In simple terms, the Capital Gains Tax (CGT) is a tax on the profit obtained from the disposal or exchange of certain types of assets.  Hitherto, there were a few exemptions from this tax, which notably included the gains on the disposal of shares in Nigerian companies duly registered in accordance with the Companies and Allied Matters Act (CAMA). These exemptions were detailed in the companies’ Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 201, which became effective from January 2nd , 2012 and was to last for a decade.

These waivers have since lapsed on the 1st of January 2022 and this effectively restores the liability to pay CGT on profit made from the disposal of shares in Nigerian companies. In addition, the recently implemented Finance Act 2021 further entrenches the stipulation that corporate investors in the Nigerian capital market are to pay a CGT of 10% on the gains accruing from the sale of their shares in any Nigerian company. However, it is pertinent to note that this tax is only applicable on the sale of shares worth N100 million and above.

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Key points to note:

The CGT is not applicable in the following instances:

If the disposal proceeds in the aggregate are less than N100 million in any 12 consecutive months.

If the proceeds from such sales are reinvested in the purchase of shares in the same or other Nigerian companies in the same year of the assessment.

If the shares are transferred between an approved borrower and lender in a regulated securities lending transaction.

In the sales of Nigerian government securities eg. Federal Government of Nigeria (FGN) bonds, FGN Savings bonds.

 An easy example:

If an investor purchases a stock for N100 million and later sells the shares for N150m, thereby making a profit of N50 million, the CGT of the rate of 10% would be charged on the profit of N50 million, which amounts to a tax implication of N5 million.

The following points are also noteworthy:

If the investor does not reinvest the N150 million, the CGT will be imposed on only the N50 million.

If the investor goes ahead to reinvest the N150 million in another listed equity, they do not pay the CGT.

If the investor sells the stock for N90 million, at a loss, they are also not liable to pay the CGT.

If the investor reinvests N120 million out of the N150 million sale proceeds, they will be liable to pay CGT on N30 million.

At present, there is a paucity of information as to how the reinstated tax liability will be administered. Without the benefit of more detailed information and direction from the regulators, it would appear that the Finance Act places the burden of assessment and collection on the individual or entity disposing of the security. Such an arrangement would require that stockbrokers and custodians adjust their tracking/trading platforms accordingly to capture this new tax bracket.

Prior to the introduction of this Act, the only tax Nigerian investors paid on the return on their investment in shares was a 10% withholding tax on their dividends. As such, the CGT represents an increase in the cost of transactions in the Nigerian capital market, particularly for the institutional and High Net-worth Individual clients (HNI) that typically transact such volumes, and are the most likely to be affected by the lapsing of this waiver.

Closing Thoughts

While the reinstatement of CGT on shares (which appears to be targeted at institutional investors and High Net Individuals) would provide additional government revenue as is the case with several other countries who apply this tax for equity trades, the timing raises some concern particularly given the need for increased market participation and other investing climate challenges.

The situation also begs for clarity to ensure its proper and effective administration and several questions remain unanswered like the treatment of capital losses for instance, would capital losses lead to a tax credit? It is also not clear if mutual funds and their likes would be subject to the CGT. If they are, then there is a pass-through effect on other classes of investors that bears consideration.