This memorandum has been prepared by George Etomi & Partners (“GE&P”) to guide a foreign company wishing to do business in Nigeria.
GE&P does not, in this memorandum, intend to provide comprehensive advice on the most appropriate structures or strategies for a specific investment. The information provided is of a general nature and we recommend that, before proceeding with any investments or establishing a business in Nigeria, the foreign investor should forward any additional questions or requests for advice that is specifically tailored to their business plans and other requirements to us for further consideration.
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) such as 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 operate 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”.
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.
There are obvious advantages to a foreign investor in doing business under the aegis of a limited liability company in Nigeria. Some of the obvious advantages are:
- under Nigerian law, this particular entity has perpetual succession and may incur liabilities of its own;
- as a limited liability company, the shareholders – including a foreign investor - would be 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 in the capital of 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 limited liability company.
If the foreign investor’s business involves, for instance, manufacturing, then the foreign investor will certainly require a corporate presence in Nigeria. This requirement of the law applies to all foreign companies intending to carry on business anywhere in Nigeria.
A possible alternative option is for a foreign investor to open a representative office and simply maintain a presence through an agent for the purpose of supervising the relationship with the distributor and any other business activities. The difficulties with this option are that if the agent is not a Nigerian, he or she would need to be sponsored by a Nigerian entity in order to obtain a visa and the necessary permits to live and work in Nigeria. Unless carefully managed, the agent could be perceived as the protégé of that sponsoring entity. The agent or representative – whether Nigerian or not – would not be able to rent property or maintain a bank account in the foreign investor’s name, and it may be important that the foreign investor be able to do both.
Furthermore, even under this option, it would be necessary for the foreign investor to operate by way of an incorporated company. Under Nigerian Law, a representative office, however limited its remit, is required to be incorporated in Nigeria since CAMA provides that 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 this [Decree]”. We therefore do not recommend this option.
INCORPORATING A LIMITED LIABILITY COMPANY
The procedure and requirements for incorporating a private and a public limited liability company are essentially the same and fairly straightforward. These requirements include the following:
- 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. The initial subscribers must, between them, subscribe for at least 25% of the authorised share capital of the company.
- The company must have a minimum of 2 directors (who may also be the shareholders of the company, and both of whom may be foreign nationals);
- The company must have a registered office;
- The proposed name of the company must be approved by the Corporate Affairs Commission (CAC) – Nigeria’s Companies’ Registry;
- 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;
- A declaration, sworn to by a lawyer, that all matters preliminary to the registration of the company have been complied with; and
- A private limited liability company has a minimum authorised share capital of
N10,000.00; a public limited liability company has a minimum authorised share capital of N500,000.00. 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 N10,000,000.00 (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.
FOREIGN INVESTMENT APPROVALS AND AUTHORIZATIONS
Where a company has foreign shareholders, the company will require certain foreign investment approvals. These are:
- Business Registration:
All companies with foreign participation in their capital structure are required to register with the Nigerian Investments Promotion Commission (NIPC) after they are incorporated, and obtain a Certificate of Registration of Company with Foreign Participation. The Nigerian Investments Promotion Commission Act, 1995 (NIPC Act) permits foreigners to own up to 100% of any business enterprise with the exception of enterprises on the “negative list” of the Act. The negative list includes enterprises involved in the production of and dealing in arms, ammunition, narcotic drugs and psychotropic substances.
The process of registering with the NIPC is fairly straightforward and registration can be achieved within 3 days.
- 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 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. It should however be noted that the issuance of a business permit to a person does not in any way dispense with the need to apply for an appropriate visa as well as a residence permit.
- 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.
4) Approval for Transfer of Technology and other Agreements
By virtue of the provisions of the National Office for Technology Acquisition and Promotion Act, 1992, any agreement under which a foreigner is to provide foreign technology, management, or assistance, to a Nigerian company must be approved by the National Office for Technology Acquisition and Promotion (“NOTAP”).
If it is anticipated that the foreign investor or any of foreign investor’s affiliated foreign companies will provide technology, management or technical assistance to its Nigerian company then it would probably be appropriate for that foreign company to enter into a technical services or management agreement with the Nigerian company. Such an agreement will have to be registered with NOTAP in accordance with the provisions of the National Office for Technology Acquisition and Promotion Act. The application for registration with NOTAP must be submitted within 60 days after the execution of or conclusion of the agreement, failing which a penalty is payable to NOTAP for late filing.
Fees payable for the provision of such technology or services must also be approved by NOTAP. Subject to the applicable limits, fees and royalties can be remitted through the Foreign Exchange Market (‘FEM’) in accordance with the provisions of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995 (‘FEMM Act’) and Central Bank of Nigeria (‘CBN’) regulations.
