DOING BUSINESS IN NIGERIA- IMPACT OF THE COMPANIES AND ALLIED MATTERS ACT 2020 ON REGISTRATION OF BUSINESS IN NIGERIA -Part 2

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1. Introduction

When President Muhammadu Buhari signed the Companies and Allied Matters Act 2020(“the Act”) into law on the 7th of August 2020, the business community was abuzz excitement in anticipation of the numerous reforms it would introduce. In our previous article, we highlighted several key provisions of the Act and their general impact on doing business in Nigeria. In today’s newsletter, we address specifically, certain newly introduced provisions which impact how businesses may be registered in the nearest future and how these new provisions will affect the ease of doing business in Nigeria.

2. What is a Small Company?

Under the Act, a small company is described as a private company which has a turnover of not more than N120,000,000, (One Hundred and Twenty Million Naira) net assets not exceeding N60,000,000 (Sixty Million Naira)  at least 51% of its shares held by its directors and which does not have any foreigner, government or government corporation as a shareholder. Such companies enjoy certain exemptions and benefits, one of which is that they can now have a single director and shareholder. This significantly reduces the bottleneck of the previous requirement to have a minimum of 2 (two) directors, thereby making business registration easier and faster for qualified businesses.

3.What are the newly introduced shareholding disclosure requirements?

To increase transparency and tackle asset shielding, the Act requires holders of significant control in a company to disclose same to the company and the Corporate Affairs Commission (“CAC”) within 7 days and 1 month of such acquisition, respectively. In addition, the Act also goes on to require disclosure of interests by a substantial shareholder in a public company. A substantial shareholder is defined under the Act as any person who directly by himself or through a nominee, holds at least 5% of shares  in a public company. While this implies that holding of shares by way of trust is now given recognition under the Act, the requirement of disclosure of nominee interest defeats the purpose of anonymity which individuals seek when nominating third parties to hold shares in trust for them.

4. Can you commence business prior to registration?

The Act imposes a penalty on any person or organisation that carries on business as a company, limited liability partnership, limited partnership or business name without being registered under the Act. This provision does not mandate individuals to register a business as Nigeria has a vast informal sector. The provision however seeks to penalise individuals who fraudulently carry on business as if they were registered. The penalty is a fine of N200 for every day during which the default continues.

5. Which data privacy concerns are addressed under the Act?

In line with current day realities of data processing and the need for protection of personal data by law, the Act now classifies Directors information, particularly their residential addresses as protected information.

Both the company and CAC are prevented from using such information unless it is required to communicate with the director or in compliance with the provisions of the Act.

6. CONCLUSION

It is clear that the provisions highlighted above were specifically introduced to facilitate the ease of forming and structuring a business entity in Nigeria. The Act took into account the complexities of business arrangements between individuals and the current trajectory of the business economy which calls for a more MSME inclusive landscape. We believe proper implementation and guidance by the Corporate Affairs Commission (CAC) as the regulatory body empowered by the Act will bring about positive changes and reforms to the commercial terrain in Nigeria.

THE NIGERIAN COMPANIES AND ALLIED MATTERS ACT 2020

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  The President of Nigeria on August 7,2020 signed into law the Companies and Allied Matters Act, 2020 (“CAMA 2020”) to replace the 1990 Act. CAMA 2020 which is now the primary legislation governing the formation and management of companies in Nigeria affects all residents and foreigners intending to or doing business in Nigeria. It is geared towards supporting the government initiative to improve ease of doing business in Nigeria[1].

Key changes introduced by CAMA 2020 are highlighted below in simple terms.

