DOING BUSINESS IN NIGERIA FOR SME

DOING BUSINESS IN NIGERIA FOR SME Contributed by: Bloomfield Law Practice

GENERAL OVERVIEW OF NIGERIA Nigeria is often referred to as the "Giant of Africa", owing to its large population and economy. With approximately 174 million inhabitants, Nigeria is the most populous country in Africa and the seventh most populous country in the world. Nigeria has one of the largest populations of youth in the world. The country is viewed as a multinational state, as it is inhabited by over 500 ethnic groups, of which the three largest are the Hausa, Igbo and Yoruba; these ethnic groups speak over 500 different languages, and are identified with wide variety of cultures.As of 2015, Nigeria is the world's 20th largest economy, worth more than $500 billion and $1 trillion in terms of nominal GDP and purchasing power parity respectively. It overtook South Africa to become Africa's largest economy in 2014. Also, the debt-to-GDP ratio is only 11 percent, which is 8 percent below the 2012 ratio. Nigeria is a member of the Commonwealth of Nations, the African Union, OPEC, and the United Nations among other international organizations.LEGAL SYSTEM AND STRUCTURENigeria can be described as falling within what is generally called a common law system. More specifically, the sources of Nigerian law are:

The Amended Constitution of the Federal Republic of Nigeria, (the Constitution). The Constitution is Nigerias supreme law from which all other laws derive their validity;

Statutes passed by legislative bodies in Nigeria i.e. the National Assembly, which makes laws for the Federation, and which comprises of a Senate and a House of Representatives, and the various Houses of Assembly which make laws for each of Nigerias 36 States;

English Law comprising of the received English law (Received English Law) and some English statutes made before October 1, 1960 that were extended to Nigeria by an order-in-council. The Received English Law comprises of:

the Common Law of England; the Doctrines of Equity;Statutes of General Application in force in England on January 1, 1900;

Customary law of the various communities in Nigeria, including Islamic Law which is accepted as the customary law of various communities in the Northern part of the country.

Judicial Precedents. Nigeria, like most common law countries with a hierarchical system of courts, operates a system of binding judicial precedent where the decisions of a higher court are binding on the courts that are lower in hierarchy.

COMPLIANCE REQUIREMENTS FOR SME: POST INCORPORATIONReturn of allotment (CAC 2A) must be completed Notice of change of authorized share capital (Cac 2.4 must be completed) Re-registration and conversion of company(cac 2.7 must be completed0 Notice of situation(Change of registered address) Declaration of compliance with the requirements of CAMA Notice of change of Directors, or in the name, Residential address or postal address of Director Filing of annual return (CAC 10)

S/NAgency Functions/Role 1.NIGERIAN INVESTMENT PROMOTION COMMISSION (NIPC)

Registration of Foreign Investments, Issuance of Business Permits, Complaint Management, Linkages with NIDC Departments, and other Government Agencies, Country-wide Liaison with the 36 States on Investment matters etc.

2.NIGERIA IMMIGRATION SERVICE(NIS)Expatriate Quota Positions, Regularization of Permanent Work Permits, other immigration facilities. LEGAL AND REGULATORY REGIMES/NAgency Functions/Role 3NIGERIA CUSTOMS SERVICE (NCS)

Issuance of Import and Export Guidelines, Procedure for citing Excise Factories, Goods clearance facilitation and general information of fiscal policy issues.

4.FEDERAL INLAND REVENUE SERVICE (FIRS)

Tax registration, payment of stamp duties, issuance of tax clearance certificates and issuance of tax forms.

5.NATIONAL OFFICE FOR TECHNOLOGY ACQUISITION PROMOTION (NOTAP)

Registration of contracts agreement dealing with transfer/acquisition of technology, Approvals/licenses for technology transfer, patents and franchises, etc.

S/NAgency Functions/Role 6.NATIONAL AGENCY FOR FOOD AND DRUG ADMINISTRATION AND CONTROL (NAFDAC)

Registration of regulated products, issuance of export certificates, authorization to import unregistered food and drug products.

7.STANDARDS ORGNANIZATION OF NIGERIA (SON)

Facilitates all aspect of standardization activities, approvals or permits for use of standards.

8.FEDERAL MINISTRY OF FINANCE

Administration of incentives, tariff administration and general information and guidelines on fiscal policy.

