NIGERIA STARTUP ACT 2022

WHAT YOU NEED TO KNOW

Introduction

The activities of startups in Africa, particularly in Nigeria’s burgeoning startup ecosystem has been a subject of global attention and discussion for some time. This perhaps spurred some globally renowned innovators and leaders of the tech word, that is, Mark Zuckerberg of Meta (formerly Facebook), Jack Dorsey (formerly of Twitter) and Jack Ma, founder of Alibaba to, in recent years, visit Africa. While Zuckerberg and Dorsey ensured they were physically present in Nigeria’s “Silicon Valley” of Yaba, Lagos to see things for themselves, Ma visited some other African countries. These visits attest to the increasing global visibility of the activities of operators in the Nigerian startup ecosystem in the last few years.

Forbes defined startups as young companies founded to develop a unique product or service, bring it to market and make it irresistible for customers. Startups are young companies that bring innovation to the sector they operate in. The Managing Director & Head of the World Economic Forum’s (WEF) Centre for the Fourth Industrial Revolution, Jeremy Jurgens considers startups as catalysts for economic growth both globally and locally. Startups are usually disruptive and have high value when successful. Aside their economic contributions both locally and globally, economies like Nigeria with a teeming youthful population are in dire need of successful startups because of their potentials around job opportunities.  Notwithstanding these prospects, publicly available data show that about 90 per cent of startups fail eventually.

In the light of creating an enabling business environment for the growth and development of startups, the Nigerian Startup Bill (now Nigeria Startup Act 2022) was signed into law by President Muhammadu Buhari on the 19th of October, 2022. Since then, the Act has generated series of public discussions and articles bothering on its potential benefits to the Nigerian startup ecosystem and the Nigerian economy as a whole.

The Act was enacted to provide the following among other;

  • A legal and institutional framework for the development of startups in Nigeria.
  • An enabling environment for the establishment, development and operation of startups in Nigeria.
  • The development and growth of technology-related talents.
  • Positioning Nigeria’s startup ecosystem, as the leading digital technology centre in Africa, having excellent innovators with cutting edge skills and exportable capacity.

The Act introduces a certificate known as startup label. The certificate qualifies a startup for the many benefits available to a labelled startup under the Act once the eligibility requirements are fulfilled. However, the labelled startup is obliged to carry out certain duties to maintain its status. Where it fails to carry out such duties, the certificate could be withdrawn.

 

NIGERIA STARTUP ACT 2022

 

Startup Registration and Labelling Process

A startup desiring to take advantage of the benefits provided in the Act is expected to fulfill relevant conditions as it relates to registration, processing, labelling status and approval. Some of the things required by a startup include:

  • Be an incorporated Company registered under the Companies and Allied Matters Act (CAMA) 2020.
  • Obtain a startup label issued by the National Information Technology Development Agency (NITDA) under the Act.
  • Be a business that has been in operation for not more than ten (10) years.
  • Have objects that are innovation, development, production, improvement, and commercialisation of a digital technology innovative product or process.
  • Be a holder or repository of a product or process of digital technology, or the owner or author of a registered software.
  • Have at least one-third of its local shareholding held by one or more Nigerians as founder or co-founder of the startup.

The Startup Support and Engagement Portal

The Act sets up a platform through which a startup conducts registration process with relevant Ministries Departments and Agencies (MDAs).

The portal shall enable the following:

  • Facilitate the issuance of a permit or licence to a labelled startup.
  • Provide platform for interaction between a startup and the relevant participants which include; Federal Government, private institutions, angel investors, venture capitalists, incubators, accelerators and other institutions.
  • Create opportunities for a startup to participate in beneficial challenges and programmes.
  • Foster access of a startup to finance, information, innovation, and the global market.
  • Foster information exchange between various stakeholders in the Nigerian startup ecosystem.
  • Provide access to tools and resources to a startup.
  • Provide assistance to a labelled startup.
  • Provide information on clearances, approvals and registration requirements for a startup.

