Tax Considerations During Mergers and Acquisitions in Nigeria

The tax laws also require that when a merger and acquisition involves related companies, the approval of the Federal Inland Revenue Service (FIRS) must be obtained.

When faced with business and economic challenges, shareholders and directors of companies consider various strategies that can increase their resource base, diversify their portfolio, reduce their risks, expand their market share through the elimination of vicious competition and ultimately, enhance their earning abilities. One type of such strategy is Merger and Acquisition (M&A).

M&A activity in Nigeria is generally governed by the Investment and Securities Act (ISA), the Companies and Allied Matters Act, the Rules and Regulations of the Securities and Exchange Commission (SEC) and the Federal Competition and Consumer Protection (FCCP) Act.

The power to approve mergers is now vested in the Federal Competition and Consumer Protection Commission, instead of the Securities and Exchange Commission (SEC). However, the participants to a small merger do not need to notify the Federal Competition and Consumer Protection Commission (FCCPC), unless the FCCPC requires it to do so. The FCCP Act also prescribes rules for large mergers as the only other type of mergers. 

What is Merger and Acquisition

Merger is a combination or integration of two or more existing companies to form a single company. It is an arrangement where for strategic and economic reasons, two or more companies or organizations come together to form a larger company. Acquisition on the other hand, also known as take-over, is an arrangement where one company buys another company and folds it into its operations. In both cases, a single entity is usually produced from the combination of multiple companies.

Before a merger or an acquisition can take place, the consent of the Federal Inland Revenue Service (FIRS) must be sought. This is in line with the provision of Section 29(12) of CITA which states “No merger, take-over, transfer or restructuring of the trade or business carried on by a company shall take place without having obtained the Service’s direction under subsection 9 of this section and clearance with respect to any tax that may be due and payable under the Capital Gains Tax Act”.

M&A or business reorganization has numerous tax consequences. This is because M&A can result in the formation of a new company, continuation of the consolidated business by one of the merging parties in its name or under a new name and cessation of business by the other absorbed parties. This article discusses some of the tax considerations during mergers and acquisitions in Nigeria.

Exemption from the Application of Commencement Rule

The application of the commencement rule will apply depending on the nature of relationship that exists between the parties involved in the reorganization. If the reorganization arrangement is between related parties, and a new company emerges from the process, the new company will not apply the commencement rule. Section 29(9) of CITA posits that where a trade or business is sold or transferred to a Nigerian company for the purposes of better organization and one company has control over the other or that both are controlled by some other person, then the commencement rule will not be applicable. The company will file its returns as a going concern and its self-assessment returns will be determined on a preceding year basis.

Also, if the new company or the re-constituted company is incorporated to carry on any trade or business previously carried on in Nigeria by a foreign company, then the commencement rule will not apply as well, provided that the FIRS is satisfied that the trade or business carried on by the re-constituted company immediately after the incorporation of that company is not substantially different in nature from the trade or business previously carried on in Nigeria by the foreign company. This is in line with the provisions of Section 29(10) of CITA.

If the reorganization involves unrelated parties and a new company emerges from the merger, the new company is expected to file its returns based on the commencement rule.

Exemption from the Application of Cessation Rule

The reorganization may also lead to the cessation of business. The same principle under the commencement rule applies under the cessation rule. The reconstituted companies will not apply the cessation rule subject to the discretion of the FIRS, while unrelated entities will apply the cessation rule under Section 29(4) of CITA in respect of the absorbed companies that cease operations. The FIRS may also require the new company to guarantee or give security for payment in full, for any tax due or that may become due by any of the ceased companies.

Carry Forward of Unabsorbed Tax Losses

For unrelated entities, the new company that emerge from the merger arrangement is not allowed to take over any unabsorbed tax losses of the former entities. For a reconstituted company as seen under the commencement rule above, in line with the provision of Section 29(10), the amount of any loss incurred during any year of assessment by the company in the trade or business previously carried on by it, which is unabsorbed or unrelieved, will be to be a loss incurred by the re-constituted company in its trade or business during the year of assessment in which its trade or business commenced; and the amount of that loss will be deducted from the assessable profits of the re-constituted company.

Claim of Capital Allowances

Since unrelated entities will apply the commencement rule, the new company is entitled to all the capital allowances (initial, investment and annual allowance) based on the actual cost of acquisition during the M&A. For related entities, the company acquiring the assets will not be entitled to any initial and investment allowance with respect to that asset but can be entitled to annual allowance. The re-constituted company will also not be entitled to any initial and investment allowances in respect of those assets and will be deemed to have acquired the assets of the absorbed entity at its tax written down value.

Exemption from Capital Gains Tax

For related entities, section 32 of the Capital Gains Tax Act (CGTA) provides that CGT would not apply on the sale or transfer of assets in respect of an M&A arrangement where the reorganization arrangement is between related parties. The section further states that for such exemption to apply, the related parties must have been connected for at least 365 days prior to the date of reorganization. However, if the acquiring company were to make a subsequent disposal of the assets acquired within the succeeding 365 days after the date of transaction, any concessions earlier enjoyed under this subsection shall be rescinded and the companies shall be treated as if they did not qualify for the concessions stipulated in this subsection as at the date of initial reorganization.

Other Considerations

Section 42 of the Value Added Tax Act imposes 7.5% VAT on the supply of goods and services not exempted under the VAT Act. Thus, assets transferred pursuant to the M&A transaction and services provided in connection with the transaction be subjected to VAT. Services rendered by professional advisors in relation to the M&A transaction would be liable to VAT and WHT.

The Finance Act 2019 expands the definition of "instruments" in the Stamp Duties Act to include electronic documents. There is the obligation to stamp an M&A agreement even when electronic document is sent to a counterparty in Nigeria. Stamp duties will also apply where additional shares registration is required with the Corporate Affairs Commission (CAC).


Merger and Acquisition transactions are rife with tax issues and it is vital for companies to evaluate the tax considerations. Companies should consider the tax treatment of the M&A especially when it is with related entities. Companies should bear in mind section 29(9) of CITA on exemption from commencement and cessation rules, VAT exemptions as seen in section 42 of the VAT Act and other tax incentives related to M&A.


Tax Considerations During Mergers and Acquisitions in Nigeria
Tax Considerations During Mergers and Acquisitions in Nigeria