Empowering Innovation And Fostering Investment: The Nigeria Startup Act And Its Incentives

In recent years, Africa has been labelled the continent of innovation, reflective of its burgeoning population and talented youth. Indeed, Nigeria is arguably one of Africa's most prolific technology hubs, hosting several disruptive startups and surpassing the number of startups in Africa.

As one of Africa's largest economies, Nigeria has emerged as a frontier market for innovation and entrepreneurship, with a thriving technology startup ecosystem attracting local and international attention. According to the Nigerian Startup Ecosystem Report, 2022, Nigeria is the most popular investment destination on the continent, raising a staggering US$2.07billion¹ between 2015 and 2022 by 383 tech startups- significantly higher than any other country. However, amidst the exponential growth and potential, startups face a myriad of challenges that stifle progress and long-term scalability.

One of the primary challenges faced by Nigerian startups is the limited access to funding. While a funding boom was recorded in 2021 and in the early part of 2022, many startups still struggle to secure adequate funding to scale their operations and develop products. Another major challenge is complex and ambiguous regulations that hinder business growth. Startups often struggle to navigate the regulatory landscape, thus leading to compliance issues and legal uncertainties. Additionally, the competitive environment in Nigeria can be challenging for startups. Established companies and multinational corporations dominate many sectors, making it difficult for startups to compete effectively.

Despite these challenges, Nigerian startups have continued to demonstrate resilience and creativity in overcoming obstacles and driving innovation in various industries. It is therefore imperative that an inclusive solution is implemented. In a bid to address some of these challenges and catalyze growth in the technology ecosystem, Nigeria unveiled the game-changing Nigeria Startup Act, 2022 ("the Startup Act" or "the Act"); a co-created legislation poised to accelerate innovation and economic growth. The Startup Act was passed into law on the 19th of October 2022. It is a comprehensive framework designed to optimize and harness the benefits of the technology ecosystem, foster innovation and empower labelled startups and investors, while propelling the country into the global innovation spotlight.

To be classified as a labelled startup, the business must either be a registered limited liability company with less than 10 years from incorporation, or a registered sole proprietorship or partnership involved in innovation, development, production, improvement and the commercialization of digital technology products or processes. The startup must be the holder or repository of a product or process which imbibes digital technology or be the owner or author of a registered software.

Eligible sole proprietorships or partnerships will be granted a pre-label status for a period of six months to allow them time to incorporate. Furthermore, the business should have at least one-third local shareholding, which should be held by one or more founders/co-founders who are Nigerians. Eligible entities are required to apply for labelled status on the startup portal in a prescribed form and pay the fee stipulated by the Secretariat of the Council- National Information Technology Development Agency (NITDA).

One of the key objectives of the Startup Act is to improve the Nigerian technological landscape by creating a conducive regulatory environment that simplifies the process of starting and running a technology business in Nigeria. This includes measures to streamline registration procedures and reduce bureaucratic hurdles.

Specifically, the Act provides for collaboration between the Secretariat of the Council and agencies of government such as the Corporate Affairs Commission (CAC); to optimize the business registration process, the Nigerian Copyright Commission, Trademarks, Patent, and Design Registries; to protect the copyrights of labelled startups, and National Office for Technology Acquisition and Promotion (NOTAP);to ease technology transfer process.

Incentives for labelled startups

The Startup Act includes a range of tax and financial incentives for labelled startups, venture capitalists, angel investors, private equity companies, accelerators, and incubators. Some of these incentives include:

1. Access to Funding: The Act mandates an annual allocation of at least ₦10 billion to the Startup Investment Seed Fund ("the Fund"), with the National Council for Digital Innovation and Entrepreneurship determining funding sources, management, and access to the fund, as well as establishing an innovation grant framework to support research and development initiatives.

In addition, the Act tasks NITDA with creating a Credit Guarantee Scheme to offer financial and credit assistance to labelled startups. These financial incentives are pivotal for startups, particularly during the initial growth phase. By providing this financial stimulus, the government aims to facilitate the expansion of startups, foster the creation of innovative products and services, and generate employment opportunities for the growing youth population in Nigeria.

2. Tax Incentives: Labelled startups are eligible for tax breaks and incentives aimed at easing financial challenges of establishing and scaling a business. These include:

1. Pioneer Status Incentive (PSI): Labelled startups operating in eligible industries can apply through accelerated protocols via the Secretariat to the Nigerian Investment Promotion Commission (NIPC) for PSI. If granted, the labelled startup would be entitled to a tax holiday for an initial period of three (3) years, which may be extended for an additional two (2) years.
2. Exemption from Contribution to Industrial Training Fund (ITF): The Act exempts labelled startups from contributions of 1% of annual payroll cost, to ITF where it provides in-house training to its employees for the duration of the startup label.
3. Research and Development Tax Deductions: Research and development costs wholly incurred in Nigeria will be tax deductible.
4. A labelled startup will be permitted to deduct only a 5% Withholding Tax (WHT) from the income earned by a non-resident company providing technical, consulting, professional, or management services, which is currently applicable at 10%.

