Understanding Business Restructuring, Mergers, and Related-Party Transactions under the Nigeria Tax Act, 2025
Understanding Business Restructuring, Mergers, and Related-Party Transactions under the Nigeria Tax Act, 2025
By Baha’s Books | www.bahasbooks.com
The Nigeria Tax Act, 2025 introduces one of the most detailed and practical frameworks for handling business restructuring, mergers, acquisitions, and related-party transactions in Nigeria’s tax system. These provisions are not just about calculating taxes — they aim to balance two crucial goals: allowing businesses the freedom to grow, restructure, and combine, while also preventing tax evasion or manipulation through artificial transactions.
This part of the Act serves as a roadmap for how assets, liabilities, and tax benefits are treated when a company changes its structure, merges with another, or sells part of its operations. It defines the boundaries of what is legitimate restructuring and what the tax authority can consider as abuse of tax law.
Mergers and Business Restructuring: Continuity, Not Cessation
The Act begins by setting out the rules for what happens when two or more businesses merge. It makes a key clarification: a merger does not mean that the old companies have ceased to exist, nor does it mean that a completely new company has been born. In tax terms, this means continuity — not cessation.
This distinction is critical because, without it, mergers could trigger double taxation. If tax law treated every merger as a “closure” and a “new opening,” the merging companies would have to pay tax first for ceasing operation and again when the new entity starts. The Act prevents this by declaring that the new or surviving business simply continues from where the merging businesses stopped.
All the assets from the merging companies are transferred smoothly to the new entity without triggering capital gains tax, since they are treated as continuing investments rather than disposals. The qualifying capital expenditure (QCE) — that is, the portion of the asset value that remains unclaimed for tax purposes — carries over to the new business. This allows the merged company to keep claiming capital allowances just as the former companies did, ensuring uninterrupted tax benefits.
Carrying Over Tax Benefits and Losses
The Act also protects legitimate tax benefits that existed before the merger. For instance, any unutilized capital allowances — unused portions of tax relief on business assets — remain valid after the merger. If one of the merging companies had ₦10 million left in capital allowance, that relief is not lost; it moves with the assets to the new company.
Similarly, unabsorbed business losses (losses recorded but not yet deducted from taxable income) are also preserved. The new business can use those losses to offset future profits, as long as they were properly recorded before the merger.
Even tax credits deducted at source, such as withholding tax, can transfer to the surviving business. This ensures that legitimate tax payments or credits made under the old structure are not forfeited when companies combine.
Through these provisions, the law ensures fairness — allowing businesses to reorganize for efficiency, scale, or profitability without losing their lawful tax advantages.
Sales and Transfers: A Different Tax Treatment
While mergers are treated as a continuation, sales or transfers of entire businesses are different. A sale or transfer usually means one company’s business ends and another’s begins. Because this involves a genuine change of ownership, it triggers tax consequences.
In such cases, the business that sold or transferred its operations is treated as having ceased trade. It must pay any taxes due, including those on chargeable gains (profits made when an asset’s selling price exceeds its tax value). The buyer, in turn, cannot inherit the seller’s unutilized capital allowances or tax losses — those remain tied to the old business and end there.
However, the law also recognizes practical situations where a business might only sell specific assets — not its entire operation. For such partial transfers, there is flexibility. If both parties agree to transfer the asset for a price not exceeding its remaining qualifying capital expenditure, the sale will not trigger capital gains tax. In that case, the buyer can continue to claim capital allowances on the transferred asset, while the seller must stop claiming them. This ensures fairness and prevents double deductions.
Special Rules for the Oil and Gas Sector
Because the oil and gas industry is complex and often undergoes restructuring — through joint ventures, farm-outs, and asset swaps — the Act provides specific guidance for companies involved in upstream petroleum operations.
When such a company restructures or transfers its trade, the new company’s accounting period begins on the date the transfer occurs or any date within that same month (subject to approval by the tax authority). The period runs until December 31 of that year.
This rule helps keep financial reporting synchronized and ensures that there are no gaps in tax assessment between the old and new companies. It provides administrative clarity for both regulators and companies in this high-value sector.
Regulatory Compliance During Restructuring
The Act mandates that any company planning to restructure, merge, or transfer its business must notify the relevant tax authority before doing so. This step allows regulators to verify that the restructuring is genuine — not a disguised attempt to avoid taxes.
It also ensures that the tax authority can monitor continuity, asset transfer values, and the treatment of capital allowances, making sure the process aligns with the law.
Artificial Transactions and the Role of the Tax Authority
After addressing mergers and restructurings, the Act turns to the issue of artificial or fictitious transactions — a common strategy some companies use to reduce their tax obligations without any real business substance.
The law empowers the tax authority to disregard or adjust any transaction it believes to be artificial, fictitious, or designed to avoid tax. If a transaction seems unnatural — for instance, if a company sells assets to a related party at an unrealistically low price just to reduce taxable income — the tax authority can cancel the arrangement and issue a new tax assessment based on fair market value.
This ensures that the government collects taxes fairly, not based on manipulated or artificial accounting entries.
The Act also defines “disposition” broadly to include any trust, covenant, grant, or arrangement — meaning any transaction that could be used to shift value or ownership.
Related-Party Transactions and Arm’s-Length Principle
Section 192 introduces strict rules for related-party transactions, which are common in multinational groups or businesses with shared ownership. A related-party transaction occurs when two companies under common control exchange goods, services, or assets.
The Act requires all such transactions to be conducted at arm’s length — meaning the price, terms, and conditions must be the same as if the two entities were completely unrelated. This principle prevents companies from shifting profits between themselves to reduce taxes in one location and inflate expenses in another.
For example, if Company A in Nigeria sells raw materials to its parent company abroad at a below-market price, it would be transferring profits out of Nigeria. The arm’s-length rule ensures that such a transaction is corrected to reflect what an independent buyer would pay under normal market conditions.
The law also requires companies to report all related-party arrangements in a form approved by the tax authority. The authority may then review, adjust, or regulate these transactions using the Transfer Pricing Regulations, which align Nigeria’s tax practices with international standards.
An “arrangement,” according to the Act, includes any agreement, financial or commercial relation, or series of transactions — even informal ones. This broad definition prevents companies from hiding relationships behind technicalities.
Ensuring Fairness and Closing Loopholes
Overall, this section of the Nigeria Tax Act, 2025 is designed to balance flexibility with integrity. It allows businesses to merge, acquire, and restructure for legitimate reasons — such as efficiency, growth, or survival — but prevents them from abusing these processes to evade taxes.
It also protects honest companies by clearly defining what is allowed, how tax benefits carry forward, and when tax authorities can intervene. For regulators, it provides the legal backing to address artificial pricing, suspicious asset transfers, and unfair profit shifting.
By laying out these detailed definitions and procedures, the Act strengthens the fairness and transparency of Nigeria’s tax system. It ensures that both local and multinational companies operate on the same principles, and that tax reliefs — such as capital allowances or loss carryovers — are preserved for genuine business purposes only.
In summary, the Nigeria Tax Act, 2025 establishes a system that supports corporate growth, economic restructuring, and fiscal responsibility all at once. It gives businesses the freedom to evolve while ensuring that every transaction — whether a merger, sale, or related-party deal — is conducted on fair, lawful, and transparent terms.
For more practical guides, interpretations, and insights into how these tax laws affect your business operations in Nigeria, visit www.bahasbooks.com — your resource for accounting clarity, tax compliance, and financial intelligence.
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