SETTING UP & OPERATING BUSINESS IN NIGERIA

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TYPE OF BUSINESS A business may be conducted by individuals, partnerships or public and private limited liability companies. The names of public companies have the designation "Plc" added to them. Limited liability companies are governed by the Companies and Allied Matters Decree, 1990. A private company is required to have a minimum of two Directors and two Shareholders, while a public company is required to have a minimum of seven Directors and a minimum of seven Shareholders except when the shares are quoted on the Stock Exchange when the minimum number of Shareholders should be 50. For any expatriate investor doing business in Nigeria, a Nigerian limited liability company must be incorporated and approval must have been obtained from appropriate Government Authorities to establish such a business. Where a wholly owned company is to be formed by an expatriate investor, a minimum capital requirement of between N2 million and N20 million is required depending on the type of business to be established. A business permit on the investment must be obtained before the establishment of the company. A certificate of capital importation must also be obtained as evidence of foreign capital importation. Where a certificate of capital importation is obtained on a foreign investment, dividends and the proceeds from the sale of an investment can be repatriated. All limited liability companies are required to be audited and they must lodge their annual financial statements with the Corporate Affairs Commission. TAXATION Resident companies are subject to tax on their worldwide profits. Non-resident companies are taxed on the profits of their operations in Nigeria. A company is resident in Nigeria if it is incorporated and registered in Nigeria. A foreign company which intends to carry on a trade or business in Nigeria is required by the Companies and Allied Matters Decree to incorporate a Nigerian company. Corporate taxes The company income tax rate is 30%. However, tax is assessed at a reduced rate of 20% for a Nigerian company s first three taxable years if it is engaged in manufacturing or agricultural production or the mining of solid minerals and its turnover (gross sales) is under N500 000. Limited liability companies registered in Nigeria may apply for Pioneer Status, which is granted in industries vital to Nigeria s economic development or that would benefit the public interest. A company with Pioneer Status is granted a tax holiday of up to three years with a possible extension of a further two years and an additional two year extension if the company is located in an economically disadvantaged area. A tax holiday of three years is granted to companies operating in an "Export Processing Zone" in Nigeria, provided the exports represent at least 75% of the turnover of the companies. Similar relief is granted to new industrial undertakings engaged in exports but located outside the " Export Processing Zone", provided certain prescribed conditions are met. Companies engaged in mining of solid minerals are also eligible for tax holidays of three consecutive years. Companies are required to pay a minimum corporate tax if the minimum is greater than their actual tax liability. The minimum tax is computed by first determining the highest of the following : · 0.5% of gross profit · 0.5% of net assets · 0.25% of paid up capital · 0.25% of turnover up to N500 000 The company then adds 0,125% of turnover exceeding N500 000 to the figure to determine the minimum tax. Minimum tax does not apply to companies until their fifth year after commencement of business. Companies engaged in an agricultural trade or business and companies with at least 25% imported equity capital are exempt from the minimum tax requirement. Withholding Tax The withholding rate on investment income such as dividends and interest is 10%, and 15% on royalties. Capital Gains A capital gains tax of 10% is chargeable on the gains accruing from the disposal of all types of assets. Effective 1st January 1998, stocks and shares are no longer subject to capital gains tax. Value Added Tax With effect from 1 December 1993, a value added tax of 5% was imposed on virtually all goods whether manufactured in Nigeria or not. Also most services are affected. Exemptions are granted in respect of all medical and pharmaceutical products, basic food items, books and educational items, baby products, fertilizer, agricultural and veterinary medicine, farming machinery and farming transport equipment. The value added tax replaced the former sales tax. Other Taxes Petroleum profits tax, levied on petroleum and gas producing companies: 85%; 65%-75% for local crude oil sales and where pre-production capitalised costs are yet to be fully amortised. Nigeria Social Insurance Trust fund, monthly contribution of an amount equal to 7,5 % of the employees monthly basic