Introduction: A Game Changer for Nigerian Business

To simplify business operations, the Federal Government of Nigeria made significant changes to the Companies and Allied Matters Act 2020 (CAMA) which is the principal legislation for the formation, management and administration of companies and other business forms in Nigeria.

Among the notable advancements introduced in CAMA is the establishment of Limited

Liability Partnerships (LLPs). This innovative legal structure allows partnerships to be incorporated as separate legal entities from their partners, thereby combining the flexibility of a partnership with the benefits of limited liability. At its core, CAMA's LLP framework aims to offer a business structure that balances the flexibility of partnerships with the security of limited liability. This setup promotes operational efficiency, governance, and introduces a layer of limited liability for partners, aligning them with corporate governance standards while safeguarding personal assets against business risks. However, this innovation introduces new complexities, especially regarding the tax status and obligations of LLPs.

This article aims to examine the legal framework of LLP in Nigeria focusing on tax implications and broader legal considerations. It evaluates the Federal Inland Revenue Service (FIRS) stance on the tax status of LLPs and proposes a new perspective on tax status of LLPs.

Legal Considerations of the LLP Framework in Nigeria

The establishment of LLPs by CAMA introduces significant legal considerations in Nigeria, affecting both tax obligations and broader operational aspects. With Section 746(1) CAMA recognizing LLPs as corporate bodies, these entities enjoy a legal identity distinct from their partners.1

CAMA not being a tax law, does not address the tax status of the LLPs, leaving their tax treatment to be inferred from existing common law practices, which typically involve taxing the partners directly. Again, despite LLPs having a distinct legal personality from its partners, the Companies Income Tax Act ("CITA") remains silent on how these entities should be taxed.

Taxation at a Crossroads: FIRS's Stance and Legal Questions

This gap in legislation has been partially filled by the Federal Inland Revenue Service (FIRS), which issued a circular defining LLPs as corporate bodies subject to corporate taxes2 , i.e. under the umbrella of the CITA. This interpretation significantly broadens the scope of tax liabilities for LLPs, extending beyond the personal income tax on partners' earnings to include corporate taxes, withholding taxes, tertiary education taxes, contributions to the Nigeria Police Trust Fund (NPTF), and levies for the National Agency for Science and Engineering Infrastructure (NASENI).

Evaluating the Legal Viability of FIRS's Definition of LLPs' Tax Status

The principle that tax liabilities must be explicitly provided in written law is widely recognized worldwide; they cannot be assumed or implied3 . The FIRS's attempt to classify LLPs within the framework of corporate taxation raises significant legal questions, particularly given the lack of clear statutory guidance in Nigerian tax law.

From one angle, the FIRS's classification could be seen as an adaptive measure, aiming to align the tax framework with the evolving nature of business entities. This approach suggests the FIRS is interpreting existing laws flexibly to ensure that all entities, which operate in a manner akin to corporations, contribute equitably to the tax system. Such administrative interpretation could be viewed as an effort to prevent potential loopholes and maintain the integrity of the corporate tax base.

Conversely, this position might be considered legally flawed. In the Nigerian tax regime, administration of taxes at the federal level is two-fold: the National Assembly enacts and reviews tax statutes, including identification of taxpayers, determination of chargeable income or other tax base.; while the FIRS assesses and collect taxes due to the Federal Government as dictated by these laws.4 This raises a critical question about the extent of FIRS's authority to expand the corporate tax base to include LLPs without explicit legislative direction.

While the FIRS is empowered to create rules and regulations for the effective administration of taxes,5 this power does not extend to broadening or altering the scope of tax liabilities or redefining taxpayer categories established by law. Such actions could be perceived as usurpation of the legislative powers of the National Assembly to enact law for the good governance of Nigeria. Moreover, the CITA clearly defines the entities subject to corporate taxation, without including LLPs in this definition.6 Therefore, extending corporate tax obligations to LLPs without a corresponding amendment to CITA or introduction of new legislation by the National Assembly appears to contravene the principle of legal specificity and legislative intent.

A Redefinition of the Tax Status of LLPs in Nigeria

Under the Nigerian law, partnership is a collective of two or more individuals (up to 20) engaged in a business endeavour with the intent to profit. Traditionally, under common law, such a partnership doesn't hold a separate legal identity from its members. Hence, in line with Section 8 of the Personal Income Tax Act (PITA), the business itself is not subject to taxation; instead, each partner is taxed individually based on their share of the profits. To date, there have been no changes to PITA to suggest a shift from this taxation principle for partnerships.

