Nigeria is one of the countries with the most developed startup ecosystems in Africa, with Lagos ranking as the top startup city in Africa. With a large youth population and one of the largest economies in Africa, Lagos ranks in the top 50 cities for e-commerce and retail technology and in the global top 100 for transportation technology and education technology.1

The growing emphasis on the ease of doing business in Nigeria especially with focus on startups therefore necessitates the creation of a conducive regulatory environment for businesses, startups inclusive, to thrive. The enactment and implementation of the Nigeria Startup Act 2022 (Act) signed by President Muhammadu Buhari on 19 October, 2022, is central to the Nigerian government's objective in this regard.

The Startup Act, which is the first of its kind in Nigeria, aims to provide the legal and institutional framework for the establishment, development, and operation of Startups in Nigeria, creating an enabling environment and ensuring the growth and development of Nigeria as a leading digital technology jurisdiction.

This article aims to examine the operational structure, labelling process, tax and fiscal incentives, access to funding and regulatory collaborations under the Act in order to determine whether the Act can adequately create an enabling environment for the growth and development of the Startup ecosystem in Nigeria.

Establishment and Operational Structure of the National Council for Digital Innovation and Entrepreneurship

Section 3 of the Act provides for the establishment of a National Council for Digital Innovation and Entrepreneurship (the Council) which is charged with the responsibility of realizing the objectives of the Act, including the monitoring and evaluation of the regulatory framework to encourage the development of Startups in Nigeria. In terms of the operations of the Council, and pursuant to the provisions of Section 9 (1) of the Act, the National Information Technology Development Agency (NITDA) is to serve as the Secretariat of the Council, with the Director-General of NITDA serving as the Head of the Secretariat.

The main condition for organisations to qualify as Startups under the Act is that they must be labelled and designated as such. Under the Act, the Secretariat is responsible for managing the process of labelling organisations as Startups, disseminating information on the establishment and development of Startups and providing fiscal and non-fiscal support to Startups amongst others.2 These functions of the Secretariat will be managed through the Startup Support and Engagement Portal and the Startup Consultative Forum. The Startup Support and Engagement Portal (Portal) which is to be established by the Secretariat shall serve as an official channel through which Startups may engage with the Federal Government, angel investors, venture capitalists etc.3 Through this Portal, Startups may carry out their registration processes with the relevant government Ministries, Departments and Agencies (MDAs).4 The Startup Consultative Forum will serve as an official channel for the dissemination of information on relevant incentives and proposals to the Nigerian Startup ecosystem.5

Startup Labelling Process under the Act

With the passage of the Act, local and international organisations in Nigeria have expressed optimism that they can take advantage of the tax and fiscal incentives available under the Act to grow their business and develop the startup environment in Nigeria. It should be noted however, that only qualifying organisations that satisfy the requirements in the Act can be considered and subsequently labelled as startups. In this regard, companies incorporated under the Companies and Allied Matters Act (CAMA) 2020 and granted the Startup label, under the Act and organizations and establishments, whose activities affect the creation, support and incubation of labelled startups in Nigeria are deemed, in accordance with Section 2 of the Act, to be covered under the regulatory purview of the Act.

In order to meet the eligibility requirement under the Act for the grant of a Startup label issued by the Secretariat, a Startup must satisfy the requirements set out in the Act. These include: it must be registered as a limited liability company, been in existence for a period not exceeding 10 years, its objects are innovation and development of a digital technology innovative product and have at least one-third local shareholding held by Nigerians as founder or co-founder of the Startup amongst others6.

The Act grants a pre-label status to sole proprietorships and partnerships for a period of six months to enable them comply with the startup labelling requirements including the incorporation of a limited liability company, as non-compliance may result in the withdrawal of such pre-label status7. Furthermore, corporate entities operating as holding companies or subsidiaries of existing companies without a Startup label are excluded under the Act from registering as Labelled Startups.8

Tax and Fiscal Incentives

The Act provides a number of tax and fiscal incentives for startups and investors including angel investors, private equity funds, venture capitalists, accelerators and incubators. This is aimed at creating an enabling environment to encourage participation and investment in the development of innovative digital technology products, services or processes by stakeholders within the Nigeria Startup ecosystem.

The tax and fiscal incentives have been summarized and discussed under two sub-headings namely Labelled Startup-based incentives9 and Investor-based incentives10.

i. Labelled Startup-based Incentives

These incentives are provided exclusively for the benefit of Labelled Startups and includes:

  • The grant of tax reliefs and incentives under the Pioneer Status Incentive (PSI) Scheme to eligible Labelled Startups based on the accelerated approval received from the Nigerian Investment Promotion Commission (NIPC) in the form of tax holiday for a period of 3 (three) years and renewable for another 2 (two) years if the duration of the Startup label has not lapsed. The Labelled Startup will be exempted from income tax on its profits and enjoy other incentives such as withholding tax exemption on dividends paid by the Labelled Startup, deferral of the claim of capital allowances on assets until after the expiration of the Pioneer Status period etc.
  • Exemption from contribution to the Industrial Training Fund where the Labelled Startup provides in-house training to its employees for the period it is deemed a Labelled Startup.
  • Expenses incurred on research and development carried out by Labelled Startups are fully tax deductible.
  • Export incentives and financial assistance from the export development fund, export expansion grant and export adjustment scheme fund to Labelled Startups engaged in the exportation of eligible products and services.
  • Reduction in withholding tax rate from 10% to 5% on fees paid to non-resident companies that provide technical, consulting, professional or management services, which shall be deemed to be the final tax for such non-resident companies.

