DOING BUSINESS IN NIGERIA – A GUIDE FOR FOREIGN INVESTORS
INTRODUCTION
As many foreign investors have already discovered, Nigeria provides numerous
lucrative
investment
opportunities
in
varying
sectors:
infrastructure,
telecommunications, construction, solid minerals, fast moving consumer goods,
agriculture, oil and gas; as well as a large and growing market. The International
Monetary Fund forecasts that Nigeria’s Gross Domestic Product will grow by 7% in
2014, from 6.2% growth in 2013. With its relative stability, rapidly growing consumer
class, favourable demographics, and foreign investment-friendly operating
environment, Nigeria is very much open for business.
STRUCTURES FOR CARRYING ON BUSINESS IN NIGERIA
There are a number of company structures which are recognised by the Companies
and Allied Matters Act Cap C20, Laws of the Federation of Nigeria 2004 (“CAMA”)which is the principal legislation that regulates the affairs of Nigerian companies).
These include a private company limited by shares; a private company limited by
guarantee; and a public company limited by shares. A foreign investor that wishes to
set up in Nigeria would have to incorporate a company using one of these structures.
Notwithstanding that a foreign investor may regard its proposed Nigerian operations
as a branch or subsidiary, the Nigerian operations would have to be undertaken by a
separate legal entity, registered under the CAMA. This is because section 54 of the
CAMA provides that in order to do business in Nigeria, a foreign investor must
incorporate a separate entity in Nigeria, and until a foreign company is so
incorporated it “shall not have a place of business or an address for service of
documents or processes in Nigeria for any purposes other than the receipt of notices
and other documents as matters preliminary to incorporation under [the CAMA]”.
Notwithstanding this general rule, Section 56 of CAMA empowers the Federal
Executive Council (which is constituted by the President, Vice President and all
ministers, and represents the executive arm of the Nigerian government) to grant
exemptions from the mandatory incorporation requirement with respect to foreign
companies which are:
1. engaged by or with the approval of the Federal Government to execute
specific projects;
2. undertaking approved loan projects on behalf of donor countries or
international organisations;
3. foreign government-owned companies engaged wholly in export promotion
activities; or
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4. engineering consultants or technical experts working on specialist projects
under contract with any government of the federation or one of its
departments or under approved contracts with any other persons.
However, even if a foreign investor could qualify for an exemption from incorporation
on any of the above stated grounds, it might not always be advisable to seek such
exemption since:
·
Firstly, such exemptions are very rarely granted and, if granted, are only
granted in respect of one project and for a fixed period of time (usually
three years). The exemptions are hardly ever renewed.
·
Secondly, the Federal Executive Council may revoke the exemption at any
time if the Council is of the opinion that the company has contravened any
provision of the law or has failed to fulfil any condition contained in the
exemption order. This means that if a foreign investor sought and
obtained an exemption, it might well be vulnerable to the exercise of
executive discretion at some future date.
For the above reasons, we usually advise our foreign investor clients who are
seeking to explore other business opportunities in Nigeria, or who are engaging in
activities that will be carried out over an extended period in Nigeria, to incorporate a
local company unless there are specific reasons why this would not be appropriate.
Of the various company structures available, there are clear advantages under local
law to a foreign investor [doing business in Nigeria through a private company limited
by shares. These include:
·
this type of entity has perpetual succession and may incur liabilities of its
own;
·
as a private company, the shareholders – including a foreign investor - are
able to appoint, directly or indirectly, the directors and other persons who
will manage the company;
·
any liability that a foreign investor may incur as a shareholder is limited to
the amount unpaid in respect of any shares held by a foreign investor [NV]
in the capital of the company; and
·
should a foreign investor wish to divest itself of its interest, it will find that it
is relatively easy to transfer shares in a private company.
INCORPORATING A LIMITED LIABILITY COMPANY
The procedure and requirements for incorporating a private and a public limited
liability company are essentially the same. These requirements include the
following:
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i.
The company must have a minimum of 2 shareholders (who may be
individuals or corporate entities). With limited exceptions, companies in
Nigeria may be 100% foreign owned. For example, in order for an oil and
gas company to enjoy competitive advantage in the award of contracts in
the oil and gas industry, at least 51% of the shares of that company must
be owned by Nigerians. The initial subscribers must, between them,
subscribe for at least 25% of the authorised share capital of the company;
ii.
