Doing Business in Nigeria

Type of Government
Presidential
Multi-party Democracy
Nigeria is a federation made up of 36 states and the Federal Capital Territory, Abuja. It is governed by a federal constitution which came into force on May 29, 1999. The country is a republic and operates a presidential system of government. The 1999 constitution recognises three arms of government – the Executive, Legislature and the Judiciary.

There are three tiers of government, namely, Federal, State and the Local Government. The Federal Government is headed by an elected President who governs through a cabinet comprising of the Vice-President, the Ministers in Government and other public officers of the Federation. The States are headed by Governors who also govern through the cabinet comprising the Deputy Governor, the State Commissioners and public officers. The local government is the third tier of government. It is headed by the chairman, who governs through a council comprising of Deputy Chairman, the Councillors and Local government workers.

The Legislative arm is bicameral and consists of the Senate and the House of Representatives. The States also have their Houses of Assembly, which have powers to make laws.

There is an independent Judiciary which ensures that the rights framed in the constitution are upheld and enforced.

Forms of Business Organisation
Private limited liability company and public liability company
Company limited by guarantee
Unlimited liability company
Sole proprietorship
Foreign companies
Partnership

Formation of Business
Except in rare circumstances, Local and foreign companies must be registered by the Corporate Affairs Commission (CAC) whose headquarters is located at the Federal Capital Territory, Abuja. A foreign company must register a subsidiary company in Nigeria and until this requirement is met such a company cannot do business in Nigeria.

All new companies with foreign participation are also required to register with the Nigerian Investment Promotion Commission (NIPC) before commencing business. It is also responsible for issuance of Business permits and Expatriate quota positions. Registered companies and business enterprises are regulated by the provisions of the Companies and Allied Matters Act, 1990.

Taxation
Taxes are levied upon the profits from trade or business of a company. The corporate tax rate is 30%. Companies engaged in manufacturing, agricultural production or mining of solid minerals or wholly export oriented businesses that have a turnover of less than NGN1 million i.e. small companies, the rate is 20% for the first five years of Business.

Any dividend made by a Nigerian company (except for small manufacturing and wholly export oriented Companies which are tax exempt) is subject to withholding tax of 10% but any dividend paid in form of scrip/bonus shares is not taxable. A tax clearance certificate for three years preceding the current year is essential for business with government agencies and parastatals .

Under the Personal Income Tax Act No. 104 of 1993, a Nigerian or a foreigner resident in Nigeria is subject to tax on his income from sources inside or outside Nigeria.

Taxpayers are also subject to capital gains tax of 10% on the disposal of assets, including assets outside Nigeria. With effect from January 1, 1998, capital gains arising from the sale of stocks and shares is exempted from capital gains tax.

The value-added tax (VAT) was introduced in 1994. The rate is 5% on all taxable goods and services. The tax now affects all categories of goods and services, including some banking services, except for the items listed in schedule 1 of the Act. In the 1999 Federal government budget, the following were excluded from the VAT exemption. These are commercial vehicles, locomotives, ships, airplanes and their spare parts, newspapers and magazines, water treatment chemicals and basic food items.

An education tax of 2% of assessable profits is imposed on all companies incorporated in Nigeria. Petroleum profits tax is payable at the tax rate of 85% of chargeable profits for all companies engaged in upstream petroleum operations in Nigeria.

Property tax is also paid on real property, which is assessed by the respective state governments.

Nigeria has double taxation agreements with Great Britain, Romania, Canada, France, Netherlands, Belgium and Pakistan.

Foreign Investment
Foreign investors are welcome in Nigeria and with the new dawn of democracy, the number of investors in Nigeria has increased.

The Nigerian Investment Promotion Commission (NIPC) Act No. 16 of 1995 was enacted to encourage foreigners to invest in Nigerian enterprises.

A foreigner may now freely invest and participate in the operation of any enterprise in Nigeria except from the following:

Production of arms and ammunition etc
Production and dealing in narcotic drugs and psychotropic substances
Production of military and paramilitary wears
Foreign investors are guaranteed unconditional transferability of their dividends, profits and loan repayments. The Law gives protection against nationalisation and expropriation of business interests except where this is carried out in the national interest or for a public purpose. If this happens, then fair and adequate compensation must be paid. Foreigners who bring investment capital (cash transfer or fixed assets importation) into Nigeria must obtain “Certificate of Capital Importation” from authorised dealers.

Where equipment is brought in a valuation certificate is required from the Federal Ministry of Industries, in order to be entitled to transfer dividends or profits attributable to investment out of the country.

A foreigner wishing to establish a business may also buy shares in a Nigerian company in any convertible currency.

Exchange Control
Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 17 of 1995 in Nigeria established the Autonomous Foreign Exchange Market for transactions in foreign convertible currency or in other money instruments like foreign bank notes, coins, travellers cheques, bank drafts etc

In Nigeria, every importation or exportation of foreign exchange above US$5,000 is declared for statistical purposes only. Exportation or importation of Nigerian currency is not allowed unless permitted by the Central Bank of Nigeria.

A Domiciliary account can be opened in foreign currency in Banks and cash withdrawals from such accounts are permissible and no money imported in accordance with the Act shall be liable to forfeiture by the Federal Government of Nigeria.