ii. Investor-based Incentives

Investor-based incentives provided under the Act includes:

  • Investment Tax Credit (ITC), which is the equivalent of 30% of investments made by the investors in Labelled Startups.
  • Exemption from Capital Gains Tax (CGT) on disposal of assets held by investors in the Labelled Startup provided the asset is held in Nigeria for a minimum period of 24 months.
  • Repatriation of investments by a foreign investor through the Central Bank of Nigeria's (CBN) authorized dealer in freely convertible currencies, net of taxes, at the CBN's official exchange rate upon provision of a Certificate of Capital Importation (CCI) as evidence that the initial investment was injected through the proper channel.

The tax and fiscal incentives provided for Labelled Startups and investors under the Act demonstrate the deliberate intervention of the Federal Government in creating an enabling environment for foreign direct investment needed to sustain the growth and development of the Nigeria Startup ecosystem and position Nigeria as the leading Startup hub in Africa.

Funding Options Available to Labelled Startups under the Act

The Act provides various financing options11 to labelled startups to encourage technological entrepreneurship within the Nigerian Startup ecosystem and includes:

  • Raising funds through grants and loans administered by the Central Bank of Nigeria (CBN), Bank of Industry (BOI) and other regulatory bodies.
  • Access to funding from the NGN10billion Startup Investment Seed Fund (Fund) managed by the Nigeria Sovereign Investment Authority (NSIA).
  • Access to financial support and credit guarantees under the Credit Guarantee Scheme (Scheme).
  • Raising funds through crowdfunding intermediaries and commodities investment platforms duly licensed by the Securities and Exchange Commission (SEC).

Access to finance plays a critical role in the performance of startups and the Act seeks to remove or lower barriers associated with accessing funding such as high-interest rates. This is to ensure the growth of startups is not stifled by lack of capital or high capital cost.

Regulatory Collaboration under the Act

In recognising the importance of collaboration amongst regulatory agencies and its positive impact on the startup ecosystem in Nigeria, the Act enjoins the Secretariat and Council to ensure effective collaboration with the Corporate Affairs Commission, National Office for Technology Acquisition and Promotion and other MDAs in the areas of incorporation, intellectual property rights, technology transfer, listing eligibility requirements, licensing of fintech startups and regulatory sandbox etc.12

It is expected that the Startup Portal, will serve as a One-Stop Centre through which Startups can carry out the registration process with the relevant MDAs and this will ultimately eliminate or minimize the administrative bottlenecks associated with the processing of applications, licenses and permits etc. with government agencies.

Conclusion

The passage of the Act is expected to boost the growth of the Nigeria startup ecosystem, create an enabling environment for the growth and development of Startups and tech entrepreneurship as well as position Nigeria's startup ecosystem, as the leading digital technology hub in Africa.

However, despite the commendable efforts at incentivizing startups and investor participation in the Nigeria startup ecosystem, there are some concerrns that granting such incentives alone, is not sufficient to drive the level of investments required by startups, given other considerations, such as high rate of inflation, volatile exchange rate, insecurity, infrastructural deficit etc. which businesses face in Nigeria. It is believed that along with granting the incentives in the law, government needs to improve the overall business environment so that startups can thrive and ultimately provide returns to their investors and also pay taxes and contribute to the fiscal health of government.

As the implementation of the Act commences, there will be the need to observe its impact and identify areas where adjustments or improvements will be required in its implementation and the operation of the organs created by the Act. One likely area that may require amendment is for the establishment of an adjudicatory tribunal to expeditiously hear and determine disputes arising from the operation and administration of the Act.

In conclusion, stakeholders are awaiting the implementation of the Act, as there are already concerns that since its passage on 19 October, 2022, there has been no formal communication from Government on the Act. Some of the issues that need to be urgently addressed include the constitution of the Council and creation of the Portal to enable prospective startups commence registration and obtain the Startup label. It is therefore hoped that the implementation of the Act will commence immediately to ensure that the Nigeria Startup ecosystem is well positioned to attract the necessary foreign and local investment needed to boost the economic growth of the country.

Footnotes

1. Victor Oluwole, 'Nigeria, South Africa, Kenya Among Top 5 African Countries with the Most Developed Startup Ecosystems – Report' Business Insider Africa (24 February 2022) (https://africa.businessinsider.com/local/markets/nigeria-south-africa-kenya-among-top-5-african-countries-with-the-most-developed/23v1mx8.amp) accessed 17 December 2022.

2. Start Up Act 2022, s 9(2)

3.Start Up Act 2022, s 10 (2) (b).

4.Start Up Act 2022, s 10 (1).

5. Start Up Act 2022, s 12 (1) (b) & (f).

6. Start Up Act 2022, s 13(2). .

7. Start Up Act 2022, s 13 (4) & (5).

8. Start Up Act 2022, s 13 (3).

9. Start Up Act 2022, s 24, 25 & 26

10. Start Up Act 2022, s 29 & 37.

11. Start Up Act 2022, s 27, 28 & 32.

12. Start Up Act 2022, s 30, 31, 33, 34, 35 and 36.

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