9.FEDERAL MINISTRY OF SOLID MINERALS DEVELOPMENT

Exploration licenses, mining leases and information and guidelines on investing in the solid mineral sector. 10.CENTRAL BANK OF NIGERIA (CBN)

Provision of information and technical advice on the Nigerian, Banking and Financial System, guidelines on correspondent banking and funds transfer, including capital importation.

FISCAL REGIME ADMINISTRATION OF TAXES FOR SMECompanies Income Tax: This tax is payable for each year of assessment of the profits of any company at a rate of 30%. These include profits accruing in, derived from brought into or received from a trade, business or investment. Also, in Nigeria Company dividends or other company distribution whether or not of a capital nature made by a Nigerian is liable to tax at source at the rate of 10%.15Education Tax: This tax is charged in accordance with the Education Tax Act 1993 (as amended). It requires a company (incorporated in Nigeria) to pay tax at the rate of 2% of its profits as assessed under the Companies Income Tax Act.Withholding Tax: Nigerian law subjects certain activities and services to Withholding Tax. This means that where during transactions in any of the specified activities or services, a payment is due from one person to a company, the person making the payment is expected to deduct tax at the applicable rate and remit it to the relevant tax authority. The applicable rates range from 5% to 10%.Stamp Duties: Stamp duty is imposed on most legal documents and is jointly administered by the State and Federal authorities, depending on the type and nature of the document. Stamp duties are regarded as transaction taxes, and the rates chargeable would depend on the classification of the document. Some documents attract stamp duties on flat rate basis while others are assessed at ad valorem basis.Capital Gains Tax: This applies to all gains accruing to a company from the sale or lease or other transfer of proprietary rights in a chargeable interest which are subject to a capital gains tax of 10%. The chargeable assets may be corporeal or incorporeal and it does not matter that such asset is not situated in Nigeria. Where, however, the company is a non-resident company, the tax will only be levied on the amount received or brought into Nigeria.TAX INCENTIVES FOR SMALL AND MEDIUM ENTERPRISE

Pioneer status: This is a concession to pioneer companies located in economically disadvantaged areas, providing a tax holiday period of five to seven years. these industries must be considered by the government, to be beneficial to the country's economy and in the interest of the public.Companies that are involved in local raw material development; local value added; labour intensive processing; export oriented activities; in-plant training; are also qualified for additional concessions.Tax Relief For Research And Development (R&D)

Up to 120% of expenses on r&d are tax deductible provided that such r&d activities are carried out in Nigeria and are connected with businesses to which allowances are granted. the result of such research could be patented and protected in accordance with internationally accepted industrial property rights.LOCAL RAW MATERIALS UTILISATION:30% tax concession for five years to industries that attain minimum local raw materials utilisation as follows:- - agro 80% - agro allied 70% - engineering 65% - chemical 60% - petro-chemical 70%

