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Basic tax & non-tax considerations for merging entities in Nigeria

Friday, 07 March 2014   (0 Comments)
Posted by: Author: Deloitte
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Author: Deloitte

There are different stages in the life cycle of a business. At a certain stage, the Management of businesses may seek to change ways the businesses are organised. Drivers for such change may be internal or external. Internal would be where Management is purely seeking better alignment of functions and operations of the business or to streamline the number of entities in the group for greater efficiency.

In other instances, drivers for change are external to businesses such as the need to: address new markets, react to changes in demand, meet regulatory requirements, keep up with new technologies or products from competitors or even consequences of re-organisation by competitors. For instance, in 2005, the financial service industry witnessed a number of mergers/acquisitions as a result of reforms by the Central Bank of Nigeria.

Whatever the driver, one main reason for restructuring or re-organising a business is to enable it to achieve its objectives. Notable vehicles for achieving business re-organisation  or restructuring therefore include merger and acquisition (M&A). Today, there are many specialists in this area. Federal Inland Revenue Service (FIRS), in its information circular (the Circular) of 2006, defines merger as ''any  amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate".

We are aware of many offshoot M&A cases in Nigeria, that is, those involving separate subsidiaries of multinationals who have merged their businesses outside Nigeria as well as homegrown M&A cases. Recently, there has also been increase in the number of business re-organisation involving mergers in the consumer foreign companies have also leveraged M&A of local entities to penetrate the Nigerian market.

  • Generally, M&A involve series of legal, accounting and financial activities. These include:
  • Performance of accounting, regulatory/legal and tax due diligence
  • Drawing up of relevant agreements
  • Business valuationFiling of papers/ documents with, and notification of regulators
  • Court processes
  • Post-merger compliance actions

As beneficial as M&A can be, a company can experience unwarranted costs and possible exposures when it fails to adequately evaluate the effects and implications of its merger plans- one of which is tax.

The first step in managing tax risks in an M&A transaction is to understand what the risks are and this is done by carrying out a tax due diligence exercise. This exercise is useful in identifying present and future tax exposures that the post-merger entity may have to contend with. A proper business valuation for merger purposes would not be complete without proper valuation of the tax assets and liabilities, amongst other balance sheet items, of the merging entities Section 25(12) of the Companies Income Tax Act (CITA) specifies that "no merger, take over, transfer or restructuring of the trade or business carried on by a company shall take place without having obtained the Board's direction with respect to trade or business sold or transferred under subsection 9...)". This provision requires the companies Management to notify FIRS of their merger plans in advance or as soon as possible before completion. FIRS would typically approve the merger so long as due approvals have been obtained from the relevant regulatory bodies and it is able to recover all taxes due from the merging entities.

Section 25 (9) of CITA provides certain incentives in cases of business restructuring or re-organisation where the applicable conditions are met. Furthermore, any gains arising from such "reorganisation" where no cash payment is made for share or asset exchange are exempted from the application of capital gains tax. Would there be exposure to value added tax (VAT)? There is no specific exemption in this regard. However, the applicability or not of VAT may depend on the structure of the transaction.

  • Other non-tax issues to be considered in a merger include:
  • Competitors' use of the merging entities' former brands and the associated goodwill
  • Where a new company is formed, registration of business with the relevant authorities
  • Employee redundancy, sometimes leading to reputational damage for the companies
  • Culture shocks and clashes
  • Workforce conflicts and other office politics issues 

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