KEY CHANGE WHAT THIS MEANS
Single Shareholder for Private Companies. A company can now be registered with 1 shareholder; and businesses are no longer mandated to have a minimum of 2 shareholders. This makes setting up a business in Nigeria much easier. Section 18 of CAMA 2020.
A Company Limited by Guarantee (“CGTE”) can be registered without the Attorney General’s (“AG”) consent. Obtaining the AG’s consent remains part of the registration process for a CGTE. There is, however, now a 30days time limit for the AG to make a decision, failing which the application can progress to the advertisement stage. This should speed up the registration process. Section 26 of CAMA 2020.
Introduction of Limited Liability Partnership (LLP) and Limited Partnership (LP). The LLP and LP are newly introduced business structures by CAMA 2020. These options can now be selected by those who require the benefit of a limited liability structure with the tax status and flexibility of a partnership. Sections 746 to 810 of CAMA 2020.
Reduction of Filing Fees for the Registration of Charges. Previously, filing fees for registration or release of Charges were between 1 to 2% of the value of the charged assets. Now, the total fee payable to the Corporate Affairs Commission is not to exceed 0.35% for both private and public companies. This should result in cost savings for businesses. Section 222(12) of CAMA 2020.
Introduction of Electronic signature, electronic transfer of shares and virtual general meeting. In line with today’s world, (i) e-signatures can now be used to sign documents; (ii) companies can now maintain an e-register for share transfers; and (iii) private companies are now permitted by law to hold virtual meetings in accordance with their articles of association. Sections 101, 178(1) and 240(2) of CAMA 2020.
Small Companies are exempt from Audit requirements. Small companies and companies that are yet to commence business since incorporation are exempted from audit requirements under CAMA 2020. This reduces the regulatory burden on small businesses. Section 402 of CAMA 2020.
Appointment of a Company Secretary optional for small companies. Small companies are no longer mandated to appoint a Company Secretary. Although this should help small businesses save costs, small businesses need to weigh the advantages of outsourcing company secretarial tasks to legal professionals against cost savings. Section 330 of CAMA 2020.
Restriction on Single Person Holding Position of Chief Executive Officer and Chairman of the Board. CAMA 2020 states that, the office of Chief Executive Officer and the Chairman of the Board is not to be held by the same person, for public companies. This is in accordance with good corporate governance principles. Section 265(6) of CAMA 2020.
Restriction of Multiple Directorship in Public Companies.  The maximum number of director positions that can be held by a person in public companies is now 5. This should encourage good corporate governance. Section 307 of CAMA 2020.
Merger of Incorporated Trustees. Incorporated Trustees with similar aims are now permitted to merge. Note however that the Federal Competition and Consumer Protection Commission (FCCPC) is the apex regulator in matters of mergers and it would be useful to check the requirements of the Federal Competition and Consumer Protection Act 2018 in such cases. Section 849 of CAMA 2020.

 

[1] See our article on setting up a business in Nigeria on www.pavestoneslegal.com.

 

Startup Funding: Raising Capital as a Startup in Nigeria

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Lack of financing is a major constraint which businesses experience at the startup phase. Seed capital is required for startups to fund their operations and scale, thereby returning profits to founders and investors.

A major indicator that a startup may thrive is the availability of capital. Where capital is low or inadequate, the business operations will be impacted and the startup will likely fail. Research conducted on small businesses in the U.S. indicates that 79% of businesses fail because they start out with too little money and are unable to fund their operations.

It is therefore essential that founders are familiar with the several ways in which capital may be raised and identify the funding path that is best suited for the startup. Below are several funding sources that founders should consider when seeking capital.

  1. Crowdfunding

The proliferation of technology has seen the emergence of digital solutions aimed at solving every day problems. An example of this is the growth of crowdfunding sites which enable founders raise funds from the public. Crowdfunding[i] entails pitching the business idea of a startup to willing investors via an online platform. Investors may receive equity in exchange or a percentage of interest over a period of time. Crowdfunding is particularly advantageous to founders because they can decide the terms of the investment and easily retain control of their company.

  1. Incubators and Accelerators

Incubators and accelerators nurture and prepare startups to scale. Incubators are focused on startups  at the conception stage while accelerators target startups that are viable and ready to scale. Startups who successfully pass through incubators or accelerators typically receive a seed investment at the end of their program from the incubators/accelerators or investors/mentors introduced to the startups in exchange for nominal equity.

  1. Business Loans

Although, not typical, startups may apply for loans from banks or microlending companies. These may however attract high interest rates. Startups therefore must consider their revenue flow and ability to repay loans obtained from banks and other lending institutions.

  1. Angel Investors and Venture Capital Funding

Angel or seed investors typically fund startups at the beginning of their lifecycle while venture capital firms usually provide funds to startups that are viable with a recognized customer base and established revenue stream. These funding sources provide much needed capital in exchange for equity in the startup. The terms of the funding and equity participation are contained in agreements such as Simple Agreement for Future Equity and convertible loan agreements.

  1. Bootstrapping

Bootstrapping means growing a startup without external funding. Startups would have to rely on funding from its founders to operate and rely on revenue from sales. Bootstrapping is perhaps the toughest method of funding startups as it means that growth might be stifled or delayed due to the absence of funds required to scale their operations. However, where founders subsequently decide to receive external funding, it portrays a sense of seriousness to investors that the startup depended on the sweat and faith of its founders to grow and generate revenue. With bootstrapping, founders are also assured of absolute creative and operational control of the startup.

Conclusion

Although there are several sources of funding which startups can take advantage of, startups must consider which funding source is most suitable by weighing the pros and cons of the funding options available to them.

