Nigeria FDI Update 2020 – Part 1.

2 January, 2020

 

What is the level of FDI activity in your jurisdiction at the moment and how does that compare to the last two years?

 

The National Bureau of Statistics reported a total value of capital importation into Nigeria of USD5.3 billion in Q3 2019, an 87.99% increase compared to the same period in 2018.  Of this amount, FDI stood at 200.08 million (USD196.38 million – equity, and USD3.70 million – other forms of capital).  Despite the increase in capital importation in Q3 2019, there has been a decline in the total FDI for Q1 to Q3, compared to the same period in 2018.  FDI started strong in Q1 but experienced a sharp decline in Q2.  The decline was not unexpected, given the World Bank’s forecast of a decline in global growth to 2.9%, and the uncertainty around the post-election cycle.  Investor confidence seems to have been bolstered in Q3, given the increase in FDI activity for the period, and this may not be unrelated to the fact that the election of the President has been confirmed by the Nigerian Supreme Court and the President has hit the ground running by constituting his cabinet, setting out the government’s framework for the next 4 years.

 

The destination of the capital imported into Nigeria remains the same, with a significant percentage of the capital going to Lagos state (the commercial nerve centre), and Abuja (the capital).  Lagos remains attractive for investors, given its teeming youth population and the ports – which are central to the Nigerian economy.  Having said this, some foreign investors are setting up in Ogun state and Oyo state, given the friendly business environment in these states and their proximity to Lagos.

 

The market has benefitted immensely from the stability in the foreign exchange market and the ease of doing business initiatives of the Federal government.  This is discernible from some of the significant deals concluded this year, including Coca-Cola’s investment in Chi Limited, The Carlyle Group’s investment in Wakanow, Verod’s acquisition of Monument Metropolitan Holding’s interest in Nigeria, AR Packaging Group’s acquisition of Nampak International’s Nigerian business, Kobo 360’s Series A financing led by Goldman Sachs, Max.ng’s financing led by Novastar Ventures etc.

 

2. Which countries are the largest providers of FDI to Nigeria?

 

The United Kingdom, United States, South Africa, United Arab Emirates are top on the list of FDI providers.  Mauritius, the Netherlands, Singapore and Belgium are also some of the largest providers of FDI in Nigeria.^[1]

 

3. Which sectors and industries in Nigeria are attracting the most significant FDI activity?

 

Available data for Q1, Q2 and Q3 2019 indicate that the bulk of the capital imported into Nigeria in 2019 went to the banking, financing, telecommunications, servicing, trading, production and agricultural sectors, while the drilling and weaving sectors remained inactive in terms of FDI between this period.  We are seeing increased activity in the insurance sector, given the sector regulator’s directive that all insurance companies shore up their equity capital base.

 

4. Which are the key laws governing FDI in Nigeria?

 

1. Companies and Allied Matters Act, Chapter C20, Laws of the Federation of Nigeria 2004 is the principal legislation on the formation and regulation of business entities in Nigeria.  The Act requires every foreign company or person that intends to do business in Nigeria to incorporate a separate company in Nigeria for that purpose.  The only companies exempted from the registration requirement are foreign companies:

• invited to Nigeria by or with the approval of the Federal Government of Nigeria to execute any specified individual project;
• in Nigeria to execute a specific individual loan project on behalf of a donor country or international organisation;
• owned by foreign governments and engaged solely in export promotion activities in Nigeria; and
• engineering consultants and technical experts engaged on any individual specialist projects under contract with any of the governments in Nigeria or their agencies, or with any other body or person where such contract has been approved by the Federal Government of Nigeria.

 

The Act provides for the different types of business entities that can exist in Nigeria – a company (private, public or limited by guarantee), business name or incorporated trustee.  The Act also provides for the constitutional documents of a business entity, the rights of shareholders, the duties of directors, and key issues to foreign investors – the right to appoint a director and/ or the company secretary, the right to dividends, voting at board and shareholder meetings, deadlock, share capital increase, appointment of external auditors, business reorganisation etc.

 

The Act established the Corporate Affairs Commission (“CAC”), the Nigerian companies house, where filings in relation to the corporate structure and existence of business entities are made.  Filings required to be made at the CAC include appointment/ change of directors, shareholders, company secretary and external auditor.  Companies are also required to make filings in relation to share capital increases and reductions, business reorganisation, change of name or registered address etc.

 

2. Immigration Act 2015 and the regulations issued thereunder, regulate the entry and exit of persons from Nigeria.  The Act also requires Nigerian businesses with foreign participation to obtain a business permit, prior to the commencement of business.  In addition to this, companies seeking to employ foreigners are required to apply and obtain expatriate quota positions for the relevant number of expatriates they intend to employ.  Such approval will cover technical and management staff which a foreign investor may require to operate the business post-investment.  The Act also requires the expatriates who occupy the positions for which the expatriate quota was approved to obtain  combined expatriate residence permits and alien cards, which grants foreigners the permission to live and work in Nigeria.

 

3. The Federal Competition and Consumer Protection Act 2019 established the Federal Competition and Consumer Protection Commission (“FCCPC”) which is vested with the power to approve and regulate mergers (including equity and asset investment and acquisition transactions), a function which was hitherto vested in the Nigerian Securities and Exchange Commission (“SEC”).  The Act governs equity and asset transactions and the commercial activities of companies as well as government entities.

 

The FCCPC is yet to issue its own set of rules that will help to address ambiguities and to properly define the powers conferred on the FCCPC and compliance requirements.  For the time being, applications for approval of qualifying transactions are being reviewed by a joint desk of the FCCPC and the SEC in accordance with the previous SEC regime, but with the FCCPC remaining at liberty to exercise the wide discretion conferred by its provisions to require additional information and documentation, including in relation to competition and anti-trust issues.

