THE ARM’S LENGTH PRINCIPLE AND ITS IMPLICATION ON TAXATION IN NIGERIA

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By Aderonke Alex-Adedipe and Praise Adetunmibi

Introduction

In many developing countries, a major challenge which occurs in related-party transactions is transfer pricing. A transfer price can be defined as the price at which related parties (that is, companies having existing relationship as a result of common ownership or control) transact with one another. In such circumstances, related parties have the tendency of transacting business at a price lower or higher than the market value in other to allocate profit for tax or other purposes. Transfer pricing can deprive governments of their fair share of taxes as well as expose corporate entities to possible double taxation. To combat these problems, several countries have adopted the Arm’s Length Principle in their laws and regulations. In Nigeria, this principle is found in the Income Tax (transfer Pricing) Regulation 2018 (the “Regulation”) established by the Federal Inland Revenue Service (“FIRS”).

When is a transaction said to be at Arm’s Length?

A transaction between related parties is said to be at Arm’s Length where it is conducted in a manner that would not have been different if the parties were independent entities and have no pre-existing relationship. Thus, the transaction is conducted in the same manner a third party would have conducted it in comparable circumstances.

Where related-party transactions are deemed as non-conforming with the Arm’s Length Principle, the Regulation empowers the FIRS to make necessary adjustments to the taxable profits accruing from such transaction to bring it into conformity with the Principle.

Implications of not complying with the Arm’s Length Principle

The Regulation provides stiff penalties for related-party transactions which do not comply with the Arm’s Length Principle. Below are some highlights of the transactions and their tax implications.

a. Transactions with respect to export and import of commodities

In the case of export, where the agreed price between related parties is lower than the price obtainable from an international or domestic commodity exchange market on the date of the transaction (“quoted price”), FIRS will disregard the agreed price and use the quoted price in computing the taxable profits.

In the case of import, where the agreed price is higher than the quoted price, the quoted price will be used by the FIRS in computing the taxable profit.

The above will however not apply where the taxpayer can show that the increase or decrease in the quoted price, as the case maybe, was reasonable.

b. Intra- group services

A test applied by FIRS in determining whether a service rendered by a taxpayer to a related party is consistent with the Arm’s Length Principle is whether such service enhances the economic or commercial position of the recipient and whether an independent person in comparable circumstances will be willing to pay for such service at the agreed price or would have performed the service itself in-house.

Where the service does not fulfil the above conditions, the FIRS would make adjustments to the taxable profits of the taxpayer.

c. Transfer of Intangibles property between related parties

Intangible property includes copyright, patents, goodwill, trademarks and trade names. The test applied by the FIRS is whether an independent person in the position of the transferor would be willing to transfer such property at the agreed price and if in the position of the transferee, would consider such property useful to its business.

Whatever the case maybe, tax deductions on intangible property shall not exceed 5% of earnings before interest, tax, depreciation and amortisation.

Conclusion

Companies in related-party transactions should ensure that compliance with the Arm’s Length Principle is a priority to prevent arbitral adjustments of their taxable income by the FIRS.

Setting Up International Money Transfer Services in Nigeria

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By Seun Timi-Koleolu and Olawale Atanda

 

Companies desirous of providing International Money Transfer Operator (IMTO) services in Nigeria are required to be licensed by the Central bank of Nigeria (CBN) as provided by the Guidelines for the Operation of International Money Transfer Services in Nigeria, 2014 (“IMTO Guidelines”).

 

What activities can IMTOs Provide?

IMTOs may accept monies for the purpose of transmitting to persons resident in Nigeria or another country. They may also carry out cross-border transfer services for personal purposes such as money transfer services towards family maintenance and money transfer services for foreign tourists visiting Nigeria.

However, IMTOs are not permitted to accept deposits or carry out money lending services (as there are separate licensing requirements for these services). They may also not buy foreign exchange from the domestic foreign exchange market for settlement purposes.

 

What are the requirements for an IMTO license?

The IMTO Guidelines provide requirements for both local and foreign companies wishing to acquire an IMTO license.

Local companies must have a minimum share capital of ₦2 billion and submit relevant document such as their incorporation documents and business plan. Foreign companies on the other hand, are required to show evidence of being licensed as IMTOs in their home country and have a minimum share capital of $1 million. They must also have authorized forex dealers (banks) to serve as local agents and pay an application fee of ₦500,000.

