Business Restructuring: The Tax Angle

Restructuring is a common strategic tool deployed by businesses globally to improve operational efficiency, enhance competitiveness, or respond to financial, market, and regulatory developments. Such restructuring, whether involving mergers, spin-offs, carve-outs, or share transfers, enable companies to adapt to changing business environments and realign with long-term strategic goals.

In Nigeria, restructuring activities are often driven by factors such as evolving market dynamics, efforts to align group structures with core operations, and regulatory reforms. However, while restructuring may serve commercial and operational objectives, such restructuring often triggers a range of tax considerations including tax treatment of asset transfers, tax treatment of share transfer etc.

The Nigeria Tax Act 2025 (NTA 2025) introduces amendments that directly affect the tax treatment of business restructuring transactions in Nigeria. This article highlights the erstwhile tax framework applicable to restructuring in Nigeria, the key changes introduced by the NTA 2025, and the implications.

The Erstwhile Tax Regime

Under the erstwhile tax regime, businesses undertaking restructuring in Nigeria typically evaluated the provisions of the Companies Income Tax (CIT) Act, Petroleum Profits Tax (PPT) Act, Capital Gains Tax (CGT) Act, Value Added Tax (VAT) Act and Stamp Duty (SD) Act, as amended, to understand the tax consequences for such restructuring transaction.

Transfer of Assets Employed in the Business

Under the CIT Act as amended, Section 29 (9) stipulates where a trade or business carried on by a company is sold or transferred to a Nigerian company for the purposes of better organisation of that trade or business or the transfer of its management to Nigeria and any asset employed in such trade or business is sold or transferred. This subsection offers tax waivers/concession to reorganizations but these concessions are limited to related parties., To qualify, one of the companies must have control over the other or both companies are controlled by some other person or are members of a recognized group of companies, for a continuous period of at least 365 days prior to the date of the reorganisation. Further, any asset employed in such trade or business and transferred would be deemed to have been transferred at a value equal to the residue of the qualifying expenditure that is, the Tax Written Down Value (TWDV).

The available tax waiver includes an exemption from the application of cessation and commencement rules in respect of the trade or business being sold or transferred and the new business, respectively. The transfer of assets at a value equal to the TWDV of the qualifying expenditure means that no balancing charge or allowance will arise on the disposal of the relevant assets.

However, there is a clawback provision whereby if the acquiring trade or business disposes of the assets so transferred in the circumstance of a restructuring such as a merger, within 365 days of the transaction date, the tax concessions previously granted will be withdrawn.

Section 17 of the PPT Act also envisages business restructuring between companies engaged in petroleum operations. The provision of this section is similar to that contained in Section 29 (9) of the CIT Act. However, this section does not impose the minimum holding period of 365 days and clawback provision like we have under CITA. Furthermore, in the case where the transferee company has yet to commence sale of oil in commercial quantity, the first accounting period of the combined entity would be deemed to commence on the transaction date or any day in the month of the transaction, subject to the approval of the tax authorities.

Sections 42 and 32 of the VAT Act and CGT Act as amended, also provide for VAT and CGT waivers where certain conditions are met. The relevant conditions outlined in the VATA and CGTA are similar to those in the CITA.

Section 105 (1) of the Stamp Duty Act also provides an exemption from stamp duty on instruments relating to the transfer of property between associated companies. Section 105(3) of the SD Act further defines "associated companies" as companies where one holds at least 90% of the issued share capital of the other, or where a third limited liability company beneficially owns not less than 90% of the issued share capital of both companies.

Transfer of Shares

Section 30 of the CGTA as amended stipulates where gains accrue to a person on disposal of its shares in any Nigerian company registered under the Companies and Allied Matters Act. The section provides that such gains shall be chargeable gains and thereby subject to CGT at 10%. However, exemptions will apply where certain conditions are met. These conditions include:

1. 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
   Provided that tax shall accrue proportionately on the portion of the proceeds which are not reinvested in the manner stipulated in this subsection
2. Where the disposal proceeds, in aggregate, is less than N100,000,000 in any twelve consecutive months, provided that the person making the disposals shall render appropriate returns to the Service on an annual basis; or
3. Where the shares are transferred between an approved Borrower and Lender in a regulated Securities Lending Transaction as defined in the Companies Income Tax Act.

Interestingly, the CGTA, does not grant specific exemption on the transfer of shares between related parties.

With respect to Stamp duty, the SD Act exempts instruments relating to transfer of shares/stocks from SD.

Issues Arising Under the Erstwhile Tax Regime

The 365-day related-party requirement, though intended to prevent tax abuse, created practical barriers for legitimate commercial reorganisations. For example, restructuring involving strategic mergers between previously unrelated entities, means that such businesses must first become related parties, typically through the creation of a new holding structure or acquisition and wait 365 days before carrying out the restructuring to qualify for the tax concessions provided in the relevant legislation. This delay can be commercially untenable and, in some cases, adversely impacted transaction timelines.

