Introduction

In Nigeria, mergers are governed by the Federal Competition and Consumer Protection Act, 2018, which defines a merger as an event where one or more businesses acquire control over another. This can be achieved through purchasing or leasing shares, interests, or assets; amalgamating or combining businesses; or establishing a joint venture. For a merger to be legally binding, it requires the approval of relevant agencies, including the Federal Inland Revenue Service (FIRS).

Securing FIRS Approval for Mergers

According to Section 29(12) of the Companies Income Tax Act (CITA), obtaining FIRS clearance for taxes payable under the CITA or Capital Gains Tax Act (CGTA) is a prerequisite before any merger, takeover, transfer, or restructuring of a business. Without this approval, a merger cannot be fully executed.

To obtain FIRS approval, merging entities must submit several documents, including the scheme of merger, scheme of arrangement, and a due diligence report covering the tax aspects of the merging entities. If the merger involves related entities and the transfer of assets, the FIRS may require one of the entities to provide a guarantee or security for the payment of all due taxes, as stipulated in Section 29(9)(c)(i) of the CITA.

Tax Implications of Mergers

Upon obtaining the necessary approvals and completing the merger, several tax implications arise depending on the merger’s outcome. These implications include:

1. Capital Allowance
   • If a new company emerges from the merger, it must record transferred assets, liabilities, and reserves at their Tax Written Down Value, not at fair value. Any allowances already claimed by the absorbed company on these assets cannot be claimed again by the new company.
   • If one of the merging entities continues the consolidated business, it cannot claim investment and initial allowances on transferred assets but can claim annual allowances based on the Tax Written Down Value.
2. Unabsorbed Losses
   • A new company formed from a merger cannot inherit the unabsorbed losses and capital allowances of the absorbed companies unless it carries on the same business as the absorbed companies.
   • If one of the merging entities continues the consolidated business, it cannot inherit the unabsorbed losses and capital allowances of the merging companies.
3. Annual Returns
   • A new company must file its returns within eighteen months from incorporation or six months after the end of its first accounting period, whichever comes first.
   • If one of the merging entities continues the business, it must file within six months after its accounting year-end.
4. Cessation of Business
   • If a merging company ceases operations, its assessable profits will be calculated from the start of the accounting period to the cessation date, and taxes must be paid within six months from the cessation date.
   • For connected merging companies, the FIRS may decide not to apply the cessation rule.

Conclusion

Understanding the steps required for a merger and the necessary documentation for tax authorities is crucial to ensure a smooth transaction. Familiarity with the tax implications of different merger options helps in making informed decisions about the most suitable approach. Compliance with FIRS requirements and timely submission of documents are essential to avoid complications and facilitate the successful consummation of mergers in Nigeria.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.