Obiageli & Co (Tax Consultants) Asaba Road, Umunede, Delta State

INTERNAL MEMO Date: …….

From: Assistant Manager To: Principal Partner

SUBJECT: RE: Mergers and Acquisitions and other Related Matters I refer to our client’s request on tax considerations for mergers and acquisitions when a new company takes over an existing company; tax concessions and conditions to be met by a company seeking for reorganisation and restructuring; and powers of the Federal Inland Revenue Service (FIRS) in respect of mergers and acquisition. I hereby present a report for your review before same is presented to the client.

a. Tax considerations for mergers and acquisitions when a new company takes over an existing company

i. Where a new company takes over an existing or old company, the old company is deemed to have ceased business while the new company is deemed to have commenced a new business. The cessation rules will apply to the old company, while the commencement rules will apply to the new company.

ii. Filing of annual returns: The new company that emerges from a merger process is expected to file audited accounts and returns with the FIRS within eighteen months from the date of its incorporation or not later than six months after the end of its first accounting period, whichever is earlier. Meanwhile, it should be noted that a mere change of name of an existing business entity does not constitute a new company. Such companies will continue to be treated as old businesses on ongoing concern basis.

iii. Basis of assessment: The commencement rules will apply to the new company.

iv. Claim of capital allowances: No initial allowance will be claimed on the transferred assets. The annual allowance claimable will be based on the tax written down value of the transferred assets.

v. Unabsorbed losses and capital allowances brought forward: The unrelieved losses and unabsorbed capital allowances of the individual merging companies will not be allowed to be carried forward and set off against the assessable profits of the new company after the merger. However, the utilised capital allowances may be added to the tax written down value of the assets taking over for annual allowance purposes in the enlarged entity.

vi. Stamp duties: Stamp duty payment will arise on the share capital of the new company. If a merger also results in increase in share capital, stamp duty will be paid on the increase in share capital. Besides, merger of companies will also involve the sale/transfer of assets of the merging companies to the new company, necessary transfer or sale documents must be prepared to reflect the change of title. Stamp duties will be paid on documents perfecting these titles in accordance with the Stamp Duties Act.

vii. Merger cost: There are some costs which are incurred in the merger process due to the involvement of professionals and regulatory agencies, for example, financial advisers, solicitors, stockbrokers, estate valuers, issuing houses, corporate affairs commission, Nigerian Exchange, Securities and Exchange Commission. The FIRS may seek to disallow these expenses on the basis that they are capital in nature and as such not tax deductible.

viii. Value added tax and withholding tax: The fees paid to the professionals for services rendered in connection with the merger will attract value added tax and withholding tax at the appropriate rates.

ix. Guarantee or security for payment of tax: The FIRS may require the new company to guarantee or give security to the satisfaction of the FIRS, for the payment in full of all tax due or to become due by any of the ceased companies.

x. End of service award: When companies merge, the services of some employees may no longer be needed. The new company may have to pay benefits, such as gratuity, compensation for loss of employment and other retirement benefits. These expenses will be treated as allowable for the new company.

b. Tax concessions and conditions to be met before qualifying for same in respect of entities that engaged in business re-organisation and restructuring

Applicable tax concessions include:

i. the commencement and cessation provisions are not applied;

ii. for capital allowances purposes, the assets sold or transferred shall be deemed to have been sold for an amount equal to the residue of qualifying expenditure thereon on the day following such sale or transfer;

iii. the company acquiring the assets shall not be entitled to any initial allowance thereon and shall be deemed to have received all allowance already granted to the vendor company up to the date of the sale or transfer; and

iv. there is no reference to unutilised losses incurred in the old trade. Such losses cannot be transferred to the new business and may not be relieved in any other way.

Conditions to be met before qualifying for such tax concessions

The Finance Act, 2019 introduced amendment to Section 29(9) of CITA to the effect that:

i. qualification for exemption from commencement and cessation rules in a business restructuring amongst related parties to now include requirements to be related for a period of at least one year (365 days) prior to the restructuring;

ii. no disposal of assets post restructuring until after one year; and

iii. flouting of this provision will lead to a revocation of the exemption.

c. The powers of Federal Inland Revenue Service in respect of mergers and acquisitions

i. The consent of the Federal Inland Revenue Service, including clearance with respect to any capital gains tax that may be due and payable, must be obtained before any merger, take-over, transfer or restructuring of a trade or business carried on by a company can take place.

ii. The Companies Income Tax Act (CITA) gave the FIRS powers to the extent that no merger can be concluded without obtaining the consent or direction of the FIRS. Under CITA, no merger, take-over, transfer or restructuring of the trade or business carried on by a company can take place without having obtained the FIRS‟s direction and clearance with respect to any tax that may be due and payable.

Thank you, Obi Akande