For some businesses, the cost burden of this prolonged separation outweighed the potential tax savings. As a result, such businesses were compelled to proceed with the restructuring and bear the associated tax costs. This outcome effectively excluded certain genuine commercial transactions from taking advantage of the concessions provided by law and defeated the purpose of the waiver provisions, which were meant to encourage genuine commercial reorganizations rather than obstruct them.

These challenges were further compounded in situations where restructuring was driven by industry reforms or regulatory directives. In such cases, regulators typically prescribed transition or implementation timelines within which affected entities were required to comply. However, these regulatory timelines did not necessarily align with the tax conditions for accessing restructuring concessions, including the 365-day related-party requirement. Consequently, businesses faced the difficult choice of either delaying compliance with regulatory directives, thereby risking regulatory sanctions, or proceeding with the restructuring and forfeiting available tax concessions.

There is also a notable gap in the erstwhile tax laws regarding the transfer of tax assets i.e., unrelieved tax losses and unutilized capital allowances. Specifically, Section 29(9) of CITA did not expressly permit the transfer of tax assets. At the same time, it did not expressly prohibit such transfers.

In practice, however, the tax authorities adopted a restrictive position that tax assets cannot be transferred. This approach created an arguably, unreasonable distinction between tax assets and other assets of a business. The implication was that valuable tax assets/attributes were permanently lost.

To mitigate this issue, businesses tried to ensure that the entity with the higher tax asset was utilized as the surviving entity in a restructuring involving a merger. However, several business considerations (other than tax) must also be carefully evaluated to determine which entity should cease to exist and which business should survive, as such, determining the appropriate surviving entity requires a balanced, holistic analysis that goes beyond just the tax asset position of the businesses or trades involved.

What has changed?

The NTA 2025 introduces updates and clarifications that directly impact how business restructuring transactions are treated for tax purposes in Nigeria. Specifically, the Act has provided clearer guidance on tax waivers in restructuring transactions where the businesses or trades involved continue as going concerns.

Section 189 of the NTA outlines three scenarios relating to the restructuring of trades or businesses, each with different tax implications/waivers:

Scenario 1: Merger of two or more trades or businesses

This scenario covers instances where two or more existing trades or businesses are combined to form a single, continuing/surviving trade.

In this case:

• The provisions of the NTA as it relates to commencement and cessation of trade or business will not apply to the new/surviving business that emerged and the business or trade that ceased as a result of the merger.
• Chargeable gains on assets transferred to the new/surviving trade or business, will not be taxed.
• The assets of the merging trades or businesses will be deemed to have been transferred at the residue of the qualifying capital expenditure on the day following the merger.
• Capital allowances will apply on the remaining useful life of the assets transferred as a result of the merger.
• The unutilised capital allowances on the assets transferred will be available for use of the new or surviving trade or business.
• unrelieved losses and withholding tax credits of the merging trades or businesses will be available to the surviving trade or business.

Scenario 2: Transfer or sales of a trade or business which results in the cessation of a trade or business.

This scenario covers instances where a trade or business is sold or transferred, and this leads to the cessation of such business or trade.

In this case:

• The provisions of the NTA as it relates to cessation will apply to the trade or business sold or transferred.
• Chargeable gains accruing on the assets transferred will be taxed.
• The assets sold or transferred will be recognized at their actual transfer or sale value.
• Unutilised capital allowances on the assets sold or transferred will not be available in the new/surviving trade or business.
• unrelieved losses and withholding tax credits of the old business or trade will not be transferred or made available to the acquiring business.

Scenario 3 - Sale or Transfer of a Business Asset (Without Cessation of Business)

This scenario refers to where a specific asset is sold or transferred without the cessation of the trade or business, and where the parties agree to transfer the asset at a value not exceeding the sum of its residue of the qualifying capital expenditure and any unutilised capital allowance of the asset.

In this case:

• Capital allowance will apply only to the residue of the asset in the hands of the acquiring business.
• The unutilised capital allowance on the asset transferred will be available to the acquiring entity.
• The transferor cannot claim any part of the unutilised capital allowance on the transferred asset after the transaction.
• Chargeable gains on the transferred asset will not be taxed.

This section also expressly provides that VAT would not apply to any restructuring transactions conducted in accordance with the provisions of the NTA.

Notably, the NTA 2025 has eliminated the provisions that restricted tax waivers to restructuring transactions between related parties with 365-day minimum holding requirement. The clawback provisions found in the CITA, VATA and CGTA has also been removed. This is a welcome development that aligns the law more closely with commercial realities.

In addition, the NTA 2025 provides a clear framework for the treatment of tax assets in restructuring transactions. The transferability of tax assets, such as unrelieved losses, unutilised capital allowances and withholding tax credits as the case maybe, is now expressly tied to whether the relevant trade or business continues as a going concern.

