Startups have the potential to play a major role in the growth of developing countries particularly because of their ability to: (i) improve the standard of living in countries through innovation; (ii) create wealth by attracting local and foreign investments; and (iii) reduce the rate of unemployment by creating new jobs.

Despite the potential to bring good to countries, the prevalent view amongst Startups in Nigeria is that the regulatory and business terrain provides many hurdles to their ability to the achievement of their fullest potential. These include high costs of doing business; multiple taxes and unpredictable regulatory oversight.

Notwithstanding the foregoing, there are incentives in existing regulations in Nigeria, which Startups can benefit from but might not utilize due to a lack of awareness of such incentives. We have tried to solve this problem by putting together in this article a list of incentives which can be enjoyed by Startups from various legislations.

The 5 Incentives are as follows:

  1. Exemption from Company Income Tax: Small businesses with an annual turnover of less than 25 million naira, are exempted from paying Companies Income Tax. A lower company income tax rate of 20% is also provided for companies whose yearly turnover is between 25 million to 100 million Startups may find this useful in their early stages. Click here to read on other impacts of the Finance Act 2019 on Startups and SMEs.
  2. Tax Holiday of Up to 5 Years: Startups who qualify for Pioneer Status in Nigeria can enjoy tax holidays for an initial period of 3 years from their first year of commencement, extendable for an additional 2-year period as established under the Nigerian Industrial Development (Income Tax Relief) Act. Startups in sectors such as e-commerce, waste management, electricity and agriculture may be eligible for pioneer status incentives. Click here to read more on industries eligible for Pioneer status in Nigeria.
  3. Reduced Tax Rate for Investors: There are various incentives provided in the Nigerian Venture Capital Incentives Act for investors and Startups engaged in venture projects. These include: (i) up to 30% capital allowances for eligible Startups on equity investments made by Venture Capitalist firms; and (ii) up to 100% exemption on capital gains tax on capital gains accruing to Venture Capital investors upon disposal of their equity interest.
  4. Opportunity for Startups in Government Projects: One way the Nigerian government has tried to encourage the growth of Startups is by requiring companies to engage Startups in projects involving the Federal Government or any of its agencies where the gross value of the project contract is 500 million naira or above. This requirement is provided in the Guidelines for Nigerian Content Development in Information and Technology 2019.
  5. Tax Exemption for Start-ups in the Agricultural Sector: Eligible small or medium-sized companies in the Agricultural sector with an annual gross turnover of 25 million to 100 million naira, may apply for tax exemption for 4 years and an additional 2 years. This incentive is created under the Finance Act, 2020 which amended the former provision under the Industrial Development (Income Tax Relief) Act. Click here to read more on the key highlights of the Finance Act, 2020.

Please note that this list is not exhaustive.

Conclusion

As stated earlier, many Startups and investors are unaware of incentives available to them in Nigeria because of the absence of a comprehensive platform or document that highlights all applicable incentives and regulations. A search by Startups for such incentives (without the assistance of professionals) can be as tedious as searching for a needle in a haystack. It is, therefore, our recommendation that the Nigerian government collates relevant incentives and applicable regulations on a single platform for ease of reference by Startups.

Originally published October 29, 2021

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