EMPLOYMENT OF FOREIGN EMPLOYEES IN NIGERIA
- 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 authority which sets the number of expatriates that a Nigerian company may employ.
Please note that the number of quota positions that will be granted is dependent on the share capital of the company (15 Million – 30 Million share capital is entitled to a maximum automatic quota of 2 expatriate quota slots, while above 30 Million is 4 automatic quota positions). Note however that a company may be granted more slots at the discretion of the Minister of Interior. The applicant company is, amongst other things, required to have an authorised share capital of at least
N10,000,000.00 (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.
It is possible, however, for companies with foreign equity participation to obtain a “permanent until reviewed” (PUR) quota. This will normally be given in respect of chief executives of such companies. A fee payable in convertible foreign currency is charged for renewals or grants of PUR quotas. Regulation 5(7) of the Immigration Regulations 2017 also stipulates that foreign nationals who have imported an annual minimum “threshold of capital” over a period of time as stipulated in Section 37(11) of the Immigration Act 2015 may be conferred with the benefit of permanent residence.
- 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(s) applications will be submitted on their behalf.
- Visa on Arrival Policy
The Nigerian government now has a Visa on Arrival policy to enable ease of access for foreign investors. The policy has been enshrined in Regulation 9 of the Immigration Regulations 2017 and Section 16 of the Executive Order on the Promotion of Transparency and Efficiency in the Business Environment 2017 otherwise known as the Executive Order on Ease of Doing Business.
Beyond the Visa on Arrival policy, foreign nationals looking to do business or take up employment in Nigeria are also now assured of speedy processing of their applications as Section 14 of the Executive Order on Ease of Doing Business mandates a 48-hour window for the Consular Office of Nigerian Embassies and High Commissions to grant or reject such applications with reason.
TAX SYSTEM AND REGISTRATIONS
All 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:
- 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);
- Education Tax at the rate of 2% of corporate profits as assessed under the CITA;
- Stamp Duties imposed at different rates on most legal documents;
- Value Added Tax at a flat rate of 5% on the supply of a wide range of goods and services;
- 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 (please note that in Nigeria, there is no CGT on the disposal of shares);
- Petroleum Profits Tax
- 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:
- make a monthly deduction of 2.5% of each employee’s basic salary payable to the National Housing Fund;
- make monthly contributions to a mandatory pension scheme (contributions are made by the employer and the employee), if it has 15 or more employees;
- 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
- make a contribution of 1% of payroll costs to the Industrial Training Fund if it has 25 or more employees.
There are several investment incentives available to investors in Nigeria which are aimed at reducing their tax liabilities.
- The Pioneer Status scheme established by the Industrial Development (Income Tax Relief) Act grants companies, operating in certain industries, that have spent a minimum of
N50,000.00 (in the case of companies controlled by Nigerian indigenes) or N150,000.00 (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.
- 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”).
- 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. The Companies Income Tax Act (“CITA”) in addition, permits the company to claim an IA of 15% of the qualifying expenditure made in respect of the replaced assets;
- 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;
- Capital Gains Tax is not charged in respect of gains from the sale of shares and stocks;
- 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
Above 7 years
Not less than 2 years
5 - 7 years
Not less than 18 months
2 - 4 years
Not less than 12 months
Below 2 years
Additional incentives are also granted in respect of investments in certain sectors such as the oil and gas, power, solid minerals 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.
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.
The Federal Government of Nigeria in July 2017 through an Executive Order, "Executive Order No. 004 of 2017 on the Voluntary Assets and Income Declaration Scheme (the Scheme) introduced a tax amnesty policy to subsist for 9 (Nine) months.
Under the scheme, all categories of taxpayers who have defaulted in payment of taxes due and collectible under Federal and State Law may now voluntarily declare their Assets and Income relating to the preceding six (6) years of assessment, pay the taxes due on them and in return obtain some benefits which include immunity from prosecution for tax offences, immunity from tax audit, waiver of interest, waiver of penalties, and the option of spreading payment of the outstanding liabilities over a maximum period of three (3) years as may be agreed by the relevant tax authority.
Companies that have not been fully declaring their taxable income and assets, have been underpaying or under remitting, and/or are under a process of tax audit or investigation with the relevant tax authority can now take advantage of the tax amnesty under the scheme within the available timeframe or otherwise face the consequences of default; one of which includes liability to be prosecuted in accordance with relevant extant laws for tax offences.
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.
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.
We hope you find our memorandum useful, please do not hesitate to let us know if there is any aspect of this memorandum that requires clarification, or if you require any other assistance in relation to the subject matter.