What You Need to Know about Startups in Nigeria
The Nigeria Startup Act, 2022 (“the Act”) is the principal legal and institutional framework for the development, operations and regulation of startups in Nigeria. According to the Act, a startup is a company in existence for not more than 10 years, which is set up with the objectives of promoting and or rendering innovation or adoption of a unique digital technology, innovative product, service or process.
A company must be labelled and be certified as a Startup in order to enjoy the benefits provided under the Act. Eligible companies are required to apply for status label and pay the fee set by the National Information Technology Development Agency (“NITDA”), which serves as the Secretariat of the National Council for Digital Innovation and Entrepreneurship (“Council”), the responsible and supervisory agency for startups in Nigeria.
Upon the approval by the Coordinator of the Startup Support and Engagement Portal (“Startup Portal”) that the relevant conditions and requirements for startup labelling have been fulfilled, the applicant company will be issued a certificate (called “startup label”) and its name will be listed in the Register of Startups maintained by the Coordinator of the Startup Portal and kept at the Secretariat.
Please note that the startup label shall be valid for a period of 10 years from the date of issuance. Startup label may be withdrawn for failure to fulfill the obligations provided under Section 16 of the Act or make rectification after being notified of such default. Startup label may be reissued upon rectification of default by the affected startup company.
Eligibility for Application for Startup Label
Labelled Startups are the companies that are labelled as Startups in accordance with the Act and must hold a digital certificate issued by the Coordinator of the Startup Portal. According to Section 13 (2) of the Act, a company is eligible for labelling as startup if it meets the following criteria:
(a) Corporate Structure: A company seeking to be labelled as a startup must be registered as a limited liability company under the Companies and Allied Matters Act, and must have been in existence for a period not more than 10 years from the date of incorporation. Please note that a Business Name registration will not qualify its proprietors for being labelled as a startup no matter how innovative its business activities, products or services are.
(b) Innovative Business Objectives: The company’s objects must relate to the promotion of innovation, development, production, improvement, and commercialisation of a digital technology innovative product or process;
(c) Digital Technology: The company may also be a holder or repository of a product or process of digital technology, or the owner or author of a registered software
(d) Local Participation: A startup company must also have at least one Nigerian holding not less than one-third of its shares. A startup is required to have one or more Nigerians as its founder or co-founder; and
(e) Sole Proprietorship or Partnership: Where the startup company is a sole proprietorship or partnership, it must satisfies the conditions set out in paragraphs (b), (c) and (d) above.
Tax Incentives For Startups in Nigeria
The Act provides for tax incentives to be enjoyed by Labelled Startups, investors and other stakeholders. One way to reduce tax liabilities as a startup is to apply for the Startup Certificate and take advantage of these incentives.
The tax incentives available to startups under the Act are as follows:
i) Pioneer Status Incentive
Labelled Startups operating in eligible industries under the Pioneer Status Incentives (PSI) Scheme are entitled to and may apply for grant of tax relief and incentives under the PSI. If granted, this would entitle the Labelled Startup to a tax holiday for an initial period of three (3) years, which may be extended for an additional two years. This is in accordance with the Industrial Development (Income Tax Relief) Act.
Under the PSI, only two financial services are eligible to enjoy PSI – Real Estate Investment Trust and Mortgage Backed Securities.
ii) Exemption from Contribution to Industrial Training Fund (ITF)
The Industrial Training Fund has the mandate to compel all employers of labour with more than 5 employees to contribute 1% of their total payroll cost to the ITF.
However, Labelled Startups are exempted from this employer contributions to ITF provided the Startups provide in-house training to their employees for the duration of the startup label.
iii) Tax Relief for Investors
Angel investors, accelerators, and venture capitalists are entitled to an investment tax credit equivalent to 30% of their investment in a startup. The credit shall be applied on any investment gains which are subject to tax. Only investors who invest using a company are eligible to enjoy this incentive.
The Act also exempts angel investors, venture capitalists, private equity funds, accelerators or incubators from capital gains tax when they dispose of their investment in a labelled startup provided that the assets have been held for a minimum of 24 months.
From the foregoing, in order to reduce its tax liabilities, the company and its investors can take advantage of ITF exemption and 30% investment tax credit available to investors.
Statutory Obligations of Startups in Nigeria
Under Section 16 of the Act, a startup company is obliged to
(a) to comply with all the extant laws governing businesses in Nigeria;
(b) provide information annually on the number of human resources, total assets and the annual turnover achieved from the period the startup label was granted;
(c) maintain proper book of accounts in accordance with reporting obligations provided under extant laws and regulations;
(d) provide an annual reports on incentives received and advancement made by virtue of the incentives;
(e) notify the Coordinator of any change in structure, composition or objects within a period of one month from the date of such change; and
(f) comply with the obligations set out by the Coordinator after issuance of the startup label.
Other Relevant Information Investors Need to Know about a Startup Company in Nigeria
a) Repatriation of Capital and Profits in a Startup
Foreign investors, with the aid of the Secretariat and the Central Bank of Nigeria (“CBN”), are guaranteed full repatriation of all investments in freely convertible currency, provided that the investor presents a Certificate of Capital Importation as evidence that the initial investment fund in a startup was brought into Nigeria through official channels.
b) Priority forTransfer of Foreign Technologies by Startup
The Act has eased the process of transfer of foreign technologies into Nigeria by mandating the National Office for Technology Acquisition and Promotion (NOTAP) to prioritize applications from Labelled Startups, grant discounts to startups on their registration fees and provide technical assistance to them to commercialize their research results.
YOU CAN ALSO READ ABOUT OUR PREVIOUS POSTS:
***********************************************************************************************
About KORIAT & CO.
We are a commercial law firm in Lagos, Nigeria with a network of lawyers and consultants in Kenya, Ghana and Rwanda.
The above article is not legal advice and does not automatically make our readers our clients unless they specifically instruct us to act or represent them in any way.
Please contact Koriat & Co. through admin@koriatlaw.com or 09067842241 if you require additional information about or assistance in incorporating a company or making the application for a business licence.