 

Is there any regulatory update concerning International Money Transfer?

The CBN issued two circulars (the “Circulars”) on November 30, 2020 announcing a new policy initiative on diaspora remittances through IMTOs. The Circulars clarified the CBN’s position on the operation of domiciliary accounts and the procedure for receipt of diaspora remittances.

 

What do the Circulars say?

The Circulars state that recipients of diaspora remittances through IMTOs shall now receive such inflows in foreign currency (US Dollars) through the agent bank of the IMTO.

The Circulars provide for recipients of remittances to have the option of receiving these funds over the counter in foreign currency cash (US Dollars) or have it transferred into their ordinary domiciliary accounts.

 

Conclusion

The CBN seeks to deepen the foreign exchange market by ensuring the availability of more foreign currency in the market and creating more transparency in the administration of diaspora remittances into Nigeria as provided in the Circulars.

The CBN has so far licensed about 60 IMTOs with many foreign based IMTOs looking to debut in the Nigerian market alongside local ones. It is important that these IMTOs understand the regulations around IMTO licensing and compliance.

THE NEW BANKING REGULATION: IMPACT ON FINTECH BUSINESSES IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

Introduction

On November 12, 2020, President Muhammadu Buhari assented to the Banks and Other Financial Institutions Act 2020 (the “Act”) which repealed the previous Banks and Other Financial Institutions Act 1991 (as amended) (the “Previous Act”). The Previous Act, which remained operational for over 16 years, dealt substantially with matters affecting traditional banking and financial services. Over time, there has been significant activity in technology-enabled financial transactions. These activities have heightened in the wake of the covid-19 pandemic which has necessitated digitisation across several sectors. In recognition of these facts, the Act introduces new provisions which are in line with current and modern financial services rendered by financial technology (“Fintech”) companies in Nigeria.

In our previous article, we highlighted in summary, some differences between the provisions of the Act and the Previous Act. In today’s newsletter however, we analyse the potential impact of the Act on Fintech companies and their services in Nigeria.

 

Definition of “Other Financial Institutions”

Under the Previous Act, “other financial institutions” include discount houses, finance companies, money brokers and companies which engage in factoring, project financing, equipment leasing, debt administration, fund management, private ledger services, investment management, local purchases order financing, export finance, project consultancy, financial consultancy and pension fund management. Under the Act however, the definition has been expanded to include bureau de change businesses, finance companies, authorized buying of foreign exchange, international money transfer services, mortgage refinance and mortgage guarantee company, financial holding companies, and payment service providers.

The Act further provides that the above listed businesses shall be regulated by the Central Bank of Nigeria (the “CBN”) “regardless of whether such businesses are conducted digitally, virtually or electronically only”.

 

What is the impact of the expanded definition?

Prior to the advent of the Act, the CBN had through several circulars, publications, and guidelines, sought to regulate businesses which were not previously covered by the definition of “other financial institutions”. Consequently, majority of the businesses now defined as “other financial institutions” in the Act were already regulated by the CBN through several fragmented rules. Therefore, the Act seeks to ensure that these businesses are controlled and organised by the primary piece of legislation which applies to financial institutions in Nigeria.

In addition, the expansion of the applicability of the Act to financial services conducted “digitally, virtually or electronically” implies that Fintech companies offering financial services, strictly through the use of technology and which have no physical presence or offices in Nigeria will now be regulated by the Act provided that the services they render fall within the definition of “other financial institutions”. Therefore, such businesses will now be required to obtain licenses to commence or continue operations in Nigeria.

 

Conclusion

Although, the Act provides significant coverage of Fintech services, it, also appears to exclude businesses relating to blockchain and digital assets, virtual savings, lending services, amongst others. Whilst the reason for the decision to exclude certain Fintech services from the purview of the Act remains unknown, it should be noted however that the Act also makes provision for discretionary powers of the CBN to “designate” businesses as “other financial institutions’ from time to time. Therefore, the CBN may at any time, expand the definition as it deems fit.