 

4. Nigeria Investment Promotion Commission Act Chapter N117, Laws of the Federation of Nigeria 2004 provides the framework for the registration of Nigerian companies with foreign shareholding.  The Act requires all companies with foreign participation in their capital structure to register with the Nigerian Investment Promotion Commission after they are incorporated.

 

5. Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Chapter F34, Laws of the Federation of Nigeria 2004 established the Nigerian official foreign exchange market (“Official Market”), where foreign currency transactions are to be consummated between:

 

1. the public and authorised dealers^[2];
2. among the authorised dealers;
3. the authorised dealers and authorised buyers^[3];
4. among authorised dealers, authorised buyers, the public and the Central Bank of Nigeria.

 

In general, the Act regulates dealing in foreign currency in Nigeria, prohibits any unlicensed dealing in foreign currency and penalises such unlicensed activity.

 

6. Central Bank of Nigeria Foreign Exchange Manual 2018 (“Manual”) is a guide to authorised dealers, authorised buyers and the general public on processing foreign exchange transactions.  The Manual provides for transactions that are eligible for obtaining foreign exchange from the Official Market, as well as the documentation required to access the Official Market.  In addition to the above, the Manual sets out the requirement for obtaining an electronic certificate of importation (the document required by foreign investors bringing capital into Nigeria, to access the Official Market when repatriating principal, interest, dividends etc in relation to the capital invested in Nigeria).

 

7. Investment and Securities Act No 29 of 2007 established the Securities and Exchange Commission, the principal regulator of the Nigerian capital markets. The Act and the regulations made thereunder provide for the establishment of capital market operators, the governance of the activities of these operators, the relevant rules for mergers and acquisitions in relation to public companies, the establishment and operations of collective investment schemes, and funds including private equity funds and sukuk funds.

 

8. Customs and Excise Management Act Chapter C49, Laws of the Federation of Nigeria 2004 provides for goods that are prohibited from being imported or exported from Nigeria, as well as the duty on imported goods.  The Act gives investors a sense of whether the major raw materials utilised by target companies can be imported into Nigeria, if not readily available in Nigeria.  It also gives foreign investors a sense of whether goods manufactured by targets can be exported to other countries.

 

1. Industrial Development (Income Tax Relief) Act Chapter I7, Laws of the Federation of Nigeria 2004 provides for a tax holiday for an initial period of 3 years with a possibility of an extension for another 2-year period, for companies that are within the pioneer industries, and provide goods or services that are within the pioneer products recognised by the Nigerian government^[4], and are granted pioneer status.  In addition to this, dividends distributed by pioneer companies during the pioneer period are exempt from withholding tax, and capital expenditures incurred during the pioneer period are deductible from taxable profits generated after expiration of the tax relief period.

 

10. National Office for Technology Acquisition and Promotion Act, Chapter N62, Laws of the Federation of Nigeria 2004 provides for the registration of technology provided by a foreign entity to a Nigerian Company.  The Act, the Guideline and Manual issued thereunder set out a list of foreign technology agreements that are registrable^[5], the requirements for the registration of these agreements, applicable fees and the timeline for registration.  An understanding of the Act is relevant, as the registration of the foreign technology agreement forms the basis for the repatriation of fees under the agreement through the Official Market.

 

11. Rulebook of the Nigerian Stock Exchange 2015 provides for the process of listing on the different boards of the Nigerian Stock Exchange^[6], as well as the process of share buybacks, takeovers, mergers, related party transactions, and block divestments in relation to a public listed company.

 

• Money Laundering (Prohibition) Act 2011 (as amended) sets out the reporting requirements for the international transfer of funds and the limits on cash payments for transactions undertaken by individuals or corporate entities.  The Act also provides for the scrutiny and review of foreign exchange transactions by financial institutions in Nigeria.

 

5. Which legal structures are most commonly used by foreign direct investors for doing business in Nigeria?

 

Foreign direct investment generally involves establishing a business enterprise or acquisition of business assets in Nigeria.  Nigerian law provides that any non-Nigerian (a company or an individual) may invest and participate in the operation of any enterprise in Nigeria.  Section 54 of the Companies and Allied Matters Act 2004 (“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”.

 

A foreigner intending to do business in Nigeria may choose between registering a business name as a sole proprietor (or partnership), incorporating a new company or acquiring an existing company.  If establishing a new business, a variety of business structures are available. The business structure chosen will determine the cost, tax, legal, regulatory and financial risk implications.

 

The Companies and Allied Matters Act, Chapter C20, LFN 2004 recognises the following business structures:

 

1. limited liability company (Ltd or Plc)

 

2. company limited by guarantee (Ltd/Gte)

 

3. unlimited liability company (Ultd)

 

Any of the above companies may be a Private Company or a Public Company.

 

4.  Business Name (Sole Proprietorship or Partnership)

 

5.  Incorporated Trustees (usually formed for not-for-profit or charitable purposes)

 

The most common structure for foreign investor clients seeking to explore profit-making business opportunities or engage in activities that will be carried out over a long period of time is the Limited Liability company, particularly the private limited liability company.  Some of the advantages of a company limited by shares include:

 

• A company is its own legal entity. Its identity is separate from the shareholders, directors, and employees.

 

• Under Nigerian law, it has perpetual succession – meaning that the business can continue despite the resignation, bankruptcy or death of directors or shareholders.

 

• The shareholders – including a foreign investor – would be able to appoint, directly or indirectly, the directors and other persons that manage the company.

 

• It is relatively easy to expand or to scale-up by selling shares, or if a foreign investor wishes to divest itself of its interest, it can offer a stake in the business.

 

• It can take advantage of the investment incentives, pioneer status and tax exemption offered by the Nigerian government.

