According to the provisions of the signed Finance Act 2021, investors on the Nigerian Stock Exchange will pay a 10% capital gains tax on the sale of shares. The tax is imposed on the sale of shares valued at N100 million or more.
The tax also applies to anyone selling shares in any company, even if the company is not publicly traded, which inadvertently includes private equity firms, startups, venture capitalists, and any shareholder looking to sell shares in Nigeria.
However, anyone who sells shares and reinvests the proceeds in another company’s shares or the same company’s shares within the same year is exempt from the law. This is only true if you invest all of the proceeds within a year. Any proceeds that are not reinvested will be taxed, while the remainder will be tax-free.
Read Also: Buhari Warns APC of Disunity’s Consequences
This was enshrined in the Act’s Part 1 Section 1, which reads as follows:
“Without prejudice to any other applicable law, gains accruing to a person on the disposition of its shares in any Nigerian company registered under the Companies and Allied Matters Act shall be chargeable gains under this Act unless —
(a) the proceeds from such a disposition are re-invested in the same or other Nigerian companies within the same year of assessment:
Provided, however, that tax will be levied proportionately on the portion of the proceeds not reinvested in the manner specified in this subsection;
(b) the aggregate proceeds of the disposals are less than N100,000,000 in any 12 consecutive months, provided that the person making the disposals submits annual returns to the Service; or
(c) the shares are transferred in a regulated Securities Lending Transaction between an approved Borrower and Lender.”
The act also specifies a ten percent capital gains tax on the sale of the shares.
“Without prejudice to the provisions of section 2 of this Act, the capital gains tax rate on share dispositions under this section shall be 10%.”
If you are an investor looking to sell shares, you must pay a 10% tax on the capital gains you make if you do not reinvest the proceeds into shares.
Read also: Troops killed 1,910 terrorists, bandits, others in seven months
If you sell shares you bought for N100 million for N150 million and decide not to reinvest the entire N150 million, you will owe tax on the N50 million gain. This translates to an N5 million tax.
If you reinvest only N130 million, you will be taxed on N20 million, resulting in a tax bill of N2 million.
You do not pay tax if you do not make a profit (or gain).
Individual Investor: Anyone selling shares in any company that is not a registered company. The personal income tax is used to pay taxes to the state’s inland revenue service. If you live in Lagos, for example, that tax is paid to the Lagos State Inland Revenue Service. Individuals with a high net worth will be the majority.
Taxes will be paid to the Federal Inland Revenue Service by foreign investors, pension funds, private equity firms, venture capitalists, and any corporate that invests in startups.
Consequences for investors
For the first time in decades, investors who sell shares in Nigerian companies without reinvesting the proceeds within a year will be taxed.
This will have a significant impact on Nigerian stock market investors, whose capital gains can be easily managed through stockbrokers or sny intermediaries.
At the moment, the only tax that applies to the stock market is a 10% withholding tax on dividend payments. The tax is deducted at the point of sale.
Investors will have to be more strategic in how they manage their portfolios, employing more tax avoidance strategies to reduce the amount of tax they pay when they take profits from their investments.
There will also be a need for corporate finance departments to acquire the software and human resources to assist in the documentation of these transactions and the analysis of tax implications.
Read Also: FG releases N31.97 billion for the payment of accrued rights liabilities
Individual investors (particularly HNIs) will almost certainly have to calculate their own taxes or hire consultants to do so for them.
Why does the government levy a tax on stock sales?
After decades of zero tax on stock sales, the Buhari administration has imposed taxes that many see as a deterrent to investing in the stock market.
Until now, one of the many benefits of investing in Nigerian stocks has been the absence of capital gains taxes, which are levied in most other countries.
However, the Nigerian government has been struggling to cope with ballooning multi-year budget deficits due to severe revenue constraints. This tax is being imposed in an attempt to boost revenue.
Supporters of the tax point to the need to strike a balance, particularly for institutional investors who hold dividends and avoid paying withholding tax. Rather, they sell the shares and pocket the capital gains to avoid paying taxes.
If they do not reinvest the capital gains within a year, the law now requires them to pay tax.
As a result, this tax is aimed at institutional investors and high-net-worth individuals (HNIs) who sell hundreds of millions of dollars worth of stock.
What is the maximum amount the government could earn?
Zainab Ahmed, the Minister of Finance, did not say how much money the government expects to make each year.
The total transaction value of foreign and domestic investors on the Nigerian Stock Exchange was N1.9 trillion in 2019 and N21 trillion in 2020, according to data from the Nigerian Stock Exchange. As of November 2021, the figure stands at N1.74 trillion.
In 2019 and 2020, total foreign portfolio outflows (amount taken out of the stock market by foreign investors) were N523 billion and N482 billion, respectively. As of November YTD 2021, it stands at N540 billion.
Read Also: FCT threatens to sanction monarchs for violating the peace
Assuming a 10% profit for foreign investors who exited the stock market in 2021, the government could reap capital gains of N5.4 billion in stock market equities from just FPIs.
This assumes that the entire sum comes from investors with a net worth of more than N100 million, which is unlikely.