REVISED BANKING LAW IN NIGERIA- BOFIA 2020

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by Seun Timi-Koleolu and Praise Adetunmibi

In response to the significant developments in the financial sector, President Muhammed Buhari on the 12th of November 2020 signed the Banks and Other Financial Institutions Act 2020 (“2020 BOFIA”) into Law. This Act repeals the Bank and other Financial Institutions Act 1991, and now regulates the businesses of banks and other financial institutions in Nigeria.

Below are some key revisions introduced in the 2020 BOFIA.

REVISION SECTION IMPLICATION
Application for licence Section 3(1)-(5) Similar to the 1991 BOFIA, the 2020 BOFIA requires any person that wishes to carry on banking and related businesses in Nigeria to obtain a licence from the CBN. The CBN continues to have the right to refuse to grant such licence without reason.

A new restriction is, however, introduced by Section 3(5) of 2020 BOFIA. It specifically states that foreign banks or other entities- (i) without a physical presence in their country of incorporation; or (ii) that are not licensed in their country; or (iii) are not affiliated to any supervised financial group – shall not be permitted to operate in Nigeria or establish a relationship with Nigerian banks.

This would help to restrict the arbitrary and unregulated provision of digital financial services by foreign entities through online platforms.
CBN consent required for transfer of shareholding

 

 Section 7(1)(ii)

 

 

 In the 2020 BOFIA, the consent of the CBN is to be obtained for any agreement involving the transfer of significant shareholding in a bank or other financial institution. This was not clearly indicated in the old BOFIA but in practice, it is typically a licencing requirement.
 Operations of Foreign Banks in Nigeria & offshore banking Section 8(2)-(4) Section 8(2) of 2020 BOFIA suggests that Foreign or Nigerian banks wishing to operate in the free trade or special economic zone are to obtain a licence from CBN in addition to the approval of the Nigeria Processing Zones Authority. Note that banks and financial institutions operating in these zones are to enjoy up to 100% off taxes amongst other incentives.

All banks or persons who provide offshore banking services are to obtain the prior approval of CBN. The 2020 BOFIA now clearly defines offshore banking as the provision from Nigeria of cross border intermediation of funds and provision of financial services to a non-resident of Nigeria (other than Nigerian citizens).
Prohibition of Unlicenced Financial Institutions Section 57(2) The 2020 BOFIA clearly defines “other financial institutions” to include entities that carry on financial businesses electronically, virtually, or digitally. Such entities are to incorporate a company in Nigeria and obtain a licence from the CBN before carrying out financial businesses in Nigeria. Thus, the operations of digital financial service providers/FinTechs in Nigeria are now governed by the 2020 BOFIA and regulated by the CBN.
Establishment of Resolution Fund  Section 74- 78

 

 

 The 2020 BOFIA establishes a “Banking Sector Resolution Fund”. This fund, among other things, is to be used for providing credit facilities to banks and other financial institutions as well as pay the cost of transfer of all or part of the business of a bank or financial institution arising from a resolution measure. Banks and other financial institutions will now be subject to an annual levy of an amount equal to ten points of its total assets. The levy is to be paid in arrears and not later than 30th day of April in each year.
 Introduction of the Special tribunal for the Enforcement and Recovery of Eligible loans (Credit Tribunal) Section 102 The new Act establishes a Credit Tribunal for the enforcement and recovery of eligible loans. This is aimed at improving the loan recovery system in Nigeria.

 

AfCFTA and Trade Benefits to Nigeria

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By Aderonke Alex-Adedipe and Olawale Atanda

 

The Federal Executive Council ratified Nigeria’s membership of the African Continental Free Trade Area (AfCFTA) on the 11th of November 2020. This occurs more than a year after Nigeria signed the African Continental Free Trade Agreement (the “Agreement”) in July 2019. The Agreement establishes a single market for goods and services across 54 countries, allows for the free movement of business travelers and investments, and creates a unified customs union to streamline trade on the continent.

 

The AfCFTA Agreement comes into effect on the 1st of January 2021. Although, full implementation of the Agreement may take some time as countries would have to negotiate aspects of the Agreement such as trade, dispute settlement processes, tariffs and intellectual property rights.

 

Nigeria is however poised to gain from the investment and trade opportunities that the AfCFTA will inevitably bring. In this article, we highlight some of these benefits.