 

• 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 company.

 

​6.         Have there been significant legal or regulatory developments in the last 2 years that would impact on FDI?

 

Nigeria's economy is vulnerable to global oil price fluctuations, however, it is the largest economy in Africa and is among the “next eleven”- identified as having a high potential to become one of the world’s largest economies, with favourable demographics including a large, relatively educated population, labour force and consumer class. 

 

Notwithstanding these factors, commentators and stakeholders continue to identify regulatory/ legal, compliance and transparency issues as crucial obstacles to the huge potential the Nigerian market still has to offer.  In addressing these issues, Nigeria has embarked on a vigorous legislative review of its current laws, some include:

 

6.1       The Federal Competition and Consumer Protection Act (“FCCPA”)

 

The FCCPA was signed into law on 30 January 2019. The FCCPA repealed the Consumer Protection Act and the provisions of the Investment and Securities Act relating to merger control and established the Federal Competition and Consumer Protection Commission (FCCPC).  The FCCPC is now vested with the powers to approve and regulate mergers which include amalgamations, business combinations, and joint ventures.

 

The FCCPC has assumed the role of the former Consumer Protection Council and will replace the Securities and Exchange Commission (“SEC”) as the authority in charge of merger control in Nigeria.

 

On 3 May 2019, the FCCPC and the SEC issued a joint notice on mergers, acquisitions, and other business combinations pursuant

to the Competition Act (the “Advisory Notice”).  The Advisory Notice confirmed the requirement to file notifications with the FCCPC and stated that all notifications or filings will be reviewed in accordance with the existing SEC regulations, guidelines, and fees.

 

Based on this, the FCCPC and the SEC will have joint regulatory oversight to review mergers until otherwise determined by the FCCPC.  Formal approvals, however, will be granted by the FCCPC and all applicable fees will be payable to the FCCPC.

 

The FCCPA regulates two types of mergers:
 

1. Large mergers: mandatory, pre-closing, suspensory notification.
2. Small mergers: voluntary notification, but parties may be required by the FCCPC to make a notification within six months of implementation.

 

The FCCPC is responsible for determining the relevant thresholds defining large and small mergers.  By virtue of the Advisory Notice, the applicable thresholds will be as prescribed in the existing rules and regulations issued by the SEC (the “SEC Rules”).   

 

These interim provisions do not, however, address the fact that the Competition Act does not include a category of intermediate mergers (which the SEC Rules do) so it is not clear how transactions that fall between the small and large thresholds in the SEC Rules should be treated.  Under the FCCPA, the mandatory notification obligation only applies to large mergers.

 

On 13th November 2019, the Federal Competition and Consumer Protection Commission published the “Guidelines on Simplified Process for Foreign-To-Foreign Mergers with Nigerian Component” (“Guidelines”).   The Guidelines set out a new process for obtaining FCCPC approval in respect of foreign-to-foreign mergers that have an impact in Nigeria and prescribe a new regime in relation to the processing fees that are payable in respect of such transactions.  The guidelines also introduced an expedited review process for foreign to foreign merger filings available upon payment of applicable fees.

 

6.2       Companies and Allied Matters Bill

 

The bill, amongst other things, provides for sole directorship and sole shareholding for small companies.  This provision is consistent with several other progressive economies such as the UK and Hungary.  On 17 January 2019, the House of Representatives passed the Companies and Allied Matters Act (Repeal and Re-Enactment) Bill (Bill).  The Bill, which had previously been passed by the Senate on 15 May 2018, contains several innovative provisions in the context of Nigerian company law.  The Bill requires the assent of the President in order to be passed into law. If passed in its current form, the Bill will ease the rigours of doing business in Nigeria, thereby making investment in the country more attractive.  It will also allow viable businesses to thrive, while ensuring that non-viable businesses can properly exit the market.  Some of the highlights of the Bill include:

 

• Single-member and director companies: Under the Bill, small companies can have a single shareholder and director.

 

• Companies limited by guarantee: Three significant changes have been made in relation to companies limited by guarantee.  The Bill proposes to remove the requirement for the approval of the Attorney-General of the Federation for the registration of such companies.  Instead, under the Bill, an application for registration is now required to be advertised in three newspapers and, if no objection is received from the public, the company must be registered by the Corporate Affairs Commission.  The aggregate amount guaranteed by the members of this type of company has been increased from N10,000 to N100,000.

 

• Netting: A novel initiative of the Bill is the introduction of close-out netting provisions as a means of promoting financial stability and investor confidence in Nigeria.

 

• Company rescue procedures: The Bill seeks to introduce company voluntary arrangements and administration into Nigerian company law to create a framework for company rescue and the efficient exit of non-viable businesses.

 

• Limited Partnerships and Limited Liability Partnerships: The Bill proposes to make it possible for LPs and LLPs to be recognised and registered within the framework of the federal companies Act.  Prior to the Bill, only Lagos provided a framework for LPs and LLPs but the constitutionality of the Lagos State Law is questionable.

 

• Small companies: More SMEs will be able to benefit from the incentives provided to small companies under the Bill such as exemption from audits and from the requirements to appoint a company secretary and hold annual general meetings.  Under the CAMA, a small company is one that has a turnover of not more than N2 million and net assets of not more than N1 million. Under the Bill, a small company has a turnover and net asset of not more than N120 million and N60 million, respectively.

 

• Company seals: The use of company seals by Nigerian companies will no longer be mandatory.

 

• Trusts: Companies will be able to recognise trusts in respect of shares.

 

• Financial assistance: Private companies will now also be permitted to provide financial assistance to their shareholders, increasing the chances of attracting much-needed investment, as shareholders or potential shareholders have access to funds, security, and so on, which in turn enables them to invest in such companies.