The company must have a minimum of 2 directors (who may also be the
shareholders of the company, and may each be foreign nationals);
iii.
The company must have a registered office;
iv.
The proposed company name must be approved by the Corporate Affairs
Commission (“CAC”) – Nigeria’s Companies’ Registry;
v.
An indication of the nature of the business to be carried on by the
company must be contained in the Memorandum and Articles of
Association of the company; and
vi.
A private limited liability company has a minimum authorised share capital
of =N=10,000.00; a public limited liability company has a minimum
authorised share capital of =N=500,000.00. This distinction is, however,
irrelevant in the case of companies with foreign equity participation
because such companies are required to have a minimum share capital of
=N=10,000,000.00 (ten million Naira) regardless of whether the company
is private or public.
The statutory fees payable to incorporate a company in Nigeria would be dependent
on the authorised share capital of the company. For instance, where the authorised
share capital of the company is =N=10 million the statutory fees payable would be
=N=168,500.00 (approx. $1,085.41 at the CBN’s current exchange rate of
=N=155.24 to =N=1.00).
FOREIGN INVESTMENT APPROVALS
Where a company has foreign shareholders, the company will require certain foreign
investment approvals. These are:
1) Business Registration: All companies with foreign participation in their
capital structure are required to register with the Nigerian Investments
Promotion Commission after they are incorporated, and obtain a Certificate of
Registration of Company with Foreign Participation. This is a fairly
straightforward process and registration can be achieved within 3 days. An
official fee of =N=15,000.00 is payable to the NIPC for the issuance of this
certificate.
2) Business Permit: Companies with foreign shareholders are also required to
obtain a certificate called a “business permit” from the Federal Ministry of the
Interior (“FMI”) before they are permitted to carry on business in Nigeria. In
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order to obtain the business permit, the company will need to, amongst other
things, provide evidence that it has invested in the Nigerian company either
through cash and/or equipment. This evidence will usually be in the form of a
Certificate of Capital Importation which is discussed below.
3) Certificate of Capital Importation: Nigeria’s foreign exchange regulations
require that foreign investors must, if they wish to have access to the official
foreign exchange markets for the purpose of remitting their dividends, interest
or capital, obtain what is called a Certificate of Capital Importation (“CCI”) as
evidence that their investment has been brought into Nigeria.
CCIs are issued by Authorised Dealers (i.e. banks licensed by the Central
Bank of Nigeria to deal in foreign exchange) through which the funds are
remitted into Nigeria and state, on their face, the purpose for which the
moneys were brought in and the amount of the investment.
Once obtained, a CCI permits the foreign investor to access the official foreign
exchange market to purchase foreign exchange to remit its dividends, or to
repatriate its capital in the event of the partial or complete sale of its
investment. A CCI can be obtained within 24 – 48 hours after the investor has
brought its foreign investment capital into Nigeria through an Authorised
Dealer.
EMPLOYMENT OF FOREIGN EMPLOYEES IN NIGERIA
1) Expatriate Quota Approvals: Where a company intends to employ
expatriates, it must apply for expatriate quota positions for the relevant
number of expatriate personnel it intends to employ. This approval is granted
by the Federal Ministry of the Interior and it is the authorisation that sets out
the maximum number of expatriates that a Nigerian company may employ.
There is no restriction on the number of quota positions that may be applied
for; however, the number of quota positions that will be granted is at the
discretion of the Minister of the Interior. The applicant company is, amongst
other things, required to have an authorised share capital of at least
=N=10,000,000.00 (ten million Naira).
Expatriate quotas are usually granted for a period of 2 years and may be
renewed up to 5 times or for a period not exceeding 10 years in exceptional
circumstances. The Federal Government of Nigeria has a policy of
encouraging the employment and training of Nigerians and, therefore, the
renewal of a quota position is normally dependent on showing that at least 2
(two) Nigerian employees have been appointed to understudy the expatriate.
2) Residents Permits and Visas: After the grant of the expatriate quota
positions, the expatriates will each be required to apply for residence permits,
in order for them to reside and work in Nigeria. Expatriates can be
accompanied by their families and dependant applications will be submitted
on their behalf.
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TAX REGISTRATIONS
All local companies are required to be registered with the relevant tax authorities for
tax purposes. After incorporation, the company makes an application to the relevant
tax office requesting the issuance of a Tax Identification Number (“TIN”), a Tax
Clearance Certificate (“TCC”) and VAT registration.
