At some point in the life cycle of any business, the decision to acquire or divest business lines may be made in order to create synergies or improve financial performance. In 2014/2015, in an attempt to reorganize their businesses, reduce overhead cost and increase revenue, major telecommunication companies in Nigeria sold off about 30,000 base transceiver stations tower assets in deals worth over US$ 300 million.

In 2016, Nigeria was plunged into an economic recession, which lasted from the third quarter of 2016 to the third quarter of 2017, hurting many businesses. Although Nigeria has exited the recession, the monetary policy committee (MPC) of the Central Bank of Nigeria recently warned, after its last bi-monthly meeting held in September 2018, that the economic fundamentals of Nigeria remains fragile and the country's exit from recession may be under threat as the economy has started showing signs of weakness. Investors planning to enter into any business venture must cautiously evaluate their entry strategies. Depending on their findings, investors may structure the acquisition as an asset deal rather than a share deal.

This piece examines the reasons why an asset transfer may be an option and important tax considerations in negotiating and concluding that option.

Why Asset Deals?

Generally, an asset transfer is a less preferred option for business acquisition when compared to a share transfer, which is simple, straightforward, and more tax efficient. This is evident in the fact that the parties are exposed to tax at various points of the transaction. For example, the purchaser is required to pay stamp duties on the asset purchase agreement as well as Value Added Tax (VAT) at 5% on the value of the asset. On the other hand, the seller is obliged to pay Capital Gains Tax (CGT) on any gain that accrues from disposal of the assets and may be liable to income tax where there is a balancing charge on the transfer of the assets.

Notwithstanding the above, asset transfers are not as bad as may be imagined in terms of tax benefits. For example, for assets that have been fully depreciated by the seller, the buyer could create a tax base for claiming capital allowance on such assets based on purchase price allocated to them. It is also possible for the buyer to get a step up advantage so that the assets are recorded at their fair market value as opposed to their tax written down value for capital allowance purposes. These tax benefits create a huge opportunity for cost recovery by the buyer, which could make up for the tax inefficiencies of an asset transfer option.

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