 

• Disclosure of Persons with Significant Control: These changes are aimed at increasing transparency and combating money laundering and asset shielding.

 

• Replacement of authorised share capital: One significant amendment is the elimination of the concept of 'authorised share capital' and its replacement by a minimum issued share capital.

 

6.3       Nigerian Police Fund (Establishment) Act 2019

 

On June 24th, 2019, the Nigerian president signed the Nigerian Police Trust Fund (Establishment) Bill into law.  The Act establishes the Nigeria Police Trust Fund to provide funds for the training and welfare of personnel of the Nigeria Police Force and to procure security machinery and equipment.  The Act imposes a levy of 0.005% on the net profit of companies operating a business in Nigeria amongst other sources.  Since it is imposed on companies operating a business in Nigeria, it is likely it will apply to both Nigerian companies and foreign companies established in Nigeria.

 

6.4       Ease of doing business in Nigeria

 

The Presidential Enabling Business Environment Council (“PEBEC”) was set up in July 2016 by His Excellency, President Muhammadu Buhari, to remove bureaucratic constraints to doing business in Nigeria and make the country a progressively easier place to start and grow a business.  The 60-day action plan of the Federal Government of Nigeria’s Presidential Enabling Business Environment Council (PEBEC) was released in February 2017, with the purpose of facilitating doing business in Nigeria.  The action plan proposed 31 reforms across eight priority areas: starting a business; construction permits; getting electricity; registering property; getting credit; paying taxes; trading across borders, and entry and exit of people.  Reforms implemented by the Corporate Affairs Commission include online business registration and company incorporation. Other proposed reforms include simplifying existing business and tourist visa processes.

 

Some of the reforms over the past 12 months include:

 

1. Starting a business: Number of days required to start a business reduced from 10 to 1.

 

2. Getting Credit: Borrowers now have the right to access Credit Report data.

 

3. Construction permits: Reduced the days for obtaining development permits from Lagos State Physical Planning Permit Authority from 61 days to 30 days.

 

4. Registering a property: Reduction in time to get governor's consent by 50%.

 

5. Trading across borders: Export documentation process reduced from 7 days to 30 minutes.

 

6. Entry & Exit of people: Nigerian Immigration Service has harmonised four forms on arrival into one form, in line with global standards.

 

7. Paying taxes: Preparation, filing & payment of Company Income Tax reduced from 2 weeks to 8 hours.

 

Recently, Nigeria marked a fifteen-place rise on the World Bank ‘Ease of Doing Business’ Index and government policies were adjudged as a key factor to this leap.

 

6.5       Establishment of Investors’ & Exporters’ FX Window

 

In April 2017, the CBN liberalised the foreign exchange (FX) market by introducing importers and exporters "FX window" with the objective of increasing liquidity in the FX market and enabling investors to buy and sell FX at market-determined rates. The FX window has helped to boost and to facilitate (i) the supply of foreign exchange by portfolio investors, exporters, authorised dealers and other parties, and (ii) the offshore repatriation of proceeds from investments.

 

7          Which restrictions on (a) investment and (b) exchange control or currency apply to foreign investments in Nigeria?

 

7.1       Restrictions on Foreign Investments

 

Section 17 of Nigerian Investment Promotion Commission Act (NIPC) provides that a non-Nigerian, whether company or individual, may invest and participate in the operation of any enterprise in Nigeria in any convertible foreign currency – other than the “negative list” of sectors of investment in which both Nigerian and non-Nigerians are prohibited from investing, namely:

 

• the production of arms, ammunition, etc.;
• the production of, and dealing in, narcotic drugs and psychotropic substances;
• the production of military and para-military wears and accoutrements, including those of the Nigerian Police Force, the Nigeria Customs Service, Nigeria Immigration Service, and Nigeria Prison Services; and 
• such other sectors as the Federal Executive Council may, from time to time, determine.

 

In addition to these general restrictions, sector-specific restrictions on foreign participation include the following:

 

1. in the private security sector, the prohibition of the acquisition of any equity and of any board participation in a Nigerian private security guard company;

 

2. in the advertising sector, the requirement that at least 74.9% of the equity of an advertising agency must be Nigerian-owned as a condition for that agency to advertise to the Nigerian market;

 

3. in the petroleum sector, preferential – and in specific instances, exclusive – consideration being required to be given to companies that are at least 51% Nigerian-owned, and the additional prescription of other minimum local content criteria to be applied in awards of licenses, contracts, etc., in the Nigerian petroleum sector, in a bid to increase indigenous participation in the petroleum sector;

 

4. in the shipping sector, cabotage laws prohibit the use of foreign-owned or foreign-manned vessels on Nigerian waters;

 

5. in the broadcasting sector, a company requiring a broadcasting license must demonstrate that it is not representing foreign interests and that it is substantially Nigerian-owned and operated;

 

6. in the aviation sector, the Nigerian Civil Aviation Authority only issues aviation licenses or permits to Nigerian citizens or to Nigerian companies in which the majority shareholder is a Nigerian;

 

7. in the engineering sector, all companies engaged in, or proposing to provide engineering services in Nigeria are required to be registered with the Council for the Regulation of Engineering in Nigeria (COREN), with COREN registration subject to the strict requirement that 55% of every applicant company must be held by Nigerian director(s) of the same company who must, in turn, be COREN-registered;

 

8. in the pharmaceutical sector, foreigners may only register with the Pharmacist Council of Nigeria where their home country accords a reciprocal right of registration to Nigerians and subject also to the applicant having been resident in Nigeria for at least 12 months prior to the application.

