Sunny & Co (Tax Consultants) Jaye Road, Mowe Date …… The Managing Director Yemmysea Beverages Limited Abeokuta Dear Sir RE: TAX IMPLICATIONS ON MERGER AND ACQUISITION ARRANGEMENTS I refer to your request for professional advice on the tax implications of the merger and acquisition arrangements proposed by the Board of Directors. My comments are as follows:                                                                                                                                                                                                                        (a.) Tax implications when an existing company absorbs another existing company Under the Companies Income Tax Act (CITA) 2004 (as amended), when an existing company absorbs another existing company, the following tax implications may arise:             i. The absorbing company may be entitled to carry forward and utilize any unutilized tax losses of the absorbed company, subject to the provisions of Section 31 of CITA, which allows for the carry forward of losses for a maximum of four years, provided there is continuity of the same business.                                                                                                                                                                                     ii. Capital allowances claimed by the absorbed company on its qualifying capital expenditure may be transferred to the absorbing company, subject to the approval of the Federal Inland Revenue Service (FIRS).                                                                                             iii. The transaction may attract stamp duties on the transfer of shares or assets, depending on the structure of the absorption, as provided under the Stamp Duties Act.                                                                                                                                                                      iv. No immediate capital gains tax (CGT) liability arises if the transaction qualifies as a reorganization under Section 29 of CITA, which allows for roll-over relief, provided the assets are retained for the purposes of the business.                                                            v. The absorbing company may be required to file a notice of amalgamation with the FIRS within 90 days, as required under Section 29(9) of CITA, to ensure compliance with tax regulations.

(b.) Tax implications when merger results in the cessation of business When a merger results in the cessation of business, the following tax implications may arise                                                                                                                                                                          i. The ceasing company may be liable to pay CGT on any chargeable gains arising from the disposal of assets, calculated as the difference between the market value of the assets and their original cost, less any allowable deductions, at a rate of 10%, as provided under the Capital Gains Tax Act (CGTA) 2004 (as amended).                                                                                                           ii. Any unutilized tax losses of the ceasing company cannot be carried forward, as the business has ceased, and there is no continuity for loss relief under Section 31 of CITA.                                                                                                                                              iii. The company may be required to file any outstanding tax liabilities, including companies’ income tax and tertiary education tax, before cessation, as per Section 55 of CITA.                                                                                                                                                      iv. Employees of the ceasing company may be entitled to compensation for loss of office, which may attract CGT if the amount exceeds N10 million, as provided under Section 4 of the Finance Act 2020.

(c.) Tax implications when a business is sold or transferred When a business is sold or transferred, the following tax implications may arise                                                                                                                                                                                                                            i. The seller may be liable to CGT on any chargeable gains arising from the sale, calculated at 10% of the gain, which is the difference between the sale proceeds and the original cost of the assets, less allowable deductions, as per CGTA 2004 (as amended).                                                                                                                                                                                                                        ii. The buyer may be entitled to claim capital allowances on the qualifying capital expenditure of the acquired assets, subject to the approval of the FIRS                                                                                                                                                                                                  iii. The company absorbed will be deemed to have ceased business and the cessation rules will apply to it;                                             iv. The company that absorbs will not be deemed to have commenced a new business as far as the nature of business carried on by it before and after absorption is not different from that of the company absorbed or taken over. Therefore, commencement provisions will not apply to it and tax returns will be filed as an ongoing company,                                                                                       v. The surviving company will not be entitled to investment allowance and initial allowance on the assets transferred to it through absorption. The annual allowance will be based on the tax written down values;                                                                              vi. The unabsorbed losses and capital allowances of the individual merging companies may not be allowed to be carried forward and set off against assessable profits of the surviving company after the merger;                                                                                        vii. Fees payable for professional services in connection with the merger will be subject to value added tax and withholding tax; and                                                                                                                                                                                                                                      viii. Any increase in share capital as a result of a merger will attract payment of stamp duties.

(b) The tax implications when merger results in the cessation of business include                                                                                         i. The cessation provisions will only apply to those companies which have ceased business permanently;                                              ii. Any unrelieved capital allowances at cessation can be carried backward and set off against assessable profits of five years preceding the year of cessation;                                                                                                                                                                                 iii. Any unrelieved losses at cessation cannot be carried backward to be set off against the assessable profits of the preceding years of assessment; and                                                                                                                                                                                               iv. Any sum received or paid by the company, its receivers or liquidators after the date of cessation will be deemed to have been received or paid on the last day before such cessation occurred.

(c) The tax implications when a business is sold or transferred If a trade or business is sold or transferred to a Nigerian company together with any asset employed therein and the FIRS is satisfied that one of the companies has control over the other or that both are controlled by some other person or are members of a recognized group of companies, the FIRS may at its discretion direct that:                                                                                                                                                                                                                        i. The commencement and cessation provisions are not applied;                                                                                                                     ii. For capital allowance’s purpose, the assets sold or transferred shall be deemed to have been sold for an amount equal to the residue of qualifying capital 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;                                                                           iv. There is no reference to unutilized losses incurred in the old trade. Such losses cannot be transferred to the new business and may not be relieved in any other way, and                                                                                                                                                               v. In order to benefit from the unutilized losses incurred in the old trade, the company acquiring the old trade may leave some business in the old trade that will produce small profits annually which will gradually use up the losses over a number of years, before that part of the trade is transferred to the new trade.

(d) The powers of the Federal Inland Revenue Service on issues that concern mergers and acquisition of companies include           i. The consent of the FIRS, including clearance with respect to any capital gains tax that may be due and payable must be obtained before any merger, sales, takeover, transfer, or restructuring of a business carried on by a company can take place;           ii. The CITA 2004 (as amended) gave the FIRS powers to the extent that no merger can be consummated without obtaining the consent or direction of the FIRS; and                                                                                                                                                                          iii. Under CITA, no merger, takeover or transfer can take place without having obtained the FIRS’s direction and clearance with respect to any tax that may be due and payable.

We hope this presentation satisfies your requirements. Should you still need any further clarification on this, please do not hesitate to contact us.

Yours faithfully Akin Bode