Archive for category: Pavestones Newsletters

By Aderonke Alex- Adedipe and Feyijuwa Akinyanmi

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Introduction

Companies Income Tax (“CIT”) is a major source of revenue for the Nigerian government. To ensure continued inflow of revenue, the Companies Income Tax Act (“CITA“) provides for a number of measures to curb tax evasion and tax avoidance, one of which includes the provision for excess dividend tax.

Excess dividend tax in practice, has resulted in the double taxation of some companies caught under the provision.  To curb this menace, the Finance Act, 2019 has amended the provisions of the CITA by providing for exemptions to the excess dividend tax rule in Nigeria.

This newsletter considers the previous provision for excess dividend tax under the CITA and the exemptions provided for under the Finance Act 2019.

Excess Dividend Tax under the CITA

Under the CITA[1], where a company pays dividends to its shareholders while declaring that: (i) it made no profit for the year; or (ii) its profit for that year is less than the dividend paid out to its shareholders, the company paying the dividend will be taxed as if the dividend paid out is the total profit of the company for that year.

The rationale for the provision is to prevent tax avoidance/ evasion by companies on the basis that only profit generating companies in a financial year are capable of declaring and paying dividends to its shareholders. While this provision indeed curbed tax evasion and other unethical practices of companies, the provision had negative effects on companies that did not actually generate profit or whose declared dividends exceeded their profit for legitimate reasons.

By virtue of Section 19(1) of the CITA, the dividends of holding companies not carrying on any business were subjected to both withholding tax and companies income tax despite the fact that the withholding tax paid on the dividend was franked investment income and as such, not subject to further taxation.

In addition, companies declaring dividends based on their retained earnings or who had postponed the payment of dividends to the present year were made to pay income tax on the dividends declared previously been subjected to  income tax in the year the profit was actually made.

This in effect, discouraged many companies (local and foreign) from setting up holding company structures in Nigeria for fear of double taxation.

Exemptions to Excess Dividends Tax under the Finance Act 2019

Favouring the clamours for the review of this harsh provision, the National Assembly passed the Finance Act which created exemptions to excess dividend tax in Nigeria. Section 7(a) of the Finance Act amended Section 19 of CITA by providing for instances where the dividend of a company will not be subjected to income tax where the company does not declare profit for the year or where the profit of the company is less than the dividend declared. The exemptions are listed below.

1. Dividends paid out of the retained earnings of the Company– where the dividends of a company is paid out of its retained earnings which have been previously subjected to companies income tax, capital gains tax or petroleum profit tax, the company will not be required to pay CIT on it.

2. Dividends paid out of profits exempted from income tax– where a company pays dividends from its profit which has been exempted from tax by any law in Nigeria, the dividend paid will not be subject to excess dividend tax.

3. Franked investment income of the company– CITA[2] defines franked investment income as the dividend received by a corporate shareholder after deduction of withholding tax. The implication of this is that companies (e.g. holding companies) are no longer required to pay excess dividend tax on declared dividends which originate from franked investment income.

4.Distributions made by a real estate investment company to its shareholders– where a Real Estate Investment Company distributes dividends to its shareholders from its profit made from rental income or dividend income, such dividend declared will be exempt from excess dividend tax. This based on the provision of the Finance Act[3] which exempts the rental and dividend income of real estate investment companies from tax, provided that 75% of the dividend and rental income is distributed within 12 months after the end of the financial year in which it was earned.

Conclusion

The provision for exemption to excess dividend tax in Nigeria is and continues to be a welcome development in the Nigerian tax regime. It serves as an incentive for businesses intending to set up holding company structures in Nigeria and encourages corporate savings.

[1] Section 19(1) of CITA

[2] Section 80(3) of CITA

[3] Section 9 of the Finance Act, 2019

By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction
Money lending has from time immemorial been a part of the Nigerian economy and was borne as a result of the desire for individuals and businesses to secure access to funding. Currently, companies in Nigeria, interested in carrying on the business of providing credit facilities have the opportunity of considering several licensing options, including the Money Lender’s License. Generally, the Money Lender’s License is preferred by businesses because it is less capital intensive and the procedure for its application is less cumbersome in comparison to other licenses.

In today’s article, we highlight briefly, the  stages as well as the current requirements for obtaining a Money Lender’s License in Lagos State.

Who is a Money Lender?
The Lagos State Money Lenders Law (the “Law”) provides that any person who lends money at interest or who lends a sum of money in consideration of a larger sum being repaid will be regarded as a money lender until proven otherwise. Institutions such as co-operative societies, banks, insurance companies and licensed pawnbrokers are excluded from this classification under the Law.

Procedure and Requirements for Obtaining a Money Lender’s License in Lagos State
A company intending to procure a Money Lender’s License (Applicant) must fulfil the requirements listed below.

