subject to CGT. The Finance Act 20212 (the "Act") however amends the relevant provisions of the Capital Gains Tax Act ("CGTA")3 by introducing a new taxation regime regarding the disposal of shares in Nigeria. Gains accrued from the disposal of shares and stocks in Nigeria are no longer exempted from CGT4.
The Act provides that gains accrued from the disposal of shares worth at least N100,000,000 (one hundred million Naira) in a Nigerian company in any 12 (twelve) consecutive calendar months, are to be taxed at the rate of 10% (ten percent) except in any of the following instances5 –
- the proceeds from the disposal of the shares are reinvested within the same year of tax assessment in the acquisition of shares in either the same or another Nigerian company, provided that if the entire proceeds are not re-invested in the shares of either the same or another Nigerian company, the proportion not re-invested shall be taxed at the applicable tax rate of 10%;
- the aggregate of the proceeds of the disposal of the shares are less than N100,000,000 (one hundred million Naira) in any 12 (twelve) consecutive calendar months and the disposing entity renders appropriate returns to the Federal Inland Revenue Service (FIRS) on an annual basis; or
- the shares are transferred between an approved borrower and lender in a Regulated Security Lending Transaction as defined under the Companies Income Tax Act ("CITA")6.
Thus, partial re-investment of the proceeds from the disposal of the shares shall attract tax proportionately to the part not reinvested, while transfer of shares under the regulated Security Lending Transaction is exempted. Importantly, re-investments of the proceeds of the disposed shares must be in a Nigerian Company and not a foreign company or in any other business entity (sole proprietorship, partnership, limited partnership, limited liability partnership) for this exemption to apply.
The CGTA also provides an exemption from the application of CGT in cases of transfer of shares in any re-organisation or restructuring between members of a recognized group where one entity has control over the other7.
The tax due in respect of the disposal of the shares are to be paid to the Federal Inland Revenue Service ("FIRS") if the disposing entity is a company and to the relevant tax authority under the Personal Income Tax Act i.e., the individual's relevant state inland revenue service, if the disposal is made by an individual.
With the introduction of Capital Gains Tax on share transactions, it is important for parties to such transactions to consider how the CGT due (if any), will affect the pricing conditions and tax provisions in the sale and purchase agreement they are parties to.
1. Finance Act 2021, s. 41
2. Finance Act 2021, s.2
3. Finance Act 2021, s.30
4. Capital Gains Tax Act, Cap C1, Laws of the Federation, 2004, s. 30
5. CGTA, s.30 (1)(a)
6. s.105 of CITA defines a "Regulated Securities Lending Transaction" as "any securities lending transaction conducted pursuant to rules made by the Securities and Exchange Commission."
7. CGTA, s. 32. The condition for this exemption is that related parties should have been in the relationship for a period of 365 days prior to such transfer and the transferred assets cannot be disposed within 365 days after the transfer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.