salary up to a maximum of N48 000 in the following proportion: · Employer: 5% · Employee: 2.5% (Businesses with fewer than ten employees are exempt; expatriates covered by a plan in their home country may qualify for exemption). Education Levy - 2% of assessable profit Relief of Losses - All trade and business losses may be carried forward to offset profits of the same trade or business in future years. Losses may be carried forward for a maximum period of four years after which the losses lapse. Losses can not be carried back. Individuals Individuals are taxed on a sliding scale between 5% and 25%. Residents are taxed on their worldwide income. Non-residents are subject to tax only on Nigerian source income. Individuals are considered residents if they are: Nigerians residing in Nigeria regardless of their length of stay Expatriate employees of a resident company who are in Nigeria for the purpose of their employment Expatriate employees of a non-resident company who are in Nigeria for more than 183 days in a 12 month period A husband and wife are taxed separately. Foreign nationals resident in Nigeria are subject to tax on their worldwide income provided that the foreign income is brought into or received in Nigeria. Expatriates are not given any special tax treatment. Chargeable income is arrived at in the case of income from business or investment, after the deduction of expenses wholly, exclusively, necessarily or reasonably incurred in the production of such income and in all cases, except capital gains, after deduction of personal allowance. Employment income includes wages, salary, pension, fringe benefits and most allowances. Tax assessed on employment income is usually payable by monthly deduction from employee s remuneration under the Pay As You Earn (PAYE) system, the last deduction being from the employee s December remuneration. In cases where tax returns are filed late, direct payment can be made by the employee to the tax authority. A non-resident with investment income or director s fees, is not required to file tax returns, as tax deducted at source from such income is final tax payable by the non-resident. However, a recipient of a distribution of income by a partnership is required to file a tax return. Deduction of Allowances The following are deductible in arriving at taxable income : Earned income allowance 20% of earned income Personal allowance N5 000 Child allowance (4 maximum) N2 500 each Dependent relative (2 max) N2 000 Insurance premiums No limit Alimony N300 Premiums paid in respect of insurance contracted within and outside Nigeria are deductible. Non-residents are only entitled to earned income and personal allowances where the full tax computation is applicable. However, pensioners qualify for full allowance. The tax law provides for withholding tax on business income as follows: Line of Business Companies Individuals * Building construction/related activities and contracts (other than for the sale and purchase of goods and property) 5 5 * Consultancy, Management, Technical, Professional and Agency 10 5 * Directors fees - 10 If any investment income is earned by the business in addition to business income, the former is treated as a separate source of income. Only expenses incurred in producing it will qualify to be deductible. Investment is assessed on a resident at the scheduled personal tax rates after the deduction of any expenses incurred in the production of the income. For a non-resident, the tax withheld is the final tax. EXCHANGE CONTROL Before investing in Nigeria, foreigners should obtain a business permit from the Federal Ministry of Finance. A permit is granted after the investor provides satisfactory documentation that foreign currency or goods have been imported. A foreign investor who has obtained a business permit is guaranteed unconditional transfers in freely convertible currency of : * dividends or profits (net of taxes) attributable to the investment, * payment in respect of loan servicing where a foreign loan has been obtained, * the remittance of proceeds (net of all taxes) and other obligations in the event of a sale or liquidation of the enterprise or any interest attributable to the investment. Remittances must be made through authorised banks. Companies are free to determine the amount of dividends to distribute, but distributions must be made from current profits only. Borrowing funds to remit dividends is not allowed and an application for remittance of dividends to non-resident shareholders must be supported with documentary evidence including the relevant tax clearance certificate. VISA REQUIREMENTS With the exception of nationals of ECOWAS countries, all visitors to Nigeria must obtain a valid visa before entry. Also, the hotel and other expenses of such visitors must be settled in a foreign currency. Application Application forms are available from any Nigerian Embassy and the Federal Ministry of Internal Affairs in Nigeria.