By: Tokunbo Ibrahim
Udo Udoma & Belo-Osagie
Natasha: When must an entity register to do business in your jurisdiction? Are there alternative forms of registration (i.e. a representative office)?
Tokunbo: Section 54 of the Companies and Allied Matters Act Cap C20, Laws of the Federation of Nigeria 2004 (“CAMA”, the principal legislation that regulates the affairs of Nigerian companies) provides that in order to do business in Nigeria, a foreign investor must incorporate a separate entity in Nigeria, and until the entity is so incorporated, it “shall not have a place of business or an address for service of documents or processes in Nigeria for any purposes other than the receipt of notices and other documents as matters preliminary to incorporation under CAMA”. Although a foreign company may register as a private company limited by shares, public company limited by shares, private company limited by guarantee and an unlimited company, there are no alternative forms of registration.
The under-listed companies can apply to the Federal Executive Council to be exempted from the requirement to incorporate a local entity in Nigeria:
- A foreign company invited to Nigeria by the Federal Government of Nigeria;
- Foreign companies in Nigeria on behalf of specific donor countries or international organization;
- Foreign government owned company operating an export business; and
Engineering and technical foreign consultants under contract from any government body or agency.
Natasha: Are there any treaties that govern foreign entities doing business in your jurisdiction? Are there exemptions for educational activities under those treaties?
Tokunbo: There are applicable double taxation treaties that have an impact on foreign entities doing business in Nigeria. There are two categories of double taxation arrangements under Nigerian Law. The first category involves Nigeria and members of the commonwealth nations and the second category covers Nigeria and individual member states with which Nigeria has signed Double Taxation Treaties (“DTTs”).
Presently, Nigeria has entered into DTTs with ten countries and two of these DTTs are yet to become effective. This is because under section 12 of the Nigerian Constitution, an international treaty shall not have the force of law until such treaty has been ratified by the National Assembly.
All the Nigerian DTTs contain similar provisions and cover companies’ income tax, personal income tax, petroleum profits tax and capital gains tax in Nigeria. Under the relevant tax statutes in Nigeria, a Nigerian resident (be it an individual or corporate entity) is required to pay taxes on his global income i.e. ‘ income accruing in, derived from, brought into, or received in’ Nigeria. Such resident, however, will be entitled to a tax credit or deduction where any foreign tax is due or payable to commonwealth country or a country with which Nigeria has concluded a DTT.
A notable example of the relief under the DTT is the reduced rate of 7.5% withholding tax on dividends, interest, rent and royalties when paid to a bona-fide beneficial owner of a treaty country. This is in contrast to 10% payable by a non treaty country. There are no exemptions for educational activities under the DTT.
Although this is not a treaty, Nigeria has enacted the Foreign Judgments (Reciprocal Enforcement) Act which provides that judgments obtained from Commonwealth countries may be enforceable in Nigeria if the Commonwealth country concerned would accord reciprocal recognition to a judgment made by a Nigerian court. What this means is that judgments emanating from Commonwealth courts would be enforceable in Nigeria upon proof by the judgment creditor that, his country of origin, would accord reciprocal recognition and enforcement to judgments made by Nigerian courts.
Natasha: What is the test for when a foreign entity is subject to local taxes?
Tokunbo: In order to do business in Nigeria a foreign investor must carry out that business by way of a limited liability company incorporated under the provisions of the Companies and Allied Matters Act. All companies incorporated in Nigeria are only subject to tax in Nigeria on income accruing in, derived from, brought into or received in Nigeria. Under Nigerian law, residents (Nigerians and non-Nigerians) are subject to the same rate of tax. Non-residents (i.e. foreigners who do not reside in Nigeria) are not liable to tax in Nigeria. If however, foreign individuals receive income like dividend, interest, rent or royalty from Nigeria, such income will be liable to the withholding of tax at the applicable rate. Where non-residents, however, reside in Nigeria for an aggregate period of 183 days (inclusive of annual leave or temporary period of absence) in a 12 months period and they carry out their employment in Nigeria, they will be liable to tax in Nigeria.