The taxes payable by local companies include:
a. Companies Income Tax levied at the rate of 30% on the profits of all
Nigerian companies (excluding certain tax-exempt companies and
companies engaged in the exploration for or production of petroleum);
b. Education Tax at the rate of 2% of corporate profits as assessed under
the Companies Income Tax Act (“CITA”);
c. Stamp Duties imposed at different rates on most legal documents;
d. Value Added Tax at a flat rate of 5% on the supply of a wide range of
goods and services;
e. Capital Gains Tax (CGT) levied at the rate of 10% on any gains from
the disposal of assets. This tax is not payable where the money is used
to acquire replacement assets within a twelve month period before or
after the disposal ( note that in Nigeria, there is no CGT on the disposal
of shares);
f. Withholding Tax ranging from 5% (for construction and agency
arrangements) to 10% (for dividend, interest and rent).
A company that employs staff is also required to:
a. make a monthly deduction of 2.5% of each employee’s basic salary
payable to the National Housing Fund;
b. make monthly contributions to a mandatory pension scheme
(contributions are made by the employer and the employee), if it has 5 or
more employees;
c. register with the Nigeria Social Insurance Trust Fund and contribute a
minimum of 1% of its total monthly payroll into the employees’
compensation fund; and
d. make a contribution of 1% of payroll costs to the Industrial Training
Fund if it has 25 or more employees.
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TAX INCENTIVES
There are several investment incentives available to investors in Nigeria which are
aimed at reducing their tax liabilities.
a) The Pioneer Status scheme established by the Industrial Development
(Income Tax Relief) Act grants companies, operating in certain
industries, that have a minimum expenditure of =N=50,000.00 (in the
case of companies controlled by Nigeria indigenes) or =N=150,000.00 (in
the case of any other company) a non-renewable tax holiday exempting
the company from the obligation to pay corporate income and education
tax, and the obligation to withhold tax on dividends for 5 years.
b) Manufacturers and purchasers of local plant and machinery are entitled
to an Investment Credit of 25% (for plant) and 15% (for machinery) –
convertible to an Investment Allowance (“IA”).
c) A company that is replacing plant and machinery is permitted to take a
Capital Allowance of 95% of the qualifying expenditure in the first year
with 5% retention as the book value until disposal. In addition, the CITA
permits the company to claim an IA of 15% of the qualifying expenditure
made in respect of the replaced assets.
d) An industry engaged in research and development is allowed to deduct
up to 120% of costs incurred and up to 140% of the cost if local materials
are used.
e) Capital Gains Tax is not charged in respect of gains from the sale of
shares and stocks.
f) The interest payable in respect of a loan granted to a Nigerian company
by a foreign company may be exempt from tax, depending on the tenor
of the loan and the moratorium granted. Applicable tax exemptions for
loans are as follows:
Repayment Period
including moratorium
More than 7 years
5 - 7 years
2 - 4 years
Less than 2 years
Grace Period
Not less than 2 years
Not less than 18 months
Not less than 12 months
Nil
Tax Exemption
100%
70%
40%
Nil
Additional incentives are also granted in respect of investments in certain sectors
such as the oil and gas, power, and agricultural sectors.
For example, where a company operating in the oil and gas sector utilises Nigeria’s
natural gas resources, the incentives that are available include a tax holiday for an
initial period of 3 years, which is renewable for an additional 2 years..
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In the power sector, all areas of investment are considered to be pioneer and would,
therefore, qualify for the grant of pioneer status.
In relation to agriculture, any company carrying out agricultural activities is entitled to
an exemption from the provisions of section 28A of CITA which imposes a minimum
tax on all companies regardless of whether or not they make a profit.
OTHER KEY MATTERS TO CONSIDER
In Nigeria, there are certain sectors which require special licenses to carry on
business in those sectors. These include the telecommunications, banking, capital
markets, insurance and the oil and gas sectors.
Agreements that provide for the transfer of foreign technology to Nigerian companies
are required to be registered with the National Office for Technology Acquisition and
Promotion (“NOTAP”) within 60 days of the execution of the agreement.
CONCLUSION
It is possible that the applicable laws relevant to the incorporation of companies may
be revised or changed. We would, therefore, recommend that detailed legal advice
should be sought and obtained in order to ensure that the information set out herein
is up-to-date and/or applicable to your circumstances. Should further advice be
required, Nigerian counsel should be contacted.
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