 

NIGERIA STARTUP ACT 2022

 

Benefits to Labelled Startups and Investors

A startup label is a certificate issued to a startup upon fulfillment of labelling requirements. This certificate qualifies a startup Company for a number of incentives and concessions granted by the Nigerian Government. Some of the benefits, embodied in Section 26 – 29 of the Act are as follows:

Access to Finance

  • Startup label qualifies the holder access to finance through the Startup Investment Seed Fund (SISF) established by the Act.
  • Access to grants and loan facilities administered by the Central Bank of Nigeria (CBN), the Bank of Industry (BOI) or other bodies statutorily.
  • Access financial support, credit guarantee, financial and credit information, financial management capacity building through NITDA’s Credit Guarantee Scheme established under the Act.
  • The listing of startup on the relevant boards of the Nigerian Exchange Limited (NGX) or on similar stock or commodities exchanges within Nigeria is fast tracked with the support of the National Council for Digital Innovation and Entrepreneurship (the Council).

Fiscal and Tax Incentives

  • Seamless approval of Pioneer Status Incentive (PSI) by the Nigerian Investment Promotion Commission (NIPC) for labelled startups which falls within Pioneer Status Incentive Scheme.
  • A labelled startup will enjoy simplified requirement to benefit from existing fiscal incentives.
  • Tax free holiday of 3 years in the first instance and additional 2 years if still within the period of a startup label in line with Industrial Development (Income Tax Relief).
  • Exemption from Industrial Training Fund (ITF) where in-house training is conducted for employees during the period designated as a labelled startup.
  • Full deduction of any expenses on research and development which are wholly incurred in Nigeria irrespective of the restrictions provided in Section 26 of CITA.
  • Investors in labelled startups are granted investment tax credit equivalent to 30% of the amount invested provided that such credit shall be applied on any gains on investment which are subject to tax.
  • Investors are exempted from capital gains tax on gains that accrue on assets disposed in a labelled startup, provided the assets have been held in Nigeria for a minimum of 24 months.

 

NIGERIA STARTUP ACT 2022

 

Statutory and Regulatory Requirements for Startups

Generally, a labelled startup is required among others to;

  • Comply with all extant business regulations in Nigeria;
  • Maintain proper book of accounts in accordance with reporting obligations provided under extant laws and regulations;
  • Provide annual reports of incentives received and advancements made as a result of the incentives;
  • Provide information annually on the number of human resources, total assets and the annual turnover achieved from the period the startup label was granted;
  • Notify the Coordinator, who serves as the registrar of labelled startups amongst other functions, of any change in structure, composition or objects within a period of one month from the date of such change;
  • Comply with the obligations set out by the Coordinator after issuance of the startup label.

Where a labelled startup fails to meet up with any of these obligations or the eligibility requirements, the labelled startup, after being notified of the default by the Coordinator, would be required to rectify the default within 30 days, failure for which, the startup label would be withdrawn by NITDA.

Arising Issues

  • The Act is totally silent on renewal of startup label. The implication of this is that a labelled startup can only utilize any available benefits within 10 years without recourse to the preliminary period where active business operations are not likely to have commenced.
  • The startups referred to in the Act are basically technology-enabled startups. The implication of this is that the government is not interested in the growth and development of other startup businesses.
  • Where labelled startups can only enjoy tax free benefit/holiday for a maximum of 5years, small businesses who have not grown beyond N25Million annual turnover threshold could enjoy a limitless period for income tax holiday.
  • The scope of labelled startup is not clearly defined in the Act as all categories of technology-enabled companies whether small, medium or large can always benefit.
  • How does the withdrawal and re-issuance of startup label affect the validity period of 10 years provided in the Act.

 

NIGERIA STARTUP ACT 2022

 

Take Away

The enactment of the Nigerian Startup Act is commendable and opportunities therein should be exploited by startups in Nigeria. However, there are areas of the Act that should be considered for review.

  • A beneficial review of the tax incentives outside the PSI should be considered so as to encourage startups who may not want to subject themselves to the scrutiny and administrative costs that comes with maintenance of the startup label.

 

  • Some Nigerian startup companies have completed several funding rounds running to millions of dollars, therefore the annual payment of N10,000,000,000 to the Startup Investment Seed Fund, meant to provide finance to labelled startups across the country, may be insufficient considering the number of startups in Nigeria who may want to take up the startup label.

For further clarifications on the content of this write-up, please feel free to connect with our team:

Ajibola Sogunro                                          Olumuyiwa Osho                                    Rere Ogunrinde

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