As of now, Nigerian capital gains tax (CGT) generally does not apply to offshore transactions involving the sale of foreign holding companies with indirect Nigerian exposure. However, under the proposed reforms, offshore sales of shares or interests in foreign entities may now trigger Nigerian CGT if those entities hold significant Nigerian assets.
Under the proposed CGT regime, CGT will apply where:
(i) more than 50% of the value of the foreign entity is derived, directly or indirectly, from Nigerian assets (such as equity interests in Nigerian portfolio companies, real estate, or other chargeable assets); and
(ii) this 50% threshold was met at any point during the 365-day period preceding the disposal.
The proposed CGT rules effectively brings offshore transactions with a material Nigerian nexus into Nigeria’s tax net, even where both the buyer and seller are non-residents and the transaction occurs entirely offshore.
Impact on Private Equity and Venture Capital Funds
From a fund economics perspective, the proposed reforms are unlikely to create disproportionate financial exposure for fund managers. In most cases, any Nigerian CGT arising from indirect transfers would be treated as a fund-level tax expense, reducing gross sale proceeds prior to distribution through the fund’s waterfall. LPs would ultimately bear the economic burden of the tax in proportion to their interests, while the GP’s carried interest would continue to be calculated after the deduction of fund-level taxes. Most existing LPAs already contemplate that taxes incurred at the fund level reduce distributable proceeds. As a result, we do not expect any fundamental change to the carry mechanics would be required.
However, beyond the economic allocation, there could be a range of governance, execution, and reputational considerations. First, GPs generally owe a fiduciary duty to structure transactions efficiently. A failure to anticipate or properly manage tax exposures that could have been lawfully mitigated may raise governance concerns, particularly where LPs suffer avoidable tax leakage.
Also, sophisticated LPs are increasingly focused on cross-border tax compliance and may seek enhanced transparency, pre-transaction tax analysis, and contractual protections such as indemnities or escrow arrangements to address emerging tax exposures.
In the context of transaction execution, Nigerian CGT exposure may surface as a diligence item during sale processes, particularly where buyers are concerned about potential liabilities arising from indirect transfer rules. This may lead to price adjustments or specific tax indemnity negotiations.
As a practical matter, GPs should be prepared to present defensible valuation analyses demonstrating whether the 50% Nigerian asset value threshold has been triggered in the relevant 365-day period preceding any exit.
In addition, there is a growing regulatory enforcement dimension. The Federal Inland Revenue Service (FIRS) is expected to scrutinize valuation methodologies and related-party structures more closely under the new regime, which may result in more frequent audits and potential disputes.
Conclusion
The introduction of Nigeria’s indirect transfer capital gains tax regime reflects a broader global shift towards asserting taxing rights over offshore transactions involving domestic assets. While the immediate fund economic implications for GPs may be modest, effective governance, compliance readiness, and transparent LP engagement will be essential to navigating this evolving landscape.
Balogun Harold insights are shared for general informational purposes only and does not constitute legal advice. For tailored guidance, please contact our Private Equity and Venture Capital Lawyers at bhlegalsupport@balogunharold.com
