As businesses continually evolve to align with dynamic economic policies, corporate restructuring becomes a strategic imperative for entities seeking resilience, growth, or compliance with regulatory changes. Corporate restructuring may arise from various circumstances such as business failure, expansion goals, or regulatory mandates like increased minimum capital requirements for financial institutions. One of the most prevalent forms of corporate restructuring, particularly in Nigeria, is through Mergers and Acquisitions (M&A).
Distinguishing Mergers and Acquisitions:
It’s essential to clarify that Mergers and Acquisitions are terms often used interchangeably, but they hold distinct meanings. A merger involves the combination of two or more companies to create an entirely new entity (A + B = C), while an acquisition entails one company purchasing another (A + B = A).
Tax Implications in Mergers and Acquisitions:
In the realm of corporate restructuring, particularly M&A, understanding the tax implications is crucial. This article sheds light on these tax considerations, taking into account the amendments introduced by the Finance Act.
1. Notification to Federal Inland Revenue Service (FIRS):
- Before embarking on any business merger or acquisition, it is a legal requirement, as per Section 29(12) of the Companies Income Tax Act (CITA), to notify the Federal Inland Revenue Service (FIRS). Obtaining the Board’s direction and clearance regarding potential tax liabilities under the Capital Gains Tax (CGT) Act is paramount.
2. Capital Gains Tax (CGT):
- The sale of shares, a common aspect of M&A transactions, is exempt from CGT.
- Asset sale or transfer to a Nigerian company for business reorganization may escape CGT under specific conditions.
3. Transaction Taxes (VAT, WHT, and Stamp Duties):
- Value Added Tax (VAT): Sale or transfer of assets to a Nigerian company for business considerations may be exempt from VAT, provided certain conditions are met.
- Withholding Tax (WHT): While not applicable to the purchase consideration, WHT is deducted from legal and professional fees related to M&A transactions.
- Stamp Duty: All contracts during the M&A process are subject to stamp duty at applicable rates, with exemptions for certain transfers under business reconstruction or amalgamation.
4. Companies Income Tax:
- Section 29(9) of the CITA provides leeway for the Board to exercise discretion on the commencement and cessation rule when a trade or business is sold or transferred to a Nigerian company under restructuring, subject to specific conditions.
- Assets transferred between related entities are valued at their Tax Written Down Value, impacting allowances and investments.
Conclusion:
The Finance Act 2019 has played a pivotal role in clarifying contentious issues surrounding the tax implications of Mergers and Acquisitions. A thorough tax due diligence, encompassing both companies involved, becomes essential before concluding any M&A transaction. FIRS seeks assurance that the new entity will shoulder the tax liabilities of the merging entities. Professional advice is paramount during M&A processes to navigate potential tax exposures effectively.
In essence, understanding the nuanced tax landscape surrounding M&A transactions is imperative for businesses embarking on corporate restructuring journeys in Nigeria.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