 

Size of the Nigerian Market

Nigeria has the largest economy and population in Africa with more than $500 billion in GDP and a population of 200 million. This market size allows manufacturers to increase capacity and expand into other African countries. This enables investors benefit not only from the Nigerian market but from other countries on the continent as well.

 

To put this in context, Nigeria contributes an estimated 76% of total trading volume in the ECOWAS region. This is made possible because of the ECOWAS treaty which provides for the free movement of people and goods throughout 15 West African countries. The AfCFTA grants access to 54 countries with a population of 1.2 billion and a market worth a combined $2.6 trillion in GDP.

 

Supply Chain Infrastructure

Producers and retailers expanding their operations to other markets would depend on a distribution network that can efficiently deliver goods to their intended markets. This would give rise to increased investments in the distribution and logistics supply chain to ensure the infrastructure needed for transportation of goods is available. The winners would be investors who invest in the logistics and transportation space to cater for the large volume of goods which would be involved in cross-border trade.

 

Increased Jobs

The AfCFTA also seeks to create a  single liberalized market for trade in services for the continent. Countries such as Nigeria which have an abundant supply of professionals in various services industries such as construction, engineering, technology, and financial services would see increased movement of such professionals to countries with a demand for their services. In addition, labour-intensive trade across borders would require the services of low skilled workers and the free movement of persons guaranteed by the AfCFTA will bring with it the free movement of services these persons will render.

 

Conclusion

Although, there have been valid concerns about the effect the AfCFTA would have on the Nigerian economy, these concerns can be addressed by the government putting in place safeguards to ensure vulnerable industries are protected. Safeguards include improving transport infrastructure and enforcing policies which would see a reduction in the cost of production. This would in turn make goods export friendly.

 

SUITABLE GROUP INVESTMENT STRUCTURE IN NIGERIA; THE TRUST STRUCTURE

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By Seun Timi-Koleolu, Eustace Aroh and Praise Adetunmibi

There is a growing connection amongst people around the world, largely due to the use of technology by startups and other tech companies to solve problems across borders. Technology is also making it possible for investors who see value in such startups to invest in them from any country in the world. Apart from the growing crop of startups arising from Nigeria, there is also a growing crop of investors who are identifying and investing in business opportunities within and out of Nigeria.

Investors in Nigeria range from institutional to individual investors. It is quite common for a group of individuals to pool funds together to invest in businesses (Group Investments).

In establishing an investment group, it is pertinent for the members to utilize a suitable business structure to maximise returns. The business structure an investment group applies will, invariably, affect its returns, tax liabilities, asset protection and operational cost.

What are the available structures for Group Investments in Nigeria?

Group investments in Nigeria may be structured in various ways such as: a Partnership, a Company, a Cooperative Society and a Trust; with each one having its merits and demerits. For Instance, one of the merits of a company structure is its distinct legal personality from its owners. It can own properties as well as enter contracts. There are, however, administrative requirements and tax implications which may make it unsuitable for group investors. A Cooperative Society (CS) structure is another structure that can be considered. The merit of a CS structure is that upon registration, it acquires corporate status and is exempted from Companies Income Tax. The process of establishing a CS is, however, tedious. Another structure an investment group may adopt is a Limited Liability Partnership which enables the partners enjoy limited liability status with minimum tax exposure. Although this structure has been introduced by the Nigerian Companies and Allied Matters Act 2020[i], it is yet to be given effect to at the Corporate Affairs Commission. A useful and typically preferred structure for Group Investment in Nigeria is the Trust structure.

What is a Trust?

A Trust is a legal relationship between a Settlor, a Trustee and a Beneficiary. A Trust is set up by a person called the Settlor through a Trust Agreement or Trust Deed. With this structure, the Settlor transfers property or funds (“Trust Asset”) to a person he appoints as the Trustee who then holds and manages the Trust Assets on behalf of the Beneficiaries.

In the case of a group investment, the Trust should be structured to make the investors both the  Settlors and the Beneficiaries, with one or more of the investors appointed as the Trustees. The investors (as Settlors) will then pool funds together to invest in equity or other target assets and the Trustee will enter into the investment deal on behalf of the Trust. The Trustee is to be responsible for managing and distributing proceeds of the investments to all the investors (in their capacity as Beneficiaries). This structure is also referred to as an ‘Unincorporated Syndicate’.