1. Application to the Magistrate Court
The Applicant is required to submit an application to any magistrate court of Lagos State for documents (“Magistrate’s Ordinance”) indicating that the Applicant is fit and proper in terms of character and disposition. The application to the magistrate court is to be accompanied by: (i) the incorporation documents of the company; (ii) the Tax Identification Number (TIN) of the company; and (iii) police clearance certificates issued on behalf of all the directors. Upon satisfactory review of the application, the Magistrate’s Ordinance will be issued by the court to the applicant.

2. Application to the Lagos State Ministry of Home Affairs and Tourism (the” Ministry”)
Upon issuance of the Magistrate’s Ordinance, the Applicant is required to apply to the Ministry for the issuance of the Money Lender’s License. The application is to be made in form of a written application on the Company’s Letterhead. The application letter is to be accompanied by:
(i) copies of Tax Clearance Certificates of all directors of the company (for past 3 years);
(ii) the Tax Clearance Certificate of the company;
(iii) incorporation documents of the company
(iv) a reference letter from the company’s bankers;
(v) proof of payment of the Money Lender’s License fee in the sum of N200,000 (Two Hundred Thousand Naira);
(vi) proof of payment of fees for the application form in the sum of N25,000 (Twenty-Five Thousand Naira); and
(vii) evidence of police clearance of all directors of the company.

Requirements for Companies with Foreign Participation
Companies with foreign directors must have at least one Nigerian Director. In addition, the foreign directors must have permits to live and  do  business in Nigeria.

Furthermore, Applicants who have foreign shareholders or ultimate beneficial owners (in the case of a foreign corporate shareholder) are now also required to present proof of residency to the Ministry.

3. Inspection of the Official Address of the Applicant
Upon satisfactory review of the above-listed documents, the officials of the Ministry will conduct a visit to the official address of the Applicant. The visit is conducted to ensure that the Applicant’s business is a potential going concern. Where the officials of the Ministry are satisfied that the Applicant has complied with all statutory requirements, the Money Lender’s License will be issued. The Money Lender’s License is valid for a period of one year and the applicant will be required to renew the license annually to continue to carry on business as a money lender.

Conclusion
The requirements for obtaining a Money Lender’s License varies from state to state and are periodically reviewed by the relevant state ministries. While the above highlights the current requirements for obtaining the license in Lagos state, the Ministry in some cases, applies discretion on a case by case basis and may require additional information when necessary. It is therefore prudent that intending applicants make enquiries to ensure that the above requirements are applicable.

By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

Over the years, trademarks have gained prominence around the world as one of the most important intangible assets of any business. Trademarks play a crucial role in branding as they provide businesses and their products with a unique identity. Today’s article will discuss the requirements and procedure for registration of trademarks in Nigeria.

What is a Trademark?

A Trademark may be defined as a mark or combination of marks used to individualize the goods or services offered by a business and distinguish them from those offered by other businesses[1]. Trademarks are important in the world of business as they are indicators of the origin and quality of goods and services. They also enable businesses to distinguish their products from those of competitors in the market.

Registration of a trademark gives the owner, the rights to use, sell and/or license the trademark to the exclusion of all others. Trademarks may take the form of a name, signature, logo, word, letter, device, numeral or a combination of these.

Registrable Trademarks in Nigeria
An important criterion for the registration of a trademark in Nigeria is that such trademark must be distinctive. Trademarks which are deceptive, scandalous or identical to an already registered trademark in respect of the same goods or service are not eligible for registration in Nigeria.

It is pertinent to note that trademark registration in Nigeria is done in accordance with the Nice Classification established by the Nice Agreement of 1957, which provides for the classes of goods and services under which business owners may apply for the registration of their trade mark. Business owners are required to register their trade mark under the class which the business description of the trade mark falls. The implication of this is that the trade mark will only be protected under the class in which the trademark is registered by the business owner.

Procedure for the registration of a trademark in Nigeria
Registration of trademarks in Nigeria is done at the Trademarks, Patents and Designs Registry, of the Federal Ministry of Industry, Trade and Investment (“Registry”). An applicant is required to appoint an accredited agent to conduct the registration on his behalf through a power of attorney in the prescribed form. The procedure for registering the trademark is summarized below:

i. Conduct an availability search: The accredited agent is required to conduct an availability search at the Registry, to determine whether the mark is available under the relevant class. Where the trademark is not in conflict with any existing trademark, under the relevant class, the accredited agent can proceed to register the mark;

ii. Application-Acknowledgement: Upon confirmation of the availability of the trademark, the accredited agent will be required to fill the relevant statutory application form detailing the personal information of the owner of the mark as well as the name and/ or specimen of the logo or mark which the applicant intends to register. Upon submission of the application form and payment of the required fees, the Registry will issue an Acknowledgement Form to the accredited agent confirming receipt of the application;

iii. Acceptance: Upon acknowledgement of the application, the trademark will be examined by the Registry to confirm its distinctiveness and to ensure that it is not in conflict with any previously registered trademark. An Acceptance Form will be issued where the trade mark is deemed satisfactory by the Registry;

iv. Publication of the Trademark: After the Acceptance Form has been issued by the Registry, the trademark application will be published in the Trademarks Journal. The publication is a public notification to interested parties who may have any reservations on the registration of the trademark. Any person who may have an objection to the registration of the trademark is required to file same with the Registry within 2 months of the publication; and

v. Issue of a Certificate of Registration: Where no objection is filed against the registration of the trademark or where such objection is withdrawn or overruled, the applicant will be issued a Certificate of Registration by the Registry.