3. Access to Export Facilities: Labelled startups involved in the exportation of products and services deemed eligible under the Export (Incentives and Miscellaneous Provisions) Act, are entitled to export incentives and financial assistance from the Export Development Fund, Export Expansion Grant and the Export Adjustment Scheme Fund.

4. Establishment of Technology Development Zones: The Act provides for collaboration between the Secretariat and the Nigeria Export Processing Zones Authority (NEPZA) to establish a Technology Development Zone ("the Zone") to spur the growth and development of startups, accelerators, and incubators. Startups, accelerators, or incubators situated in the Zone will be entitled to existing incentives provided under the NEPZA Act including tax exemption, non-applicability of the FX regime administered by the CBN, exemption from import duties, etc.

5. Other benefits of the Secretariat and startup portal include:

• The Secretariat will collaborate with the CAC to designate a separate section on the startup portal to facilitate seamless, expedited processes and transactions carried out by the labelled startups with the CAC.
• The Secretariat will collaborate with the Nigerian Copyright Commission and the Trademarks, Patent and Design Registries to ensure that the registration and protection of intellectual property of labelled startup is seamless and expedited.
• Labelled startups can raise funds through crowdfunding intermediaries and commodities investment platforms licensed by the SEC, through an expediated process.
• The Secretariat in conjunction with NOTAP will designate a section on the startup portal to ease technology transfer registration for labelled startups. In addition, labelled startups will enjoy discounts on all applicable fees for technology transfer registrations.
• The Secretariat in conjunction with the CBN and SEC will ensure that labelled startups operating as financial technology ("Fintech") companies will have access to simplified licensing procedures with the CBN and SEC through a designated section on the startup portal.
• The Secretariat will facilitate the process of a labelled startup that seeks to list on the Nigerian Exchange Limited (NGX) and may grant incentives to promote growth and development.
• The guarantee of repatriation of investment by foreign investors through CBN's authorised dealers in a freely convertible currency subject to a Certificate of Capital Importation (CCI).

Incentives for Venture Capitalists/ Angel Investors/ Private Equity Companies

Venture capitalists and investors play a crucial role in driving innovation, fueling growth and supporting the success of startups around the world. In Nigeria, the startup ecosystem has attracted the attention of venture capitalists seeking to capitalize on the potential of the African market. The Act further incentivizes these investors to invest in the country's dynamic and diverse startup landscape by offering:

1. Investment Tax Credit: Investors are offered 30% of their investment in a labelled startup as a tax credit to be applied to any gains on investment which are subject to tax.
2. Capital Gains Tax (CGT) Exemption: Investors are exempted from 10% CGT on the disposal of investments in labelled startups held for a minimum of 24 months. Currently, the CGT Act subjects gains arising on share disposals to capital gains tax, where the aggregate from such disposal exceeds N100million in any 12 consecutive months, and where the proceeds have not been reinvested within the same year of assessment in acquiring shares in the same or other Nigerian companies.
3. Regulatory Support: The Act streamlines investment procedures, reduces regulatory barriers, and ensures legal protections for investors. For instance, the Act provides that the Secretariat of the Council will collaborate with the Central Bank of Nigeria (CBN) to guarantee the repatriation of investor's funds net of all taxes and other obligations.

It is worth noting that the existing Venture Capital (Incentives) Act, 1993 (VCIA), administered by the Federal Inland Revenue Service offers similar incentives as the Startup Act. For instance, the PSI and export incentives are also incorporated into the VCIA for eligible startups. Additionally, the VCIA provides a 50% reduction in WHT on dividends for qualifying companies over a 5-year period.

The VCIA however does not seem to be operational in practice as its implementation appears to be opaque. There is also a need for the VCIA to be updated to align with current realities by adequately incorporating the technology ecosystem.

Indeed, the Nigeria Startup Act has laid a solid foundation for the growth and success of the country's startup ecosystem. The Act provides that the Federal Government will develop and implement a national policy for incentives for individuals, impact investors, angel investors, companies, venture capitalists, private equity funds, accelerators or incubators who invest in a labelled startup or in the startup ecosystem to enjoy tax credits on their investment.

The achievements of the Act cannot be fully determined at this time, considering that implementation is still ongoing. However, as of April 2024 according to NITDA 12,948 startups, 912 venture capitalist firms,1,735 angel investors and 925 accelerators, incubators and hubs had registered on the startup portal. This reflects the immense potential for innovation, entrepreneurship, and economic prosperity that can be unlocked through strategic policy interventions and continuous support for startups. As the ecosystem continues to evolve, the Nigeria Startup Act is poised to drive further achievements, whilst positioning Nigeria as a hub of innovation and technological excellence on the global stage. However, it is imperative to expedite the implementation of the tax incentives and other benefits specified in the Act.

Footnote

1. The Nigerian Startup Ecosystem Report 2022 – By Disrupt Africa

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.