What are the useful clauses to include in a Group Investment Trust Agreement?

The Trust Agreement must specifically create the Trust and a name should be given to the Trust. The Agreement should clearly appoint one or more of the investors as a Trustee and grant him/her rights to manage the investment on behalf of the Trust. The investors should be identified as Settlors and Beneficiaries unless the proceeds of the investment are to go to a third party (in that case, the third party will be identified as the Beneficiary). The contribution ratio and the profit/asset sharing ratio should be clearly stated in the Agreement. Liability of each of the parties to the Agreement should be clearly detailed.

Conclusion

Where a trust structure is adopted for a Group Investment in a startup, the stock purchase agreement should be reviewed to ensure it allows for the free transfer of shares amongst members of the Group (for instance, transfer of shares should not be limited by a ‘right of first refusal’ which is typically granted to companies.

[i] Please see our article on Companies and Allied Matters Act 2020 https://pavestoneslegal.com/the-nigerian-companies-and-allied-matters-act-2020/

Legal and Regulatory Considerations for Business Acquisitions in Nigeria

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By Aderonke Alex-Adedipe and Olawale Atanda

The main objective of every business is to make profit. Companies continually explore methods of increasing their bottom line and sometimes, that may mean acquiring companies in the same industry for several operational or economic reasons which ultimately would lead to increased revenue.

Recently, the fintech space in Nigeria was given a significant boost following the acquisition of Paystack by international payments company, Stripe in a record-breaking deal. For companies seeking to make similar acquisitions in Nigeria, there are certain legal and regulatory requirements to be considered when acquiring a business.

  1. General Applicable Legislations

Acquisitions in Nigeria are governed by key legislations. These are the Federal Competition and Consumer Protection Act (FCCPA) 2019 and the Companies and Allied Matters Act 2020 (CAMA).

Prior to the passage of the FCCPA in 2019, the Investment and Securities Act (ISA) 2007 and the Securities and Exchange Commission Rules and Regulations 2013 (SEC Rules) governed mergers and acquisitions in Nigeria. By the provisions of the FCCPA however, the Federal Competition and Consumer Protection Commission (“the Commission”) took over the regulation of mergers and acquisitions from SEC.

Under the FCCPA, all acquisitions are required to be approved by the Commission. However, acquisitions classified as “small mergers” are not required to be notified to the Commission except otherwise requested by the Commission. Small mergers are classified as such, where the combined assets and turnovers of the acquiring and target company fall below NGN1 billion.

It should be noted that acquisitions of shares qualify as “mergers” and fall under the regulation of the Commission whenever they result in an acquisition of controlling stake in the acquired company.

  1. Sector-Specific Legislations

There are other legislations that are specific to individual industries. Companies operating in these sectors are required to follow the rules of acquisitions specified in the legislations or required by regulators. These laws and regulatory requirements operate in addition to the primary legislations stated above.

In the banking sector for example, the Banks and Other Financial Institutions Act and the Central Bank of Nigeria’s Guidelines regulate acquisitions in the banking sector. Also, the Central Bank of Nigeria (“CBN”) generally requires other financial institutions which the CBN regulates to seek its consent prior to a change in the ownership structure of such institutions.

  1. Taxes

Acquisition transactions should not take place without the prior direction from the Federal Inland Revenue Service (FIRS) in connection with taxes/duties which may be applicable to such transaction. It is important that both the acquirer and target companies settle all outstanding tax obligations to the FIRS. Where the acquisition involves the sale of assets, capital gains tax will be payable. In situations where an acquisition results in the creation of more shares, stamp duties tax will be payable on the new shares.

Conclusion

Acquisition transactions are major deals which require several legal considerations. Acquiring companies should ensure that, in addition to the economic factors already considered, legal and regulatory requirements should be met when closing an acquisition deal to prevent regulatory sanctions and legal liability.