 

7.2       Restrictions on Exchange control/currency

 

According to Nigeria's foreign exchange regulations, if foreign investors intend to access the official foreign exchange market for the purpose of remitting their dividends, interest or capital, they must obtain a Certificate of Capital Importation (“CCI”) as evidence that their investment was brought into Nigeria.  CCI's are issued by authorised dealers (that is, banks licensed by the Central Bank of Nigeria to deal in foreign exchange) within 24 to 48 hours after the foreign investment has been brought into Nigeria and converted into Naira.  However, the government’s efforts to promote transparency and efficiency have led to its policy to digitise CCIs, hence the transition to e-CCIs.

 

8          Which incentives are currently available to providers of FDI in Nigeria?

 

Nigeria has various tax incentives aimed at encouraging investments in certain key sectors, some of which include the following;

 

1. The Pioneer Status scheme established by the Industrial Development (Income Tax Relief) Act grants companies operating in certain industries a non-renewable income tax holiday exempting the company from the obligation to pay corporate income and education tax and the obligation to withhold tax on dividends for a period of three years, which can be extended for a further period of two years upon satisfaction of specified conditions.

 

In 2017, the Federal Executive Council approved the addition of twenty-seven (27) key industries and products included in the revised list of 'pioneer status' incentives for prospective investors.

 

2. Manufacturers and purchasers of local plants and machinery are entitled to an

Investment Credit of 25% (for plant) and 15% (for machinery) – convertible to an Investment Allowance.

 

3. Interest earned by a foreign company on its deposits in a foreign currency domiciliary account in Nigeria is exempt from tax.

 

4. Capital gains tax (CGT) is not levied on gains from the sale of shares, stocks and treasury bills.

 

5. The interest payable in respect of a loan granted to a Nigerian company by a foreign company, and interest on any loan granted by a bank for the purpose of manufacturing goods for export 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	Moratorium	Tax Exemption
Over 7 years	Not less than 2 years	100%
5-7 years	Not less than 18 months	70%
2-4 years	Not less than 1 year	40%
Below 2 years	Nil	Nil

 

6. Certain incentives are available to companies located in rural areas.  The incentives take the form of tax reductions at graduated rates for enterprises located at least 20 kilometres from available electricity, water, and tarred roads. The rural investment allowance is tied to the profits of the year in which the date of completion of the investment falls and should not be carried over to the next year.

 

7. Companies which engage wholly in the fabrication of spare parts for local consumption and export are allowed 25% investment tax credit on qualifying capital expenditure.

 

8. Where investments are made in certain localities classified as economically disadvantaged areas, a tax holiday for up to a period of seven (7) years is granted, together with an additional five percent (5%) depreciation allowance over and above the initial capital depreciation.

 

1. Companies that utilise Nigeria's natural gas resources are entitled to: a tax-free holiday for an initial period of three years (renewable for an additional two years); or an additional investment allowance of 35%.

 

10. Machinery and equipment purchased for the use of gas in downstream operations are exempt from value-added tax (VAT).

 

11. Tax relief on double taxation treaty: This relief is available where a Nigerian company is liable to Tax in a Commonwealth or other country having a double taxation agreement with Nigeria.  Nigeria presently has double taxation treaties with Belgium, Canada, China, France, the Netherlands, Pakistan, Philippines, Romania, South Africa, United Arab Emirates, and the United Kingdom.

 

• Companies engaged in Research and Development activities in Nigeria for commercialisation are allowed 20% investment tax credit on their qualifying expenditure.  Expenses incurred on research and development, including the amount paid to the National Science and Technology Fund are allowed as deductible expenses.

 

13. A company that is replacing a 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.  In addition the Companies Income Tax Act (“CITA”) permits the company to claim an investment allowance of 15% of the qualifying expenditure made in respect of the replaced assets;

 

• 25% of the income derived from tourism by hotels in convertible currencies is exempt from tax if such income is put in a reserve fund to be utilised within five years for expansion or construction of new hotels and other facilities for tourism development.

 

9.       Which legal structures are most commonly used by foreign direct investors for doing business in Nigeria?

 

Under Nigerian law, the Companies and Allied Matters Act, Chapter C20, Laws of the Federation of Nigeria 2004 (the “CAMA”), the principal legislation that regulates the affairs of Nigerian companies, recognises a number of corporate structures that may be used in conducting business in Nigeria.  They are as follows:

 

1. A private company limited by shares – this is the most common form of legal structure, for both indigenes and foreign investors, in Nigeria.  Here, the liability of the members of the company is limited by the memorandum of association to the amount, if any, unpaid on their respective shares.  In addition, the company must have a minimum of two (2) and a maximum of fifty (50) members and the right of such company to transfer its shares is restricted.  Lastly, members of the public, or other interested parties, are not permitted to subscribe to any of its shares or debentures; 
2. A company limited by guarantee – this type of company is usually established as a not-for-profit for charitable purposes such as promotion of commerce, art, science, religion, sport, culture, education, research, charity or other similar objects.  The liability of its members is limited to such amount as the members may have respectively undertaken to contribute to the assets of the company, in the event of it being wound up;
3. A public limited liability company – this is one other than a private company limited by shares.  It must have a minimum of two (2) shareholders, however, there is no maximum limit to the number of shareholders it can have and the shareholders are not restricted from transferring their shares freely.  Furthermore, members of the public may be invited to subscribe to its capital and the shares may be traded on the floor of the Nigerian Stock Exchange.  Where such a company decides to trade its shares on the Nigerian Stock Exchange, the company becomes publicly quoted;  
4. An unlimited liability company – is a company with no limit on the liability of its members.  As such, it is usually not a favourable option for foreign investors; and
5. Incorporated Trustees – this is a corporate body where one or more trustees are appointed by any community of persons bound together by custom, religion, kinship or nationality.  This option is usually recommended for not-for-profit organisations.

