On 5th July 2019, in FIRS v. Citibank Nigeria Limited (CA/L/566/2017), the Court of Appeal held that profits from the sale of long term instruments not held to maturity are subject to tax.
In this case, Citibank (the respondent) purchased long term Federal Government of Nigeria (FGN) bonds with tenors of 3 – 20 years. The respondent disposed of the FGN bonds before maturity and realised gains/profits therefrom. FIRS subjected the profits realised to tax. The respondent challenged the tax assessment on grounds that section 9(1)(g) of CITA exempts from tax, any profits realised from the disposal of long term money instruments. The respondent further argued that its decision to dispose of the FGN bonds before maturity does not change the intrinsic character of the FGN bonds as a long term money instrument now held by a 3rd party and that no statute requires a holder of a long term money instrument to hold the instrument for a specific length of time in order to enjoy the tax exemption.
On the other hand, FIRS argued that by disposing of the FGN bonds before maturity, the respondent had converted its investment in the FGN bonds to a short term investment which is subject to tax. FIRS further argued that the respondent’s investment in the long term FGN bonds and then disposing same before maturity was an artificial transaction done with the sole purpose of avoiding tax and thus should be disregarded.
Decision of the Court
The Court of Appeal held that while profit from long term money instruments are exempt from taxes, profit from the disposal of long term money instruments before their maturity dates is subject to tax. The court held that it is the “profit made in the short term” from the disposal before maturity that is being taxed and not the long term money instrument itself. Thus, it is immaterial that the profit was made from the disposal of a long term money instrument, the fact that the profit was made from the disposal of the instrument before its maturity renders the investment in the instrument a short term investment which is subject to tax.
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