LABOUR INTENSIVE MODE OF PRODUCTION:15% tax concession for five years. the rate is graduated in such a way that an industry employing one thousand persons or more will enjoy 15% tax concession while an industry employing one hundred will enjoy only 6%, while those employing two hundred will enjoy 7%, etc.LOCAL VALUE ADDED:10% tax concession for five years. this applies essentially to engineering industries, while some finished imported products serve as inputs. this is aimed at encouraging local fabrication rather than the mere assembly of completely knocked down parts.IN-PLANT TRAINING: 2% tax concession for five years, of the cost of the facilities for training.EXPORT ORIENTED INDUSTRIES:10% tax concession for five years. this concession will apply to industries that export not less than 6% of their products.INFRASTRUCTURE20% of the cost of providing basic infrastructures such as roads, water, electricity, where they do not exist, is tax deductible once and for all.INVESTMENT IN ECONOMICALLY DISADVANTAGED AREAS100% tax holiday for seven years and additional 5% depreciation over and above the initial capital depreciation.IMPORT DUTY REBATE25% import duty rebate was introduced in 1995 to ameliorate the adverse effect of inflation and to ensure increase in capacity utilisation in the manufacturing sector. investors are however, advised to ascertain the current operative figures at the time of making an investment, because these concessions have undergone some ammendments in the past few years.RE-INVESTMENT ALLOWANCE:This incentive is given to manufacturing companies that incur capital expenditure for purposes of approved expansion of production capacity; modernisation of production facilities; diversification into related products. it is aimed at encouraging reinvestment of profits.INVESTMENT TAX ALLOWANCE:Under this scheme, a company would enjoy generous tax allowance in respect of qualifying capital expenditure incurred within five years from the date of the approval of the project.Dividends derived from manufacturing companies in petro-chemical and liquefied natural gas sub-sector are exempt from tax.Companies with turnover of less than N1 million are taxed at a low rate of 20% for the first five years of operation if they are into manufacturing.TAX INCENTIVES FOR OTHER LINES OF TRADECompanies profits in respect of goods exported from Nigeria, are exempt from tax provided the proceeds are repatriated to Nigeria and used exclusively for the purchase of raw materials, plants equipment and spare parts.Profits of companies whose supplies are exclusively input to the manufacturing of products for exports, are excluded from tax.All new industrial undertakings including foreign companies and individuals operating in an export processing zone (epz), are allowed full tax holidays for three consecutive years.Challenges of SMEs in Nigeria are: Poor access to affordable finance leading to inadequate working capital; Lack of work space; Poor access to local, regional & international markets leading to poor business turnover; Obsolete technology leading to inability to compete globally; Inadequate government support and encouragement; Weak infrastructure leading to high cost of doing business;Non insurance of business risk; Non effective implementation of the National Policy on SMEs; Poor management of business operation due to lack of business management skills; Administrative barriers in doing business, Multiple permits and fees are required at the state and municipal level, often spontaneously. Absence of a general rating scheme; Non availability of qualified artisans (skill gap).Government efforts in addressing these challenges: The establishment of the Bank of Industry (BOI) in 2001 from the defunct Nigerian Industrial Development Bank (NIDB) and the Nigeria Bank for Commerce and Industry (NBCI); The establishment of the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) via SMEDAN ACT 2003; The launching of the Micro Finance Policy, Regulatory and Supervisory Framework for Nigeria in 2005 which resulted in the establishment of Microfinance Banks; The N200 Billion intervention fund for re-financing and restructuring of Banks loans to the manufacturing sector; The establishment of the N200 Billion Small and Medium Enterprise Credit Guarantee Scheme (SMECGS) in 2010 by the Central Bank of Nigeria; The Nigerian Incentive Based Risk Sharing System (NIRSAL) for agricultural lending launched in 2011; The N100 Billion bond-funded Cotton, Textiles and Garment Industry Revival Scheme; The Bank of Agriculture (BOA) has emerged from the Nigerian Agricultural, Cooperative and Rural Development Bank (NACRDB ); Facilitating and guaranteeing external finance through the World Bank, African Development Bank (AfDB), International Finance Corporation (IFC) and other international institutions willing and capable of assisting SMEs; Marching funds from big Entrepreneurs by BOI such as the N5 billion by Aliko Dangote; Marching funds from States by BOI; Youth Enterprise With Innovation In Nigeria (YOUWIN)DISPUTE RESOLUTION MECHANISMS SME MUST NOTE The Court System: The Nigerian courts have evolved and the rules of court are constantly being modernised to achieve the expeditious trial of cases and to encourage the amicable pre-trial resolution of disputes. In 2004, Lagos State adopted new rules of court and thus set the pace for other courts in Nigeria. Several states such as Rivers, Akwa Ibom, Cross River and Abuja among others have followed suit. The 2004 rules have now been repealed by new rules of court adopted by Lagos State in 2012, with effect from 1st January, 2012. Alternative Dispute Resolution: Arbitration: The Arbitration and Conciliation Act Chapter A18, LFN 2004 makes provision for the recognition and enforcement of arbitral awards by the courts. The Act incorporates the 1976 UNCITRAL rules on International Commercial Arbitration so that once obtained, an international arbitral award may be registered and enforced in Nigeria by virtue of the Foreign Judgment (Reciprocal Enforcement) Act an act which makes applicable the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958. CONCLUSION AND RECOMMENDATION Nigeria is ripe for long term investment. It has a huge domestic market, an aggressive private sector, and a reasonably well educated labour force. As lawyers, we would recommend the following: Necessary to seek legal advice from a reputable lawyer on the type of business you need to register because the different types of businesses recognized under Nigerian law, which we have mentioned have different legal effect. Carry out thorough due diligenceFollow the rules - abide by laws and regulations and avoid shortcuts. Be ethical; and Use trusted advisers with an established track record.