 

As stated earlier, the most common structure is the limited liability company, and this is the most appropriate structure if the intention is to use the entity as a vehicle through which business will be conducted for the purpose of making profit.

 

10.      Which recent legal or regulatory reforms or proposals for reform are likely to impact on FDI in Nigeria?

 

In its efforts to create an enabling and thriving environment for local and foreign investors, the Nigerian government has recently pursued an extensive, and comprehensive, review of the laws and regulations governing various sectors of the economy such as competition, tax and business establishment.

 

We have set out below the recent reforms that have been introduced as well as proposed reforms that are expected to be implemented soon.

 

Recent Reforms

 

The enactment of the Federal Competition and Consumer Protection Act (“FCCPA”) 2019

 

The Federal Competition and Consumer Protection Act (“the Act”) is the key legislation governing merger control in Nigeria.  The Act, which came into effect in January 2019, is the central law governing competition in Nigeria.  Among other things, it aims to promote competition in the Nigerian market at all levels by eliminating monopolies, prohibiting abuse of a dominant market position and penalising other restrictive trade and business practices.  It also establishes the Federal Competition and Consumer Protection Commission and the Competition and Consumer Protection Tribunal

 

The Act repeals the provisions of the Investments and Securities Act dealing with merger control in Nigeria.  Prior to the Federal Competition and Consumer Protection Act’s enactment, the Investments and Securities Act empowered the Securities and Exchange Commission to administer merger control provisions.

 

Although the merger control provisions of the Investments and Securities Act have been repealed, a transitional period commenced on 3 May 2019, when the Federal Competition and Consumer Protection Commission and the Securities and Exchange Commission issued a joint advisory and guidance note on mergers, acquisitions and other business combinations, which sets out the approach to be followed with respect to mergers until a further advisory or guideline is issued.  It states that during the transitional period, the Securities and Exchange Commission and the Federal Competition and Consumer Protection Commission will jointly review applications for merger control.

 

During this interim period, merger notifications and filings will be reviewed under the existing Rules and Regulations of the Securities and Exchange Commission, 2013 (Securities and Exchange Commission Rules).  These rules therefore remain relevant until the Federal Competition and Consumer Protection Commission issues its regulations and guidelines.

 

In determining the threshold for merger applications, the FCCPC published a notice for pre-merger notification pursuant to section 93(3) of the FCCPA in the official gazette of the Federal Republic of Nigeria (the “Notice”) which indicates that a merger is notifiable where the combined annual turnover in Nigeria of the parties in the year preceding the merger was more than NGN1 billion, or where the annual turnover of the target in Nigeria in the preceding year was more than N500 million.   “Turnover” is defined broadly and includes ‘all monies received or otherwise receivable either as cash or accrual basis including monies received not necessarily in exchange for goods or services, or as sales but including injections for the purpose of the business’.  The Notice, which was dated 10^th July 2019, states that members of the public are invited to submit proposals and comments on the thresholds within 60 days of the date stated in the Notice.   As the 60-day timeline has now lapsed, we understand that the FCCPC has started applying the thresholds stipulated in the Notice.

 

On 13^th November 2019, the Federal Competition and Consumer Protection Commission (“FCCPC”) issued guidelines titled “Guidelines on Simplified Process For Foreign-To-Foreign Mergers With Nigerian Component” (“Guidelines”).   

 

The Guidelines set out a new process and documentation requirements for obtaining FCCPC approval in respect of foreign-to-foreign mergers that have an impact in Nigeria, and prescribe a new regime in relation to the processing fees that are payable in respect of such transactions.  In addition, the Guidelines confirm the prescribed merger threshold published in the Notice.

 

The fees are as follows:

 

Threshold	Fees
Combined turnover of N1 billion and above	N3,000,000.00 or 0.1% of the combined turnover, whichever is higher
Target undertaking has turnover of up to N500 million and below N1 billion	N2,000,000.00

 

The Guidelines also introduce two key innovations which are as follows:

 

• The FCCPC will publish a non-confidential summary of the transaction for which its approval is sought.  For this purpose, merging parties will be required to provide the non-confidential summary as part of the filing.  It is not yet clear whether members of the public will be invited to comment on such published transactions or if it will be published prior to the Commission taking a decision; and
   
• The FCCPC has introduced an expedited review process where decisions on foreign-to-foreign merger filings will be made within 15 Business days.  Additional fees of N5 million will be payable for the expedited review.

 

Proposed Reforms

 

Companies and Allied Matters Act (Repeal and Re-enactment) Bill.

 

Changes proposed

 

The Bill proposes replacing and updating the Companies and Allied Matters Act, 1990 (Chapter C20, Laws of the Federation of Nigeria, 2004).  Some of the key changes, amongst others, proposed by the Bill are:

 

