TAX IMPLICATIONS OF CAPITAL RAISING UNDER ISA 2025: A GUIDE FOR NIGERIAN BUSINESSES AND SUB-NATIONALS

The enactment of the Investment and Securities Act (ISA) 2025 marks a watershed moment for Nigeria’s capital markets, introducing reforms designed to enhance efficiency, transparency, and investor confidence. Beyond regulatory modernization, the Act implicitly and explicitly facilitates new and potentially more flexible avenues for capital raising by both corporate entities and sub-national governments (States and Local Governments). While the ISA 2025 itself is primarily a regulatory statute, its successful implementation depends significantly on the interplay with Nigeria’s fiscal landscape. Any entity looking to leverage the opportunities under the new Act must undertake careful consideration of the associated tax implications. Effective tax planning is no longer just advisable; it is integral to optimizing capital structure and ensuring compliance in this evolving environment.

ISA 2025: Expanding the Capital Raising Toolkit

The ISA 2025 broadens the capital raising landscape in several ways. It expands the categories of issuers allowed access to the public market, potentially paving the way for innovative products and offerings. Furthermore, it specifically addresses previous restrictions limiting the ability of sub-national entities and their agencies to raise funds from the capital market, granting them greater flexibility. This is particularly significant, offering States and Local Governments alternatives to federal allocations or traditional commercial borrowing for financing crucial developmental projects. The Act’s general push towards market alignment with international standards and enhanced transparency (e.g., through mandatory Legal Entity Identifiers – LEIs) could also make Nigerian issuances more attractive to a wider pool of investors, including foreign ones.

However, the decision to raise capital – whether through equity, debt, or more innovative instruments as enabled by the Act – carries direct tax consequences for both the issuer and the investor. These consequences are governed primarily by Nigeria’s existing tax legislation, including the Companies Income Tax Act (CITA), Personal Income Tax Act (PITA), Capital Gains Tax Act (CGTA), and Value Added Tax (VAT) Act, as periodically amended by Finance Acts (such as the Finance Act 2023). Here, we consider some of these tax impacts.

Tax Treatment of Returns and its’ Impact on Investor Appetite

Investor decisions are heavily influenced by the after-tax return on their investments. Understanding the tax treatment of dividends and interest is therefore crucial when structuring a capital raise:

Dividends: Dividends received from Nigerian companies are generally subject to a 10% withholding tax (WHT), which is considered the final tax for resident individuals and non-resident recipients. For resident companies, dividends received are typically not subject to further income tax, as these are considered as Franked Investment Income by the provisions of the CITA. The tax efficiency of equity returns remains a key consideration.
Interest: Interest income is also generally subject to 10% WHT. For corporate lenders, this WHT is usually an advance payment towards their final Companies Income Tax liability. Crucially, interest earned from Federal Government bonds (FGN Bonds) is tax-exempt. Previous policies from the Federal Government have extended similar tax exemptions to interest on bonds issued by corporate entities and sub-national governments for defined periods to stimulate the market.

While these specific exemptions may have lapsed or changed under various Finance Acts, the principle remains: the tax status of interest payments significantly impacts the attractiveness and pricing of debt instruments. The ISA 2025’s facilitation of sub-national bond issuance becomes considerably more potent if the same favourable tax treatment given to Federal Government bonds is extended to sub-national bonds. This allows these entities to raise funds at potentially lower costs compared to taxable instruments.

Capital Gains Tax: Considerations when Exiting

The tax treatment upon disposal of securities, particularly shares, bonds & digital assets, are governed by the CGTA, as amended by recent Finance Acts.

Disposal of Shares: Historically, gains on the disposal of shares were exempt from CGT. However, the Finance Act 2023 removed this blanket exemption. Now, gains on share disposals are subject to 10% CGT, unless the proceeds are reinvested in acquiring shares in the same or another Nigerian company within the same year of assessment (rollover relief), or if the disposal proceeds are less than N100 million in any 12-month period, provided the shares were held for at least 365 days. This change makes the tax implications of equity investments more complex and needs to be factored into investor return calculations.
Disposal of Bonds: Gains arising from the disposal of Nigerian government securities (including FGN bonds, treasury bonds, savings certificates) remain exempt from CGT. The status of gains from sub-national bonds may depend on specific legislation or gazettes but may align with FGN bonds if designed to encourage investment.
Digital Assets: Should companies explore raising capital through instruments classified as digital assets (now explicitly recognized as securities under ISA 2025), the Finance Act 2023 clarifies that gains on the disposal of digital assets are subject to 10% CGT.

Deductibility of Capital Raising Costs: and Its’ Impact on Issuers

Companies incurring costs associated with raising capital need to determine if these expenses are tax-deductible. Under CITA, expenses are deductible if they are “wholly, reasonably, exclusively, and necessarily” (WREN) incurred for the purpose of the business.

Interest Costs: Interest paid on loans used to generate taxable income is generally deductible. However, the Finance Act introduced limitations on interest deductibility for foreign connected party debt, capping it at 30% of Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA), with excess interest potentially carried forward. Issuers using debt instruments need to be mindful of these rules.
Issuance Costs: The tax deductibility of other costs associated with raising capital (e.g., advisory fees, legal fees, regulatory fees, underwriting costs) is less straightforward. Tax authorities may argue these costs are capital in nature (related to the company’s capital structure rather than day-to-day operations) or akin to non-deductible start-up expenses, particularly if incurred before income generation commences. While the WREN principle applies, securing deductibility for these costs often requires careful justification and documentation linking them directly to the generation of taxable income. Obtaining professional tax advice on structuring these costs is highly recommended.

The Imperative of Integrated Planning

The ISA 2025 opens doors for more sophisticated and diverse capital raising strategies in Nigeria. However, the tax implications are multifaceted and can significantly influence the overall cost and success of these strategies. Key considerations include:

Optimal Instrument Choice: The tax treatment of returns (dividends vs. interest) and capital gains varies. Choosing between equity, debt, or hybrid instruments requires modelling the after-tax impact for both the issuer and target investors.
Sub-National Financing: The viability of increased capital market access for States and LGAs under ISA 2025 is strongly linked to the tax status of their bond issuances. Advocacy for maintaining or clarifying tax incentives for investors in these bonds may be necessary.
Cost Management: Understanding the rules around the deductibility of interest and issuance costs is vital for accurately forecasting the net cost of capital.
Compliance: The ISA 2025 introduces new compliance layers (e.g., LEIs). Businesses must ensure their tax compliance framework integrates with these new regulatory requirements. Recent Finance Acts have also introduced stricter compliance deadlines, for instance, for CGT filings.

Conclusion

The Investment and Securities Act 2025 provides a modernized regulatory platform for capital raising in Nigeria. However, unlocking its full potential requires navigating the intricate web of Nigerian tax law. Issuers – whether large corporations or sub-national entities – must proactively integrate tax planning into their capital raising strategies from the outset. Understanding the tax implications for investors, managing the deductibility of costs, and ensuring robust compliance are critical success factors. As the market adapts to the ISA 2025, seeking expert legal and tax counsel will be indispensable for businesses and government entities aiming to leverage the new opportunities effectively and efficiently.