Transfer of Business Interests: Understanding the Tax and Regulatory Considerations for Asset Transfers

During the life cycle of a business, decisions to acquire or divest business lines may be made to create synergies or improve financial performance. In the telecommunications industry in Nigeria, major companies engaged in significant asset transfers, selling off around 30,000 base transceiver stations tower assets in deals exceeding US$300 million in 2014/2015. Economic challenges, such as the recession experienced from 2016 to 2017, further impacted businesses, necessitating careful evaluation of entry strategies for investors.

This analysis explores the reasons why an asset transfer may be chosen over a share transfer, along with key tax considerations in negotiating and concluding such transactions.

Why Asset Deals? Asset transfers are generally considered less preferable compared to share transfers due to complexities and tax exposure at various transaction points. Purchasers are subjected to stamp duties and Value Added Tax (VAT), while sellers may incur Capital Gains Tax (CGT) on gains from asset disposal and potential income tax liability. Despite these considerations, asset transfers offer tax benefits, especially for fully depreciated assets. Buyers can create a tax base for capital allowance purposes, and a step-up advantage allows assets to be recorded at fair market value for potential cost recovery.

Tax Considerations in Asset Transfers:

  1. Stamp Duties and VAT: Buyers are liable for stamp duties on the asset purchase agreement and 5% VAT on the asset value.
  2. Capital Gains Tax (CGT): Sellers may face CGT on gains from asset disposal. However, for fully depreciated assets, there might be no CGT liability.
  3. Income Tax: Sellers could incur income tax if there is a balancing charge on asset transfer.
  4. Capital Allowance: Buyers can benefit from capital allowance on assets with a tax base created during the transfer, providing a cost recovery opportunity.
  5. Step-Up Advantage: Assets can be recorded at fair market value, allowing potential tax advantages for buyers.

While asset transfers may involve tax inefficiencies, the potential for cost recovery through capital allowance and step-up advantages can make them a viable option for certain business scenarios.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at at Lagos, Ogun state Nigeria offices, You can also reach us via WhatsApp at +2348038460036.