Nigeria Imposes Capital Gains Tax on Shares: Tax Insight – Stephen Chima Arubike and Athanasius Akor

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. Yakurr LGA et al. (2019) LPELR-46300 (CA)).

Further, transfers of shares within a group of companies in a qualifying corporate reorganization context have always been capital gains tax exempt. The amendment did not change that position. However, it is still very much the law that the companies involved in a reorganization or restructuring must be related (i) 365 days prior to the merger, reorganization or restructuring, and (ii) 365 days afterwards for the exemption to apply to the gains realized on the shares transferred.

Procedures for Transfer of Shares
In Nigeria, a transfer of shares may be made by sale, gift, surrender or other forms. Usually, a company’s shares are transferred by an instrument of transfer. Upon the execution of the transfer instrument and the entry of the transferee’s name in the register of members, the transferee becomes a shareholder of the company.

Before the coming into force of CAMA in August 2020, a transfer of shares had to be registered at the Corporate Affairs Commission, Nigeria’s company registry, within one month after the allotment of shares. Further, the company was required to deliver to the Commission an allotment form (Form CAC 2A), together with other documents, such as (i) the instrument of transfer, and (ii) the resolution of the company’s board approving the transfer.

However, from August 2020 onward, the filing of share transfer instruments with the Commission is no longer required. The new Form CAC 5 applies to the original allotment of issued share capital and notices of increase in share capital. To be sure, the annual returns form, which is filed with the Commission yearly, will reflect the shareholding changes: But that form is to be filed within six months after the end of the accounting year and there is no requirement in the law or any regulation that payment of capital gains tax is a condition for the inclusion of the shareholding changes in the annual returns.

Strictly speaking, under the law, the title to the shares vests when the transferor’s name is entered into the register of members in respect of the shares. Therefore, there is no longer an obligation to register a transfer of shares at the Commission.

We should also not forget the procedure for settling sales of shares that are listed on stock exchanges. There is standard paperwork for clearing and settlement and changing the records with registrars, depositaries, and other capital markets operators. That paperwork, both prior to 2022 and since then, typically takes two to four days to complete, but as we will see below, the established sequence of steps still does not include resolving the conundrum created by section 45 of the CGTA. Business still goes on as if section 45 has never become law.

Effect of Section 45 of the CGTA
The main effect of the amendment is in respect of the procedure for perfecting share transfers. Section 45 provides that “the production of evidence of tax payments shall be a condition for effecting change of ownership of property including shares and stocks.”(Emphasis supplied).

Prior to the amendment, section 45 was not significant in practice. Gains accruing from the sale or disposal of shares were then not chargeable gains under the CGTA and, in respect of land, were a matter for the diverse practices of states’ land registries. However, the amendment now mandates a 10% capital gains tax on realized gains accruing to a person from the sale or disposal of shares in a Nigerian company.

The obligation imposed by section 45 seems on one reading to render void every transfer of shares effected by the transferring shareholder and perfected by the company without presenting any evidence of the payment of capital gains tax. This poses a practical challenge. It means that the buyer may be in trouble for matters that are outside its knowledge and power. The sellers, on whom the burden of capital gains tax ordinarily falls, may not pay the tax at all, or may calculate and pay it incorrectly, or may calculate and pay it correctly but the tax authorities then may not give them an official receipt or tax clearance certificate in good time.

This raises many questions. For instance, how does the buyer know what the sellers’ cost of acquisition is? Will the buyer really not get good title until the calculation, payment and receipting steps are concluded correctly by other parties? What happens if the sellers do not let the buyer have the facts in good time? Where the Central Securities Clearing System or the company secretary, registers the buyer as owner before the process in section 45 is fully complete, will title not pass to the buyer at all? Will only equitable title pass? Will the legal title pass even though both seller and buyer will be guilty of having committed a crime?

Other questions include:

• Should a prudent buyer insist that the purchase money be paid into and kept in escrow until the tax position is addressed to their reasonable satisfaction (e.g. by delivering both a receipt showing that the tax has been paid and a certificate as to the correctness of the tax paid issued by reputable chartered accountants)?
• Or should the buyer insist on having warranties or indemnities against failures to complete the process as section 45 contemplates?
• What if there is a failure in the process, such as the seller selling the same shares to a third party and then going bankrupt? Will the earlier or the later buyer take priority?

How these questions were addressed—or, indeed, whether they ever were—prior to 1998 (when capital gains were chargeable on realized gains on disposals of shares) is not clear. They have not been addressed by the courts, and appear to have been largely overlooked or not arisen in practice. The answers are not clear on the face of the newly amended statute and shares continue to be traded on the floor of the stock exchange every day as if capital gains tax law did not change on Jan. 1, 2022.As a practical matter, the secretary of the company should ensure compliance with section 45 before entering the name of the transferee in the register of members. Arguably, it may be an offense to enter the name of the transferee in the register of members without ensuring compliance with section 45. Concerning the transfer of shares in a listed company, if the Nigerian stock exchange is duty bound to ensure compliance with section 45, then henceforth the correct settlement of share transfers in trades on the exchange may well now take weeks rather than days.

On the second exception to the amendment (where aggregate share disposal proceeds are less than 100 million naira in any 12 consecutive months), in practice a prudent buyer may, out of an abundance of caution, request that the seller undertakes to indemnify the buyer in the event that the buyer bears the ultimate burden of complying with section 45 where the 100 million-naira threshold is reached.

We would not be surprised if the tax authorities were to issue regulations to clarify the implementation of section 45 as it relates to title perfection of share transfers. But even if they do, many questions may still arise as to the extent to which such regulations could in effect depart from what would appear to be a clear but, in effect, highly inconvenient primary statutory provision.

Conclusion
The reintroduction of capital gains tax on realized gains from share disposals aligns Nigerian law with what obtains in several other jurisdictions.

Going forward, evidence of payment of the 10% capital gains tax to the relevant tax authority should ordinarily form part of the documents that are required to complete and perfect title to share transfers. Any other practice would leave buyers exposed. The registration of the transfer of shares by a company secretary should not ordinarily be allowed where the seller is unable to present evidence of payment of tax.

Companies are therefore advised to take note and ensure compliance or at least address and manage the risks sensibly.

Author Information
Stephen Chima Arubike is a Partner and Athanasius Akor is an Associate at G. Elias & Co. The authors may be contacted at: steve.arubike@gelias.com; athanasius.akor@gelias.com