The introduction of LLPs by CAMA has sparked discussions on whether this new business form should follow the traditional tax rules applied to partnerships. However, CAMA's definition of a partner suggests otherwise. It describes a partner as "a co-owner, member, or investor in a partnership, and shall include a person who joins with others to form a partnership and in relation to a limited liability partnership, means any person who becomes a partner in the limited liability partnership, in accordance with the partnership agreement." 7 This definition underlines that even in an LLP structure, CAMA maintains a focus on the participatory and contractual basis of a partnership, distinctly avoiding any implication of LLPs transforming into corporate entities. This indicates that, even in an LLP structure, CAMA maintains a focus on the participatory and contractual basis of a partnership, distinctly avoiding any implication of LLPs transforming into corporate entities.

Therefore, the FIRS's approach to applying corporate tax standards to LLPs might not find direct backing from CAMA, which portrays LLPs more as an agreement-driven collective of individuals rather than a formal corporate structure.

Revisiting the Tax Status of LLPs in Nigeria: A Global Perspective

The introduction of LLPs under the Companies and Allied Matters Act (CAMA) aligns Nigeria with international standards, ensuring the country remains competitive in the global business environment. However, the tax treatment of LLPs in Nigeria contrasts sharply with practices in other jurisdictions, such as the United Kingdom and the United States, which offer valuable lessons for refining Nigeria's approach.

The adoption of LLPs in Nigeria is notably influenced by the United Kingdom's Companies Act 2006, mirroring many of its governing principles. In the United Kingdom, under the Companies Act 2006, LLPs are treated in a manner that emphasizes their partnership attributes over corporate characteristics, especially in tax matters. UK LLPs are not subject to corporate income tax; instead, profits are taxed directly in the hands of the partners through a Self-Assessment process. This system exempts LLPs from corporate taxes and levies VAT only if their annual taxable turnover exceeds £85,000, ensuring taxation reflects the distributive nature of partnership profits rather than treating the LLP as a separate tax entity.

Similarly, in the United States, LLPs enjoy a "pass-through" tax status, meaning the LLP itself is exempt from corporate income taxes. Instead, profits and losses are passed directly to the partners, who then report this income on their personal tax returns, applying individual income tax rates. 8 The basis for creating a limited liability partnership is not for tax purpose but to assuage the partnership itself with recognition and foster layers of liability amongst the partners in the course of running, managing and administering the entity.

Considering the flexible tax treatments of LLPs in the UK and USA, a revaluation of Nigeria's tax approach towards LLPs, aligning more closely with their partnership nature and international practices, appears necessary and beneficial for fostering business innovation and growth.

Embracing the LLP Era with Expertise

The introduction of LLPs in Nigeria, under CAMA, represents a pivotal step towards modernizing business structures while maintaining the flexibility and operational efficiency of partnerships. This development, however, brings to the fore the complexities of tax compliance and strategic financial planning for LLPs. As the landscape evolves, it is imperative for businesses to navigate these changes with a clear understanding of their implications. At SimmonsCooper Partners, we provide specialized tax compliance services tailored to the unique needs of LLPs and other business formations alike. For more information on how we can support your tax compliance journey, please contact: Bashir Ramoni: bashir.ramoni@scp-law.com or send us an email at info@scp-law.com

Footnotes

1 Section 746(2) & (3) CAMA 2020.

2 Information Circular No. 2023/06, 14th August 2023. Accessed on 14th February 2024 from https://www.firs.gov.ng/wp-content/uploads/2023/09/Limited-Liability-Partnership-final.pdf

3 The Cape Brandy Syndicate V. The Commissioners of Inland Revenue (1921) 2 KB 403; 7up Bottling Co. Plc. V. L.S.R.I.B. (2000) 3 NWLR (Part. 650) p.565; Aderawos Timber Trading Company Ltd. v. F.B.I.R. (1966) NCLR 416 at 422.

4 Section 8(1) of the Federal Inland Revenue Service (Establishment) Act 2007.

5 Section 61 Ibid.

6 Section 105 Company Income Tax Act.

7 Section 868 Companies and Allied Matters Act 2020.

8 Bruce P. Ely and William T. Thistle II, "An Update on the State Tax Treatment of LLCs and LLPs", Tax Notes Vol. 99 No. 6 February 8, 2021.Retrieved on 16th February 2024 from https://www.bradley.com/-/media/files/insights/publications/2021/03/sup-materialsarticle-an-update-on-the-state-tax-treatment-of-llcs-and-llps-ely-and-thistle-mar-2021.pdf?la=e

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