UNDERSTANDING THE #ENDSARS PROTEST VIS-À-VIS RELEVANT HUMAN RIGHTS

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By Seun Timi-Koleolu and Eustace Aroh

INTRODUCTION

The Special Anti-Robbery Squad (SARS) in Nigeria was established to address insecurity and crimes in the nation. Rather than achieve their stated objective, they began profiling and harassing young people which led to wrongful arrests, brutalization and loss of innocent lives. In response to the recent deaths instigated by SARS officers, anti-SARS protests erupted across the nation and around the world. Two weeks later, 12 unarmed protesters were shot at Lekki, Lagos State on October 20, 2020 by members of the Nigerian Army and Police, after the State declared a 24 hours curfew (as reported by Amnesty International).

In view of this tragic development, it is important to us that we create awareness of the human rights that protect Nigerians (as contained in the Constitution of the Federal Republic of Nigeria 1999 (“CFRN”), the African Charter on Human and Peoples’ Rights (“ACHPR”) and the United Nation’s Universal Declaration of Human Rights (“UDHR”)); and its enforcement.

Fundamental Human Right Relevant Provision Details
Freedom of Expression Section 39 CFRN; art 9 ACHPR; art 19 UDHR. These provisions grant every Nigerian the freedom to receive and express their opinion, ideas and information. It also grants the right to establish and operate any medium used in disseminating information in Nigeria subject to the regulations of wireless broadcast.
Right to Life Section 33 CFRN; art 4 ACHPR; art 3 UDHR. Everyone has a right to life and no one must be deprived of his life intentionally. The exceptions to this right are: (1) a valid death sentence by a court of law; (2) where a person dies during the use of reasonable force while engaging in self defense; and (3) where a person dies while effecting lawful arrest or suppressing a riot, mutiny or insurrection provided reasonable force is used.
Freedom of Association Section 40 CFRN; art 10 and 11 ACHPR; art 17 and 20 UDHR. Every Nigerian is entitled to form or join any association of people in Nigeria in support of his interest.
Right to Dignity of Life Section 34 CFRN; art 4 ACHPR; art 1, 4, 5 and 6 UDHR. Every individual is entitled to dignity and respect. He is entitled to be free from slavery and torture.
Right to Liberty Section 35 CFRN Every Nigerian has the right to personal liberty and no person should be deprived of this right except: (1) in execution of a criminal sentence by a court of law; (2) for failure to comply with an order of court; (3) in bringing him before a court; (4) in preventing him from committing an offence; (5) where he is reasonably suspected of committing an offence; and (6) for the purpose of care and treatment for persons with infectious disease, unsound mind or addictions.
Freedom of Movement Section 41 CFRN; art 12 ACHPR; art 13 UDHR. Every Nigerian has the right to move anywhere in Nigeria. This right, however, does not apply where a person has been lawfully sentenced to imprisonment or restricted by a court of law.

ENFORCEMENT OF FUNDAMENTAL HUMAN RIGHTS

Any citizen of Nigeria whose rights under the Constitution have been breached may apply to a high court in Nigeria for redress and this includes where the government is responsible for the breach. Furthermore, the rights contained in the ACHPR which was domesticated by Nigeria via the African Charter on Human and Peoples’ Rights (Ratification and Enforcement) Act can also be enforced in the Nigerian high court.

Pavestones Legal as a firm stands against any form brutality including police brutality and harassment. We stand for unity, peace and justice.

Establishing a Cooperative Society For Investment Purposes in Nigeria

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By Aderonke Alex-Adedipe and Olawale Atanda

Investment entities may take several forms in Nigeria. Investors may set up a Limited Liability Company (LLC) to buy shares or other investment vehicles. They may also set up a Limited Liability Partnership (LLP) or even a Cooperative Society depending on the needs of the investors, the advantage a particular entity for investment has over others, or the type of investments the entities intend to hold.

A Cooperative Society is one formed by a group of persons who share common goals relating to their social and economic advancement. Although, not as popular as LLCs or LLPs, Cooperative Societies afford certain advantages that investors may find favourable.

 

Applicable Law and Regulation

Cooperative Societies are governed by the Nigerian Cooperative Societies Act and are registered by the Director of Cooperatives in each state. In Lagos State, the Ministry of Commerce, Industry and Cooperatives oversees the registration and regulation of Cooperative Societies.

Cooperative Societies are also exempt from the provisions of the Companies and Allied Matters Act (CAMA). Consequently, obligations required of LLCs and LLPs by CAMA such as the filing of annual returns and registration of charges and debentures do not apply to Cooperative Societies.  However, returns are expected to be submitted to the Director of Cooperatives at intervals determined by the Director or such agency that regulates Cooperative Societies.

