Nigeria is regarded as a viable and attractive destination for foreign investment, mainly because of its abundant mineral resources and large population. The country also has a plethora of legislation, platforms and incentives for foreign investments. This article discusses strategies, principal legislation and incentives relating to foreign investment in Nigeria.
Foreign direct investment (FDI). Foreigners may invest and participate in the operation of an enterprise in Nigeria, except for those on the negative list. A foreign investor is eligible to form a private company in Nigeria, whether alone or with other investors. A foreign investor can also invest directly in an existing Nigerian company by means of equity, quasi equity debt, and debt financing including bonds, loans, instruments or securities that may be converted into equity, based on terms agreed between the investor and the investee company.
Foreign indirect investment. There are private equity or venture capital entities (investment managers) in Nigeria who help sophisticated investors consider investment opportunities. A foreign investor can enter into an arrangement with an investment manager, who will in turn look out for favourable investment opportunities to invest the investor’s fund.
Foreign portfolio investment (FPI). This involves the purchase of securities and other financial assets by foreign investors. Foreigners can consider investing in shares or other securities traded on the Nigerian Stock Exchange (NSE) and the FMDQ Securities Exchange. FPI includes a variety of different assets held in Nigeria by foreigners. According to the NSE’s Domestic & FPI Report in November 2020, over a 13-year period FPI on the exchange increased by 53.08%, from NGN616 billion (US$1.6 billion) in 2007 to NGN914 billion in 2019. This indicates a consistent increase, and investors interested in short-term investments usually opt for FPI due to its liquidity. FPI can also be disposed of easily once the investor decides to exit the investment.
It is important to evaluate the risks associated with the investment to minimise making bad investment decisions and maximise returns. It is advisable to engage relevant advisers, and in most cases a comprehensive due diligence may be necessary. Other relevant factors include consideration of the business model of the company, an analysis of the documentation and other legal requirements, available incentives, and tax considerations.
Nigerian Investment Promotion Commission (NIPC) Act. The NIPC is an agency established to encourage, promote and co-ordinate investment in the Nigerian economy. Every enterprise established pursuant to an FDI for the purposes of doing business in Nigeria is required to register with the NIPC before commencing business. The NIPC Act allows Nigerian enterprises to be fully owned by foreigners.
Foreign Exchange (Monitoring and Miscellaneous Provisions) Act. This act regulates the inflow and outflow of foreign currency or capital. It also provides for, and allows investment in, any Nigerian enterprise or securities with foreign currency or capital imported into Nigeria through an authorised dealer. The authorised dealer through which foreign currency or capital for the investment is imported shall, within 24 hours of the importation, issue a certificate for capital importation, and, within 48 hours thereafter, make returns on such information to the Central Bank of Nigeria.
Companies and Allied Matters Act (CAMA). A foreign investor is eligible to participate in forming a company in
Nigeria. Foreign companies intending to carry out business in Nigeria must be
incorporated with the Corporate Affairs Commission as a separate entity in Nigeria for this purpose. The CAMA prohibits a foreign company, until it is incorporated, from carrying out business in Nigeria.
Immigration Act. A non-Nigerian who intends to commence business in Nigeria must obtain the consent of the Minister of Interior. Where a person in Nigeria intends to employ a non-Nigerian, the permission of the Comptroller-General of Immigration must be obtained. This is usually referred to as a requirement to obtain an expatriate quota.
Also, a foreigner who wants to reside and work in Nigeria beyond three months must obtain a subject to regularisation visa, at the Nigerian Embassy in his country of residence, before entering Nigeria. On entry into Nigeria and submission of the required application, the foreigner is granted a residence permit known as the Combined Expatriate Residence Permit and Aliens Card, which also serves as a multiple entry visa.
National Office for Technology Acquisition and Promotion (NOTAP) Act. A foreign investor who intends to acquire or bring foreign technology and technical knowledge or management into Nigeria is required to register agreements relating to such acquisition or transfer with the NOTAP.
Some companies are also regulated by sector-specific laws and regulations. Certain sector regulators require the enterprises under their regulatory purview to obtain authorisation from regulators such as those in the following sectors: Banking and finance (CBN licence); power generation and distribution (Nigerian Energy Regulatory Commission licence); insurance (National Insurance Commission licence); pension fund administration (National Pension Commission licence); aviation (Nigerian Civil Aviation Authority licence); oil and gas (Department of Petroleum Resources licence); telecoms (Nigerian Communications Commission licence); and maritime activities (Nigerian Maritime Administration and Safety Agency licence).
In some sectors, certain restrictions are placed on the foreign participation of companies. For instance, the Private Guard Companies Act requires all directors of private security guard companies to be Nigerians. Also, some sectors, such as the oil and gas sector, mandate a threshold percentage of Nigerian participation (local content).
From time to time, tax incentives are provided to local and foreign investors. Recently, the federal government introduced an incentive to promote micro, small and medium-sized enterprises. Small companies (companies with an annual turnover below NGN25 million) are exempt from tax, while medium-sized enterprises (companies with an annual turnover greater than NGN25 million but below NGN100 million) are subject to companies income tax at the rate of 20%, instead of 30%.
The Companies Income Tax Act (CITA), as amended, provides for tax relief such as: allowing expenses exclusively, necessarily and reasonably incurred in the production of those profits chargeable to tax for the purpose of ascertaining assessable profit or loss; and donations made to some classes of funds under section 25 are deductible under the CITA.
The double taxation agreements (DTAs) entered into in Nigeria are recognised and incorporated in the CITA. The DTA affords tax relief, e.g., withholding tax rate of countries that have DTAs with Nigeria is 7.5%, instead of 10%. The CITA provides allowances to such an extent as the act allows for the purpose of tax in relation to rural investment and export processing zones.
Companies involved in mining of solid minerals are exempt from tax for the first three years of their operations. Interest payable on any foreign loan where the repayment period, including moratorium, is above seven years with a grace period not less than two years, enjoys a 70% tax exemption.
Enterprises approved to operate in a free-trade zone in Nigeria are exempted from all federal, state and government taxes, levies and rates. The NIPC Act provides for the pioneer status tax holiday granted to companies operating in eligible industries, and in respect of industries located in economically disadvantaged local government areas of Nigeria.
For the purposes of promoting foreign investment, certain incentives are provided in the NIPC Act. For example, a foreign investor is guaranteed the unconditional transfer of funds through an authorised dealer, in freely convertible currency, of proceeds attributable to an investment, provided such investor has, at the time of importing the capital, obtained a certificate of capital importation for it through an authorised dealer.
The NIPC Act also prohibits the nationalisation or expropriation of foreign investments by the Nigerian government. Accordingly, no person who owns an interest in an enterprise may be compelled by law to surrender his/her interest in the enterprise to any other person. Foreign investors are, by this incentive, assured that their investments are secured.
In cases where, for a public purpose, the federal government acquires an enterprise, the government must pay fair and adequate compensation. The investor has a right of access to court for the determination of the investor’s interest of right, and the amount of compensation to which he/she is entitled.
The above-mentioned strategies, legislation and incentives continue to make Nigeria attractive as a destination for foreign investors.
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G Elias & Co
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Tel: +234 1 460 7890; +234 1 280 6970