Investors in the Nigerian Stock Exchange must pay a 10% capital gains tax on the sale of shares in accordance with the provisions of the signed 2021 Finance Law. The tax is applicable on the disposal of shares valued at 100 million naira or more.
The tax also extends to anyone who sells shares in a company, even if the shares are not listed on a stock exchange, which inadvertently includes the sale of shares by private equity firms, startups, companies. venture capitalists or any shareholder looking to sell stocks in Nigeria.
The law, however, exempts anyone who sells shares and reinvests the proceeds in purchasing shares of another company or shares of the same company in the same year. However, this is on condition that you invest all of the proceeds within a year. Any part of the proceeds not reinvested will be taxed while the reinvested balance will not be taxed.
What the Nigerian finance law says about the equity tax
This was seized under part 1 of section 1. of the act, which reads as follows;
“Without prejudice to any other applicable law, gains accruing to a person on the disposal of his shares in any Nigerian company registered under the Companies Act and related matters shall be gains taxable under this law, except when:
(a) the proceeds of this disposal are reinvested during the same taxation year in the acquisition of shares in the same company or in other Nigerian companies:
Provided that the tax accrues proportionately on the part of the proceeds which is not reinvested in the manner stipulated in this paragraph;
(b) the proceeds of the assignment, in aggregate, are less than N 100,000,000 during 12 consecutive months, provided that the person making the assignments makes the appropriate returns to the Service annually; Where
(c) the shares are transferred between an approved borrower and lender as part of a regulated securities lending transaction. “
The law also provides for a capital gains tax of 10% on the disposal of shares.
âWithout prejudice to the provisions of article 2 of this law, the rate of tax on capital gains on the sale of shares provided for in this article is 10%.
What does that mean
For anyone selling stocks: If you are an investor looking to sell stocks, you pay 10% tax on any capital gains you realize by selling the stocks if you don’t reinvest the proceeds in stocks.
- For example, if you sell stocks that you bought for N100million for N150,000,000 and decide not to reinvest the entire N150million, you pay tax on the gain of N50million. N that you realized. This means that you pay a tax of 5 million naira.
- If you only reinvest 130 million naira, you pay tax on 20 million naira, which is 2 million naira in tax.
- If you don’t make a profit (or gain), you pay no tax.
Who do you pay the tax to?
Individual investor: This is anyone other than a registered company who sells shares in a company. Taxes are paid to the state tax service through personal income tax. For example, if you live in Lagos, this tax is paid to the Lagos State Inland Revenue Service. These will mainly be wealthy people.
Corporate investor: For foreign investors, pension funds, private equity firms, venture capital firms, or any business that invests in startups, taxes will be paid to the Federal Inland Revenue Service.
Implications for investors
- For the first time in decades, investors in Nigerian companies will pay taxes when they sell shares they own without reinvesting the proceeds within a year.
- This will certainly affect investors in the Nigerian stock market whose capital gains can easily be administered through stock brokers or shrewd middlemen.
- Currently, the only tax applicable on the equity market is the 10% withholding tax on dividend payments. This tax is deducted at source.
- Investors will now need to be smarter in the way they manage their portfolios by deploying more tax evasion tactics to reduce the taxes paid when they derive profits from investments.
- It will also be necessary to acquire the software and human resources of the corporate finance department to help document these transactions and analyze the tax implications.
- Individual investors (especially HNIs) will also likely have to calculate their taxes themselves or hire consultants to do it for them.
Why is the government taxing the sale of shares?
After decades of applying a zero tax on the sale of stocks, the Buhari administration has introduced taxes that many believe are a deterrent to investing in the stock market.
- Previously, one of the many attractions of investing in Nigerian stocks was zero capital gains tax, unlike most countries which tax the sale of stocks.
- However, the Nigerian government has been under intense revenue pressure, struggling to cope with rising multi-year budget deficits. This tax is an attempt to help consolidate income.
- Supporters of this tax also cite the need to balance things out, especially for institutional investors who suspend dividends and thus avoid paying withholding tax. Instead, they instead sell the stocks and pocket the capital gains while avoiding being taxed.
- This law now requires them to pay tax if they do not reinvest capital gains within a year.
- Thus, this tax targets institutional investors and HNIs who sell hundreds of millions of shares.
How much could the government earn?
- Finance Minister Zainab Ahmed did not say how much the government hopes to harvest each year.
- According to data from the Nigerian Stock Exchange, the total value of transactions by foreign and domestic investors on the exchange was 1.9 trillion naira and 21 trillion naira in 2019 and 2020 respectively. The figure is 1.74 trillion naira since the start of the year in November 2021.
- Total foreign portfolio outflows (amount withdrawn by foreign investors from the equity market) amounted to N 523 and 482 billion in 2019 and 2020 respectively. It is currently 540 billion naira as of November YTD 2021.
- Assuming a 10% profit for foreign investors who withdrew their money from stocks in 2021, the government could pocket capital gains of 5.4 billion naira in stocks from REITs alone.
- This assumes that the total amount comes from investors with more than 100 million naira, which is unlikely.