It is important to note that a trademark registration is valid for a period of 7 years at the first instance and subsequently renewable every 14 years after.

Conclusion

Presently, many businesses suffer from counterfeiting, imitation and other forms of infringement. While the registration of trademarks alone is not sufficient to prevent these, businesses are encouraged to register their trademarks, as the registration of the mark confers registered holders with the right to enforce it against others.

[1] Introduction to Trademark Law & Practice, authored by World Intellectual Property Organization.

Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

Nigeria has in recent times, struggled with sustaining the liquidity in the foreign exchange market and stabilizing the value of the Naira. The Central Bank of Nigeria (CBN), the apex regulator of financial institutions and financial activities, has continued to put measures in place to ensure the availability of foreign currency to consumers.

On 27th July, 2021, the CBN announced at the Monetary Policy Committee, the cessation of weekly allocations and sale of foreign currency to Bureau Du Change (BDC) Operators in Nigeria. Today’s article will consider the rationale for the cessation as well as the effects on the Nigerian economy.

BDCs and their Primary obligations

BDCs are essentially non- bank corporate entities licensed by the CBN to carry out foreign exchange business on a small scale. They are primarily licensed to service the foreign exchange requests of customers who require foreign currency for purposes such as Business Travel Allowance (BTA), Personal Travel Allowance (PTA), school fees, medical bills, utility bills and life insurance premium and such other transactions which the CBN may from time to time permit.

Rationale for the CBN’s Decision

The decision of the apex bank to halt the sale of foreign currency to BDCs is based on the premise that BDCs have been conducting foreign exchange transactions which are contrary to their mandate. In addition, BDCs have been accused of being used as conduits for money laundering activities.

It is important to note that the CBN’s Revised Operational Guidelines for Bureau Du Change in Nigeria, 2015 (Guidelines) and other directives of the CBN stipulate that the maximum amount to be allocated to a customer for a foreign exchange request  for BTA or PTA is $5,000 and $4000 respectively. The CBN Foreign Exchange Manual, 2018 also stipulates that BDCs are only permitted to sell foreign exchange to customers who require the foreign currency for BTA, PTA and payment of foreign bills highlighted above. In addition, one of the conditions of sale is that the foreign currency is to be sold to customers at the CBN’s specified profit margin. In reality, however, these rules have not been complied with for many years and sourcing foreign exchange from BDCs has been equivalent to purchasing from the parallel market. In addition, BDCs have continued to deal in foreign exchange transactions with members of the general public, whether or not they meet the required criteria.

To ensure continued liquidity in the foreign exchange market, the CBN has announced that the weekly allocations of the BDCs will be diverted to Authorised Dealers (commercial banks) who are now required to meet the legitimate demands of customers. According to the CBN’s directive to commercial banks, all banks are required to set up teller points at designated branches across the country to fulfil legitimate foreign exchange requests for PTA, BTA, payment of tuition fees, medical payments, amongst others.

Effect of the CBN’s Announcement

The implication of the CBN’s announcement is that whilst existing BDCs have not been barred from dealing in foreign exchange transactions, they are no longer able to purchase foreign exchange from the apex bank. Therefore, their only source of foreign exchange would be from the parallel market.

In effect, the cessation of the sale of foreign currency by the CBN to BDCs will likely create scarcity and result in a spike in the foreign exchange rate in the parallel market. Although the CBN’s reallocation of funds to the commercial banks is intended to curb scarcity, it is unlikely that the commercial banks will be able to fulfil all customers’ obligations in due time.

In addition, BDCs have been a major source of foreign currency to businesses which are not eligible to obtain foreign currency from the official Nigerian Foreign Exchange Market for the purpose of fulfilling their foreign obligations. By virtue of the CBN’s Foreign Exchange Manual, 2018 directing such businesses to obtain foreign exchange from autonomous sources, these businesses have relied on BDCs to provide foreign exchange without breaching anti- money laundering laws. The CBN has, however, by its decision shut another window for businesses to obtain foreign currency.

Conclusion

Although, the decision of the CBN is commendable to the extent that BDC operations beyond their original mandate will now be curbed, it is important to note that this decision may also strain the foreign exchange market, thereby creating further hardship for legitimate businesses with foreign exchange obligations.

It is therefore recommended that rather than cease supply to BDCs, perhaps a more effective solution would be enforcement of applicable CBN regulations which have not been complied with.