• single-member and director companies: sole proprietorships will be able to register as companies and benefit from the limited liability that incorporation confers.  Under the Bill, micro, small and medium enterprises (SMEs) will be able to register with one shareholder and one director;
• priority of fixed charges over floating charges: under the Companies and Allied Matters Act, the priority of a fixed charge over a floating charge is subject to the holder of the fixed charge having “actual notice” of a negative pledge.  The term “actual notice” is not defined by the Act and it is difficult to prove when a party has such actual notice.  Under the Bill, the requirement for actual notice has been replaced with “notice”, making it possible to prove that a party has received notice of any negative pledge that is filed at the Corporate Affairs Commission, Nigeria’s companies registry;
• netting: the Bill introduces netting provisions as an option for mitigating credit risks associated with over-the-counter derivatives, with a view to promoting financial stability and investor confidence in Nigeria;
• acquisition by a company of its own shares: both private and public companies will be permitted to buy back their shares subject to various conditions outlined in the Bill;
• small companies: the way in which a small company is defined has been amended to reflect the reality of SMEs in Nigeria. More SMEs are expected to benefit from concessions given to small companies under the Bill, such as exemptions from audits, from the requirements to hold annual general meetings and to have a company secretary;
• limited partnerships and limited liability partnerships: limited partnerships and limited liability partnerships will be registrable within the framework of the Bill if it is passed into law;
• disclosure of persons with significant control: under the Bill, both private and public companies must be notified of the acquisition or divestment of shares amounting to 5% or more of the issued share capital of the company;
• trusts: provisions prohibiting the recognition of trusts held over shares are excluded from the Bill, with the effect that companies may recognise any trust in respect of shares, and notices of trusts held over shares may also be filed at the Corporate Affairs Commission;
• replacement of authorised share capital: one of the most significant amendments proposed by the Bill is the replacement of the concept of “minimum authorised share capital” with “minimum issued share capital” in the context of transactional costs.  The rationale behind this is that the requirement for a company to pay stamp duty and Corporate Affairs Commission filing fees whenever it creates or increases its authorised share capital, notwithstanding that all such shares may not be allotted, results in a “front-loading” of costs.  Under the Bill, where a company proposes to issue more shares, it will simply pass a resolution to do so, issue the shares, and pay the applicable stamp duty and Corporate Affairs Commission filing fees only in respect of the additional shares issued;
• reduction of share capital: to ease the process of doing business, it is proposed that private companies will be able to reduce their share capital if they pass a special resolution to that effect, without the added burden of having to apply to court for an order sanctioning the reduction;
• issuance of shares at a discount: the issue of shares at a discount is unlawful under the Bill.  The rationale for this is reportedly that the nominal value of the shares of most Nigerian companies is so low that the provision for issuance of shares at a discount is virtually redundant;
• treasury shares: treasury shares are formally recognised, defined, and provided for in the Bill;
• prohibition of irredeemable preference shares: the Bill proposes prohibiting issuing irredeemable preference shares so that companies always have the option of redeeming any preference shares they issue;
• companies limited by guarantee: three significant changes are proposed in relation to companies limited by guarantee.  First, the deletion of the requirement for the approval of the attorney general of the federation for the registration of such companies, instead imposing a duty on the Corporate Affairs Commission to cause the application to be advertised in three national newspapers.  Secondly, the introduction of a framework for the conversion of companies limited by guarantee to companies limited by shares.  Thirdly, the increase of the aggregate amount guaranteed by the members of this type of company from N10,000 to N100,000;
• templates for constitutional documents: the Bill proposes giving the Corporate Affairs Commission the power to issue regulations amending the templates of constitutional documents in table A of the Bill.  This will enable the amendment of the form of constitutional documents as and when required, without the need to seek a formal amendment of the statute itself;
• statutory recognition of the Corporate Affairs Commission’s electronic processes: the Bill provides for, and recognises, the submission of applications for the reservation of names to be used for incorporation and registration purposes through electronic means.  At the commission, it is now possible to conduct a name availability search electronically in order to reserve names.  The process of incorporating companies, business names and incorporated trustees can also be effected online using the commission’s portal at www.cac.gov.ng;
• electronic transfers of shares: the language of the Companies and Allied Matters Act requires a hard copy instrument reflecting the share transfer to be provided, which is increasingly becoming redundant due to the use of electronic communications.  Electronic transfers of shares are now expressly permitted in the Bill;
• company seals: the use of company seals by Nigerian companies is optional under the Bill;
• de-criminalising offences under the Companies and Allied Matters Act: the Act provides for more than 100 criminal offences, all of which attract a nominal monetary penalty or a prison term.  Under the Bill, there are only 32 criminal offences provided for.  Most offences under the Bill are now administrative offences that the Corporate Affairs Commission is empowered to penalise through fines to be determined by it.  For the offences that remain criminal, the courts are given discretion to determine the amount of fines and the duration of sentences that they may impose; and
• a more inclusive Corporate Affairs Commission board: the board will now include a representative of the Institute of Chartered Secretaries and Administrators of Nigeria, and the Nigerian Association of Small and Medium Enterprises.

 

Timeframe

 

It is hoped that the Bill will be promulgated shortly, but it is not immediately clear whether or when presidential assent (which is necessary for the Bill to become operative) will be granted.

 

Finance Bill 2019 (“Finance Bill”)

 

Changes proposed

 

The Finance Bill, which is currently pending before the National Assembly, seeks to, among other things, make major changes to Nigeria’s tax laws and promote fiscal equity.  Some of the key changes proposed in the bill that would apply in the context of merger and acquisition transactions include:

 

• taxation of the digital economy using the ‘significant economic presence’ test;
• modified commencement and cessation rules to eliminate gaps and avoid double taxation;
• insurance companies will be permitted to carry forward tax losses indefinitely;
• introduction of thin capitalisation rules on loans issued to Nigerian companies by foreign connected persons;
• reduction of tax exemption on interest payments on foreign loans which meet the relevant criteria with the maximum exemption now 70% – down from the current 100% exemption;
• dividend distributed from petroleum profits now to be subject to the withholding of tax at the rate of 10%;
• increment of the VAT rate from 5% to 7.5%;
• expansion of VAT-able goods and service to include intangible assets or property excluding money, securities and transfer of interest in land;
• expansion of the meaning of ‘instrument’ under the Stamp Duties Act to include electronic documents; and
• restriction on the exemption of capital gains tax (“CGT”) when assets are transferred between related parties during a business reorganisation.

 

Timeframe

 

The Senate of the National Assembly passed the bill into law on 21^st November, 2019 and it is currently before the second Chamber of the National Assembly, the House of Representatives, for further hearing.  Once the bill is passed by both Chambers of the National Assembly, it will be passed on to the President for his assent.  It is envisaged this process will be completed before the end of the year, 2019, and the bill will become law by January 2020, as one of the objectives of the bill is to ensure the optimal funding of Nigeria’s 2020 budget.