For purposes of exchange control and monitoring flow of foreign currencies authorised dealers are required to inform the Central Bank of Nigeria whenever transfers larger than US$10,000 are made into a domiciliary account.

Regulatory Framework
By virtue of the provisions of the Investment and Securities Act No. 45 of 1999, the Securities and Exchange Commission (SEC) is empowered to regulate the Nigerian capital market and its operators. SEC also approves every merger, acquisition or business combination between or among companies.

The major industries in the country also have regulatory bodies governing their operations e.g. petroleum, telecommunications, power and steel, banking, mortgage and financial institutions among others.

Investment Incentives
Nigeria offers many incentives to business entrepreneurs to facilitate investment and attract foreign capital into the country.

They include the following:

· Tax relief granted for a maximum period of five ( 5) years for companies classified as pioneer industries. Pioneer industries are those considered to be essential for the economic development of the country.
Tax incentives for research and development which allow a 20% investment tax credit on their capital expenditure. This encourages companies to invest in research and development activities which boost the economy and enhance development of industrial technology.
25% investment tax credit for companies engaged in the manufacture of locally made spare parts, tools and equipment. Taxpayers who purchase locally made tools and equipment are similarly entitled to 15% investment tax credit on such fixed assets.
· Industrial plant and machinery brought in to replace old ones are to enjoy a once and for all 95% capital allowance. The balance of 5% will be retained till the assets are disposed of. This ensures that such assets will not attract an annual allowance.
· Tax holiday for five (5) years on the dividends from small manufacturing companies. Small manufacturing companies are those with annual turnover of less than N1million .
To enhance the country’s tourism potential, 25% of the income in convertible currencies derived from tourists by hotels shall be exempted from tax provided such income is put in a reserve fund to be utilised within 5 years for the building or expansion of new hotels, conference centres and new facilities for tourism development.
In its determination to improve earnings from non-oil exports, 25% Export Expansion Grant (EEG) is allowed on all non-oil exports from the country with effect from January 1, 2001.
Companies located in the Export Processing Zone (EPZ) are tax exempt and enjoy unrestricted remittance of profits and dividends earned through business activities in these zones.
Companies engaged in petroleum operations are subject to tax at 85% but 65.75% in the first five years of operations. However, oil companies operating under Production Sharing Contracts are assessed at a 50% PPT (Petroleum Profit Tax) rate and a Petroleum Investment Allowance of 50% on qualifying capital expenditure. For Joint-Venture operators the Petroleum Investment Allowance ranges between 5% – 20%.
Incentives for gas operations are as follows:

An initial tax holiday period of 5 years renewable for another 2 years.
All gas development projects are taxed under the Companies Income Tax Act (CITA) and not the Petroleum Profits Tax Act (PPTA).
All dividends distributed during the period of tax holiday are tax-free.
Cost of Capital investment incurred for gas business is recoverable against oil income.
The Country’s Annual budgets contain pronouncements on new fiscal policies and measures introduced by the government for the current fiscal year.

Privatisation
The Federal government has embarked on a comprehensive privatisation and commercialisation programme. Core areas of the economy are due to be privatised.

They include Nigerian Telecommunications Plc, National Electric Power Authority, the Port Harcourt, Kaduna and Warri Refineries, National Fertilizer Company Limited, the Ajaokuta Steel Company and Nigeria Airways among others.

Intellectual Property
Full protection is provided by a wide range of intellectual property laws covering copyrights, patents, trademarks and industrial designs.

Registries
The Trademarks Registry is responsible for the registration of trademarks, patents and designs.

Settlement of Disputes
The principal legislation governing arbitration in Nigeria is the Arbitration and Conciliation Act Cap19, Laws of the Federation of Nigeria (LFN) 1990 which is based on the UNCITRAL model law. International commercial agreements are subject to arbitration under the Act or any international arbitration rule acceptable to the parties. Arbitral awards are regarded as binding subject to the parties’ right to refuse enforcement of judgement.

Nigeria is a signatory to, and adopts the convention on the Recognition and Enforcement of Arbitral Awards (1958, New York Convention). Also foreign judgments from certain countries can be registered in Nigeria by virtue of the Foreign Judgement (Reciprocal Enforcement) Act S.152, LFN, 1990.

Tariffs
Nigeria is a member of GATT. It has also implemented the ECOWAS Trade Liberalisation Scheme (1990) which has established a common Customs External Tariff to protect goods produced in member states. Goods imported into Nigeria are subject to import taxes and customs duty payable in the local currency (Naira) and at rates stated in the Nigeria Customs Tariff Act, 1995 as amended. The customs duty is assessed on the Cost, Insurance Freight (CIF) value of the imported goods. A 7% surcharge is also calculated on all dutiable goods. Other duties and rates payable include:

0.5% Trade Liberalisation Scheme Levy calculated on customs duty (when the goods imported are from countries outside the ECOWAS sub-region).
1% CISS (comprehensive Inspection Supervision Scheme) on the FOB value of goods imported.
Nigeria is also a signatory to the Lome Convention which provides duty-free entry into the European Economic Community (EEC) for most goods.

Membership of International and Regional Organisations
United Nations Organisation, the British Commonwealth, African Union, Organisation of Petroleum Exporting Countries, and Economic Community of West African States.

General
The legal system is based essentially on the English common law system. The Sharia and customary law systems apply in some parts of the country in varying degrees.