Natasha: Are there any tax treaties that provide exemptions? In general, what type of exemptions are available?
Tokunbo: There are no tax treaties that provide tax exemptions in Nigeria. Nigeria, however, has double taxation treaties (“DTT”) with certain countries that reduce the withholding tax payable from 10% to 7.5%. This is the rate that applies to all countries that Nigeria has a double taxation treaty (“DTT’) with. To date, Nigeria has entered into DTTs with the United Kingdom, the Netherlands, Canada, France, Pakistan, Belgium, Philippines, Romania, South Africa and China. The Nigerian constitution requires all DTTs to be ratified by Nigeria’s National Assembly before they can become part of local laws. The National Assembly is yet to ratify the DTT with South Africa and China.
Natasha: Are there any special rules for foreign institutions of higher education?
Tokunbo: There are no special rules for foreign institutions of higher education. All educational institutions are however required to obtain the prior approval of the Ministry of Education before establishing a business in Nigeria.
Natasha: What is the test for independent contractor vs. employee in your jurisdiction?
Tokunbo: There is no single piece of legislation or regulation that sets out the factors that would be considered in ascertaining whether or not a person who is engaged to provide service(s) to another is an employee or an independent contractor. The Nigerian courts have, however, devised several tests and criteria that would be considered in order to come to a conclusion that a person is either an independent contractor or as an employee. In S.S. Co. Ltd. V. Afropak (Nig) Ltd, the Supreme Court held that the under listed factors are some of the factors which the court would take into consideration in determining the nature of contract which parties have entered into. We should point out that in delivering its judgment, the Supreme Court used the term “contract of service” to refer to the contract between an employer and an employee, and “contract for service” to refer to the contract retaining an independent contractor. The factors that the Supreme Court identified are:
a. Mode of payment – where the payment is made by way of wages or salaries, this is indicative that the contract is a contract of service; alternatively, where payment is made by way of fees, commission only, or on completion of the job, it would suggest a contract for service.
b. Ownership of the equipment, tools or instruments used in providing the services – where the employer supplies the tools and other capital equipment, this suggests that the contract is a contract of service; however, where the person engaged has to invest and provide capital for the work to progress, this indicates a contract for service with an independent contractor.
c. Delegation of duty – it is inconsistent for an employee to delegate his duties under a contract of service or employment. The ability to delegate, therefore, suggests that person providing the services is an independent contractor and the contract could be construed as a contract for services.
d. Hours of work – where the hours of work are not fixed, the contract is not a contract of service but a contract for services.
e. Place where the work is carried out – It is not fatal to the existence of a contract of employment or service that the work is not carried out on the employer’s premises, however, a contract that allows the work to be carried on outside the employer’s premises is more likely to be a contract for service.
f. where office accommodation and a secretary are provided by the employer, this suggests that the contract is one of service.
Natasha: When is a work permit required?
Tokunbo: A work permit is required when an expatriate intends to take up employment in Nigeria whether for a temporary period; i.e. up to 3 months, or for an extended period of time.
Natasha: Is there anything else you think a potential client should know about doing business in your jurisdiction?
Tokunbo: By virtue of the provisions of the Nigerian Investment Promotion Commission Act, Cap N117, LFN 2004 (“NIPC Act”) it is possible for foreign investors to own 100% of the equity of a limited liability company in almost all sectors in Nigeria, and other than these sectors and certain matters set out in the “negative list”, a Nigerian company that is 100% foreign owned may engage in the same businesses as a Nigerian company that is wholly or partially owned by Nigerians. The areas of business that are prohibited by the negative list are:
a. the production of arms and ammunition;
b. production of, and dealing in narcotic drugs, and psychotropic substances;
c. production of military and paramilitary wears and accoutrement including those of the police and the customs, immigration and prison services; and
d. other items as the Executive Council of the Federation may from time to time determine.