 

Benefits of Cooperative Societies

Similar to an LLC, Cooperative Societies are of limited liability and have a legal personality separate from that of its members. They also have the powers to hold movable and immovable property, enter into contracts, and perform such functions or actions as stated in their constitution.

Members can hold shares in Cooperative Societies, however, no individual member can hold more than 20% of the shares of the society.

 

Investment of Funds

Cooperative Societies may invest their funds in a bank, in federal government-backed securities, or in any other manner provided for in their constitution.

 

Taxes

Cooperative Societies are exempt from payment of company income tax on the profit or income generated from its activities including shares or interest held in other entities. Cooperative Societies are also exempt from the payment of stamp duties and registration fees payable in relation to the registration of instruments.

 

Registration

Cooperative Societies are to apply to the Director of Cooperatives for registration and such application must be signed by at least ten individuals qualified for membership of the society. The bye-laws of Cooperative Societies, which will govern its affairs, are to accompany the application.

 

Conclusion

Investors are constantly looking for opportunities to increase profits while reducing expenses such as operational costs and tax liabilities. Cooperative Societies provide for lower tax exposure and less regulatory oversight than LLCs and LLPs.

TAX INCENTIVES IN NIGERIA: PIONEERS STATUS

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By Seun Timi-Koleolu and Eustace Aroh

 

The Pioneer Status Incentive (“PSI”) is one of the available tax incentives in Nigeria aimed at attracting investment into critical sectors of the Nigerian economy. It was created under the Nigerian Industrial Development (Income Tax Relief) Act (“IDA”) to incentivize qualifying entities. The PSI grants an income tax “holiday” of up to five years (three years initially and renewable for an additional two years) to entities that meet the criteria. In addition, pioneer companies may enjoy other benefits including an exemption from withholding tax on dividends paid out of business profits. Below are highlights:

What are the pioneer industries?

These are the industries which qualify for PSI. Companies that engage in any of the industries below may apply for the PSI. Below is an abbreviated list of applicable subsectors.

Industry Applicable Subsector
Information and communication Publishing of books; software development; motion pictures, videos and television production and distribution; music production and distribution; and telecommunication.
Financial Services Real Estate Investment Trust; and mortgage backed securities.
Administrative Services Business process outsourcing; and transportation (land, water, rail and pipeline).
Trade E-Commerce Services.
Construction Construction and operation of roads, railways, airports, utility projects, water projects, industrial projects residential and non-residential building.
Waste Management Waste treatment, disposal and material recovery.
Electricity and Gas Supply Electric power generation, transmission and distribution; and manufacture and distribution of gas.
Agriculture Crop production; livestock; fishing; and forestry
Mining and Quarrying Mining and processing of coal; mining and processing of metal ores; and quarrying and mining of other minerals
Manufacturing Manufacture of refined petroleum products; processing and preserving of meat or poultry and its products, fish, shell fish, fruits, nuts, vegetable, cocoa; manufacturing of grain mill products, edible oils, diary products, starch and starch products, sugar, coffee and tea products, animal feed; manufacturing of wearing apparel; manufacturing of paper, personal hygiene products, basic chemicals, fertilizers, pesticides, agrochemicals and nitrogen compounds; manufacturing of rubber and plastic products; manufacturing of electrical equipment and electronics; manufacturing of basic metal and steel and fabricated metal products; Manufacture of motor vehicles and components and other transport equipment etc.

What are the Qualifications?

The company must be engaged in the pioneer industry; must have physical long-term assets worth over N100 million; and must be able to show the positive impact its business will have on the Nigerian economy.

How to apply?

Application will be by a letter to the Nigerian Investment Promotion Commission (NIPC) in the first year of production, attaching legal and business documents like incorporation documents, regulatory permits, business plan etc.

What are the Obligations on Beneficiaries?

Beneficiaries are expected to submit an annual performance report to the NIPC and must comply with the requirements of IDA and other relevant regulations of the NIPC.

For more information on incentives in Nigeria, please see our article on www.https://pavestoneslegal.com/doing-business-simplified-incentives-to-invest-in-nigeria/