FINANCE ACT, 2019 AND ITS IMPACT ON BUSINESS RE-ORGANISATION PART. IV

In this part IV of our five-part series of “the Finance Act 2019 and its Impact on several sectors of the Economy”, we shall analyse the Impact of the Finance Act on Business re-organisation.

Business re-organisation also known as restructuring, simply means remodeling, redesigning or repositioning one or more aspects of a business operations.

Just as in the life of a natural man, a company (which in law is referred to as an artificial person) may experience ups and downs at one stage or the other of its existence. At such period, the company may need to restructure or re-organise its business operation in order to either be more competitive, or to move in an entirely new direction, or to survive a current harsh business climate.

Businesses can opt for Internal Re-organisation such as arrangement or compromise, management buyout, debt conversion into shares; or External Re-organisation which includes merger, acquisition, take-over, asset deal, etc. Whatever re-organisation option or direction a business decides to take, they usually involve a change in ownership and/or transfer of operating assets and will typically attract tax obligations under the CITA, CGTA and VATA on the proceeds from asset disposal and any transaction profits.

Prior to the enactment of the Finance Act, the CGTA provided tax concessions only for business reorganization that are share-based only. The VAT Act did not make provisions for taxation on business restructuring. Whereas, the tax provisions under CITA were inadequate as it only provided concessions contained to related-party business re-organisations, subject to certain condition precedent.

The amendment in the Finance Act has now introduce the following concessions for business re-organisation–

Business re-organisation tax relief under Company Income Tax Act

Prior to the Finance Act, CITA empowered the FIRS to grant certain exemptions on group re-organisations, subject to certain condition precedent such as that the companies involved should be part of a recognized group of companies and that the transaction is for the purpose of the "better organisation of that trade or business.

The Finance Act has now added that to obtain the exemption, the companies involved should be part of a recognized group of companies, at least 365 days before the transaction, and the relevant assets should not be disposed earlier than 365 days after the transaction.

Group Business re-organisation tax relief under Capital Gains Tax Act and Value Added Tax Act

Section 49 of the amendments in the Finance Act provides for CGT exemption where a trade or business carried on by a Group of company is sold or transferred to a Nigerian company for the purpose of better organization, provided that the entities involved are recognized members of the group. A company would be recognised as part of a group if such company has been a member of such group for a minimum of 365 days before the date of the transaction.

The Finance Act also provides that any CGT exemption granted shall be withdrawn were the acquiring company disposes the assets from such transaction within a 365-day after the date of the transaction. This has limited the concessions to only bona fide commercial transactions and shut-out investors who would have taking advantage of the concession for short term benefits.

The Finance Act defines recognised group of companies to mean “a group of companies as prescribed under the relevant accounting standard”.

In addition, the Finance Act in relation to VAT, now provides that transactions involving high-value goods, such as buildings, trademarks/tradenames, securities, etc., that would otherwise have been subjected to VAT at their transfer value, will now enjoy tax-exemption, provided the acquiring company did not dispose within a 365-day after the date of the transaction.

Capital Gains Tax Imposed on Compensation for Loss

Prior to the Finance Act, the CGT Act imposed CGT on compensation for loss of employment above N10,000 (Ten Thousand Naira Only). Section 50 of the Finance Act has now expand the coverage of this provision by renaming it "compensation for loss" and increase the minimum threshold from N10,000 to N10,000,000 (Ten Million Naira Only).

The rationale behind this, it is believed, is because during business restructuring or re-organisation, it is common for there to be loss of employment as a result of such restructuring, requiring compensation, which are most times not adequate. Hence it will be difficult to bear if such individual is required to pay tax from his/her loss.

However, it is important to clear the air that CGT also applies to compensation arising from all forms of loss of employment and not only restructuring.

Conclusion

It is quite significant that the Finance Act has introduced a “minimum holding period” for related party group restructuring which is to the effect that companies to any restructuring transaction must be member of a group company for a period of 365 days before the date of the transaction and such asset must not be dispose within 365-day after the date of the transaction. The minimum holding period requirement seeks to cultivate a more responsible approach to business reorganisations and limit the concessions to bonafide commercial transactions and to significantly reduce tax leakages to the government as a result of such re-organisation structures.