 

11.      Which are the most common dispute resolution mechanisms chosen by foreign direct investors for Nigerian transactions?

 

Nigeria practices an adversarial legal system and under this practice, litigation is the widely used form of dispute resolution.  Litigation proceedings are governed by the respective rules of courts of the various states and litigants bear the costs of the suits they pursue.  This is because the common law principle of champerty and maintenance, which seeks to prevent frivolous litigation, is practiced in Nigeria.

 

As part of its efforts in ensuring the smooth administration and dispensation of justice, the courts also encourage parties to adopt Alternative Dispute Resolution (“ADR”) mechanisms to resolve their disputes.  These mechanisms, whilst not applicable in every type of matter in dispute, allow mediation and negotiation processes, using informal and relatively flexible tactics, to enable parties discuss and agree to settle their disputes; sometimes amicably.

 

The most common, and practiced ADR, mechanisms in Nigeria are as follows:

 

1. Arbitration – This involves the use of an impartial third party (or parties), called an arbitrator, for settling disputes.  Here, parties jointly agree, amongst others, on the composition of the arbitral tribunal, procedural rules, substantive law and finality of the decision of the arbitral tribunal.  In arbitration, proceedings are stripped of all formalities and procedure generally required by the court and the arbitral tribunal determines its jurisdiction in line with the competence-competence rule.  Under Nigerian law, the principal legislation governing arbitral proceedings is the Arbitration and Conciliation Act CAP A18, LFN 2004.

In addition, arbitration is the most common used form of ADR due to its speed, reduced cost (in comparison with court processes), privacy accorded to parties, party autonomy and specialised expertise of the arbitral tribunal.  In business ventures, parties currently seek to insert arbitration clauses in their agreements/ contracts as the first port of call for any issues/ disputes that may arise in the implementation of such contract.  Lastly, local and foreign arbitral awards are enforceable, upon the winning party and against the losing party, by the courts where the former party applies to the court for leave to register such judgment in his favour.
 

2. Mediation – This permits a neutral third party to help parties reach a negotiated settlement.  The process is relatively voluntary, private, flexible and non-binding in nature and the mediator considers non-obligatory procedures in communicating and enabling the parties arrive at common terms of settlement. Whilst there is no current federal legislative law on mediation, states in Nigeria have established laws, within their jurisdiction, on mediation.  For example, in Lagos State, the Lagos State Multi-Door Court Law 2007, the Lagos State Multi-Door Court Practice Directions on Mediation, the Citizens Mediation Centre Law 2007 and the Lagos Court of Arbitration's (LCA) Mediation Guidelines 2011 govern mediation practices in Lagos State.

 

3. Negotiation – enables parties, by way of bargain, to reach an agreement.  The process is voluntary and parties have total control over the formalities and procedures to be involved. 

 

4. Conciliation – This process involves the use of a neutral independent person, called a Conciliator, to resolve disputes in a less hostile and personal manner.   The Arbitration and Conciliation Act CAP. A18 LFN 2004 is the federal law governing conciliation proceedings.

 

​12.       How do you see FDI activity evolving over the next year in Nigeria? 

 

Over the next year, we see a continuous increase in the FDI activity in Nigeria. In the last 2 years alone, available deal data has shown that investments in the consumer industry, financial services, PE and M&A sectors are on the steady increase, and show no signs of waning, despite other legal, regulatory and compliance challenges in the country.  Examples of such notable investments, amongst others, include LeapFrog’s investment in ARM Pensions, The Carlyle Group’s investment in Wakanow.com, continuing investment following the merger of Access Bank plc and Diamond Bank plc, Vectis and AGL’s investment in Leventis, AFIG’s investment in NEM Insurance plc, the CDC Group plc’s investment in CCAGF, and Verod’s investment in DayStar Power Limited. 

 

In addition, macroeconomic recovery in oil production and prices, relative political stability, improvements in the business climate and other legislative reforms have spurred GDP growth, business confidence and market competition in Nigeria.  Furthermore, the establishment of the “Investors and Exporters” (I&E) window by the Central Bank of Nigeria has resulted to a concomitant boost in the availability of FX and more balanced retail prices.  Subsequently, we envisage more activity in the above-mentioned sectors, particularly the insurance, food and beverages, and financial services industries.

 

 

For further information, please contact:

 

Folake Elias-Adebowale, Partner, Udo Udoma & Belo-Osagie​

folake.adebowale@uubo.org 

 

Authors

 

Folake Elias-Adebowale is a corporate partner and co-head of the firm’s private equity, corporate/M&A, and oil and gas teams.  She is a member of Emerging Markets Private Equity Association (EMPEA)’s legal and regulatory council and participates in the legal and regulatory committees of AVCA and of the Private Equity & Venture Capital Association, Nigeria (PEVCA).

 

Chukwunedum Orabueze is an associate in the firm’s corporate and commercial team. He advises international and local clients on doing business in Nigeria, mergers, acquisitions, foreign investment, data protection, government business, and regulatory compliance. Some of his clients include private equity and venture capital funds, as well as companies in the technology, food and beverages, insurance, electric power, banking and finance sectors. He is a contributor to the annual World Bank Doing Business Report.

 

Damilola Adedoyin is an associate in the firm’s corporate and commercial team. Since joining the firm, he has been involved in a wide range of matters, including banking & finance, private equity, FinTech, general corporate advisory, capital markets and real estate.

 

Amarachi Okewulonu is an associate in the firm’s corporate and commercial team. Since joining the firm, she has been involved in a wide range of matters, including private equity, corporate advisory, and mergers & acquisitions.