Nevertheless, in a restructuring circumstance where a company operates multiple lines of trade or business and decides to transfer the assets of one line, resulting in the discontinuation of that line and a pivot to a different line of business, the critical question in determining the appropriate restructuring classification under the NTA is not whether the company itself has ceased to exist or operate, but whether a distinct trade or business has ceased for tax purposes.

Under the erstwhile tax laws, so long as the company as a whole, remains a going concern, actively carrying on other trades or businesses, it is often contemplated that this would not trigger applicable cessation rules and related tax obligations. However, a closer reading of the statutory language as it relates to "cessation of trade or business" under the NTA 2025 may suggest that this position under the erstwhile tax regime may be shifting.

Section 29(4) of CITA as amended provides that, "where a company permanently ceases to carry on a trade or business (or in the case of a company other than a Nigerian company, permanently ceases to carry on a trade or business in Nigeria) in an accounting period..."

Section 24 of the NTA, by contrast, provides that "where a trade, business, profession or vocation permanently ceases to carry on operations in Nigeria in an accounting period..."

Section 201 of the NTA also defines "trade or business" as any activity or venture from which income is generated, for whatever scale or period it is carried on but does not include employment.

This change, from referring to "a company" to referring directly to "a trade, business, profession or vocation", might be a departure from the erstwhile tax regime such that the cessation rules (and accompanying tax obligations) would now be triggered when any distinct trade or line of business within the company ceases, even if the company continues to operate it other lines as a going concern.

Accordingly, in the restructuring circumstances described above, it may be reasonable to conclude that the transaction would fall within the category of a transfer/sale of a trade or business resulting in the cessation of a trade or business for purposes of tax compliance under the NTA.

Transfer of Shares

Similar to the CGTA, Section 34 of the NTA 2025 provides that gains on disposal of shares in any Nigerian Company will be deemed as chargeable gains and taxed. However, one of the conditions for exemption was updated.

Specifically, gains arising from a disposal will not be chargeable to tax where the proceeds from such disposals is less than ₦150,000,000 and the resulting chargeable gain does not exceed ₦10,000,000 within any twelve consecutive months.

In addition, the applicable tax rate on chargeable gains for companies that do not qualify as "small companies" has been updated to 30%.

Indirect Transfer of Shares (Ownership of Companies)

Section 47 of the NTA 2025 also provides for the taxation of gains accruing to a non-resident company where the ownership structure or group membership of any Nigerian company or of ownership of, title in, or interest in any asset located in Nigeria. The apparent intention of this provision as it relates to disposal of shares is to capture situations where a non-resident company (Company A) sells its shares in another non-resident company (Company B), and Company B holds shares in a Nigerian company, Nigeria may tax the resulting gain as this has resulted in the change of the ownership structure of the Nigerian company. This transfer of shares is commonly referred to as an indirect transfer of shares.

It is important to note, however, that where a non-resident company, i.e., the transferor/the company to whom the gains accrue, is resident in a country with which Nigeria has a Double Taxation Agreement (DTA), the provisions of the relevant DTA as it relates to disposal of shares should take precedence over the provisions of the NTA 2025. This means that Nigeria may not have taxing rights on direct or indirect transfer of shares, depending on the provisions of the relevant DTA.

The introduction of taxation of indirect transfers raises some concern. One is how the Nigerian tax authorities intend to detect offshore transactions involving changes in the ownership of foreign entities with indirect interests in Nigerian assets. Additionally, there is a risk of double taxation for non-resident companies, specifically in cases where there is no effective Double Taxation Agreement (DTA) between Nigeria and the jurisdiction of the transferor. Another key concern relates to the determination of the appropriate cost base for computing gains arising from an indirect transfer. It remains unclear whether the relevant cost base should be the acquisition cost of Company B, in the example above, whose shares are transferred, or the historical cost of the underlying Nigerian entity.

This uncertainty is further compounded where Company B owns multiple entities or interests across different jurisdictions, making it difficult to reasonably identify and allocate the portion of the cost attributable to the Nigerian assets.

In any case, given the relative novelty of taxation of indirect transfer in Nigeria, it is expected that the tax authorities will issue regulatory guidelines to clarify compliance obligations in this regard.

Conclusion

We commend the Government and the Fiscal Committee for strengthening Nigeria's tax framework to better accommodate business restructurings, reflecting a policy intent to support, rather than inhibit, corporate reorganisations.

That said, some areas of the new regime still need clarification. In particular, it is unclear how to determine the cost base for gains on indirect transfers, and whether transfers between related entities that do not change ultimate ownership (i.e., intra-group transfers) should be taxed. Charging CGT in these cases could create tax on gains that do not actually exist, a concern made more significant by the increase of the CGT rate to 30%.

Notwithstanding, the full impact of these provisions under the NTA 2025 will become clearer as the law is implemented. In the meantime, taxpayers are encouraged to seek professional advice when considering any form of restructuring, to ensure informed decision-making under this new tax regime.

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.