 

[i] Equity-based crowdfunding in Nigeria is potentially regulated by the Securities and Exchange Commission (SEC). Please find our article on the crowdfunding rules proposed by SEC here https://pavestoneslegal.com/review-of-the-crowdfunding-rules-proposed-by-sec-nigeria/

You can also watch a brief analysis of the crowdfunding rules by our Partner, Aderonke Alex-Adedipe, here https://furtherafrica.com/2020/05/05/insights-funding-startups-in-nigeria-video/

 

2020 LIST OF GOODS AND SERVICES EXEMPTED FROM VALUE ADDED TAX IN NIGERIA

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Value Added Tax (VAT) is a consumption tax levied at the rate of 7.5% on goods and services supplied to consumers for a fee. The primary law governing VAT in Nigeria is the Value Added Tax Act 1993 (the “Act”), which provides for the administration of VAT and states the Goods and Services exempted from it. In addition to the Act, the Finance Act 2019 and the Value Added Tax (Modification Order), 2020, also guide the administration of VAT in Nigeria and contains provisions clarifying the list of goods and services which are exempt from VAT or zero rated VAT.

From a joint reading of the Act, the Finance Act 2019 and the Value Added Tax Act (Schedule Modification) Order 2020, the following are exempted from VAT:

  1. all medical and pharmaceutical products;
  2. basic food items;
  3. books and educational materials including educational performances and tuition from nursey to tertiary education;
  4. baby products;
  5. all exported goods and services;
  6. imported machines for use in the Export Processing Zone (EPZ) or free trade zone;
  7. fertiliser and locally made agricultural medicines and agricultural equipment;
  8. life insurance;
  9. transportation services for public use;
  10. lease on residential property;
  11. equipment for utilisation of gas in down-stream petroleum operations;
  12. microfinance banks people’s bank and mortgage institutions services; and
  13. locally manufactured sanitary towels.

Provisions of the Order

  1. The Order adopted the description of basic food items as contained in the Finance Act as agro and aqua based staple food. However, where these items are purchased in restaurants, hotels, eateries, lounges and other similar premises, they are not subject to the exemption. The Order further provides that basic food items sold by contractors, caterers and other similar vendors are not eligible for exemption.
  2. The Order provides that baby products refers to products made for children under three years including baby activity, entertainment products, clothing and even raw materials for diapers production.
  3. Educational books and materials: The Order expands the exemption to include electronic books. It also accommodates music materials, maps and charts, and materials used in vocational and religious education.
  4. Medical Products and Services: healthcare related services for both humans and animals are exempted from VAT. Furthermore, the raw materials used in manufacturing pharmaceutical products were included in the exemption list
  5. Transportation: only public road transport services shared by passengers are VAT exempt. Rented transportation for private use does not qualify for the exemption.
  6. Lease: the Order specifies that lease by individuals for residential purposes alone are VAT exempt. A lease by a corporate entity seeking residential accommodation for its staff will be subject to VAT.
  7. Petroleum Products: the Order exempts petroleum products from VAT including spirit, kerosene, natural gas, other liquefied petroleum gases and gaseous hydrocarbons.
  8. Renewable energy equipment such as wind and solar energy generators have been included in the exemption list.
  9. The Order provides the Common External Tariff (CET) Code for the products under the exemption list. This will provide clarity to importers, Nigeria Customs Service and other port authorities on the appropriate VAT treatment of the affected items and, hopefully, expedite their clearance at the ports.

However, on June 24th,2020, the Federal Inland Revenue Service (“FIRS”) issued a public notice to clarify enquiries it had received from taxpayers on the VAT exempt status of certain goods listed in the Order. In its clarification, the FIRS stated that certain items, which had been exempted from VAT by the Order, did not have the exemption status as they were not listed in the Act or a previous ministerial order. The items include: a) Natural gas; b) Essential raw materials for the production of pharmaceutical products; c) Renewable energy equipment; and d) Raw materials for the production of baby diapers and sanitary towels.

EFFECT OF THE FIRS NOTICE

The contradiction between the provision of the Order and that of the FIRS public notice on whether the items listed above are to be subject to the 7.5% VAT presents a conundrum for taxpayers, especially manufacturers and importers, in assessing their VAT liability. It is however pertinent to note that a public notice issued by the FIRS cannot override a subsidiary legislation promulgated by the Minister of Finance. Therefore, the provisions of the Order will be deemed to stand, pending the time the Ministry of Finance provides further clarity.

 

2020 LIST OF GOODS AND SERVICES EXEMPTED FROM VALUE ADDED TAX IN NIGERIA

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In Nigeria, Value Added Tax (VAT) is a consumption tax levied at the rate of 7.5% on goods and services supplied to consumers for a fee.  From a joint reading of the Value Added Tax Act 1993, the Finance Act 2019 and the recent Value Added Tax Act (Schedule Modification) Order 2020 (“Order”), below is the list of goods and services  exempted from VAT in Nigeria:

CONCLUSION

It should, however, be noted that the Federal Inland Revenue Service issued a public notice dated June 24, 2020, which seems to contradict the provisions of the Order stating that natural gases, raw materials for pharmaceutical products, renewable energy equipment, raw materials for baby diapers and sanitary products are not exempted from VAT. It is, therefore, advisable that businesses dealing in these goods seek legal advice prior to making key business decisions on the forgoing.

For more recent regulatory updates, visit our website at www.pavestoneslegal.com