The Nigerian Startup Act, 2022, Nigeria’s Bold Step to Encourage Innovation?

The Nigerian Startup Act, 2022 (the Act) was signed into law on 19^th October 2022 by President Muhammad Buhari. The core objectives of the Act are to boost digital operations and encourage innovation particularly in Nigeria’s technology ecosystem. The law aims to provide an enabling environment for the operation of startups in Nigeria and positioning Nigeria as a leading technology center in Africa. In this article, we highlight some of the important provisions of the Act and consider whether this Act will encourage Innovation or simply be another regulation in the already over regulated Nigerian business environment.

What is a Startup?

A Startup is defined in the Act as “a Company in existence for not more than 10 years, with its objectives being the creation, innovation, production, development or adoption of a unique digital technology innovative product, service or process”.

Regulatory Authorities and Structures under the Nigerian Startup Act.

The Act introduces several Authorities and structures which are responsible for the administration and development of startups in Nigeria. These established regulatory Authorities are distinct from other regulatory bodies which regulate the various sectors in which a startup may operate in Nigeria. Some of these Authorities and structures are:

• The National Council for Digital Innovation and Entrepreneurship (the ‘Council’).

The Act establishes the Council and empowers it to formulate policies for the realization of the objectives of the Act. The Council consists of about 13 members including the President and Vice President of Nigeria who are to respectively serve as Chairman and Alternate Chairman of the Council. The Council is also to appoint a Council Agent who is to submit reports on the status of programmes implemented to the Council.

• The National Information Technology Development Agency (NITDA)

The NITDA functions as Secretariat and is the operational arm of the Council. It is to be chaired by the Director General of NITDA. As part of its duties, the Secretariat is required to manage the process of startup labelling and establish a Startup Support and Engagement Portal to provide support to startups.

• The Startup Support and Engagement Portal (the ‘Portal’).

The Portal is to serve as a platform and may be described as a one-stop shop through which startups conduct their registration process with the relevant Ministries, Departments and Agencies (‘MDAs). The activities of the Startup Portal are to be administered by a Coordinator to be appointed by the Secretariat with the approval of the Council.

• The Startup Consultative Forum (the ‘Forum’).

The Forum is to be set up on the Startup Portal to provide a platform for information sharing and collaboration among startups. It is to comprise of industry stakeholders including representatives from labelled startups, venture capitalists and angel investors.

• Accelerators and Incubator and Innovation Hubs.

The Secretariat is to establish accelerator and incubator programmes for startups. An accelerator is a fixed-term cohort programme designed to provide startups with mentorship and educational assistance, while an incubator on the other hand is a company, partnership or NGO whose primary object is to support the establishment and development of startups, promotion of innovation, and related activities through the offer of dedicated physical spaces and services. The Council is also to issue a framework for the establishment and operation of startup innovation clusters, hubs, physical and virtual innovation parks in each state of the Federation. The Hub is to promote collaboration among startups and between startups and big companies.

Startup Labelling

A company, sole proprietorship or partnership may be issued a certificate by the Secretariat labelling it as a startup and thus, making it entitled to incentives provided under the Act. To be eligible for startup labelling, the following conditions must be met:

1. In the case of a company, the company ought to be in existence for not more than 10 years from the date of its incorporation;
2. Its objects ought to be that of innovation, development, production, improvement and commercialization of a digital innovative product or process;
3. It is to be a holder or repository of a digital technology product or process, or the owner or author of a registered software;
4. At least one of its founders or co-founder is to be a Nigerian who would share from the profit or revenue from the sale of shares.

It is vital to note that the provisions of the Act including the startup labelling will not apply to an organization that is a holding company or a subsidiary of a company which is not registered as a startup.

Procedure for the application for a Startup Label

A startup desirous of being so labelled is required to make an application in the prescribed form on the Startup Portal which is to be established by the Secretariat with the approval of the Council. This application is to be supported by documents and fee to be prescribed by the Secretariat.

Validity/Duration of the Startup Label

The startup label when issued is valid for 10 years from the date of issuance. Startups so labelled are expected to comply with specified obligations. Where a labelled startup fails to comply with its obligations, the Coordinator may notify the startup of its default and the startup is expected to rectify the default within 30 days of being notified. Where the startup remains in default after the 30-days period, its label may be withdrawn.

A startup whose label has been withdrawn may only re-apply to the Secretariat for re-issuance once the default has been rectified.

Obligations of Startups under the Act

Startups are to fulfil specific obligations to enable them enjoy the benefits and incentives granted under the Act. They are to:

1. Comply with extant laws governing businesses in Nigeria, such as the Companies and Allied Matters Act, 2020;
2. Comply with obligations set out by the coordinator after the issuance of the startup label;
3. Notify the Coordinator of any changes in its structure or objects within a month from the date of such change;
4. Provide information annually on the number of human resources, total assets and annual turnover achieved from the period the startup label was granted;
5. Maintain proper book of accounts in accordance with reporting obligations under extant laws and regulations;
6. Provide an annual report on incentives received and advancements made by virtue of the incentives.

Incentives provided under the Act

The Act makes provision for various tax and fiscal incentives to labelled startups. These incentives cuts across reliefs for the labelled startups, their employees, service providers and investors. They are:

1. The Pioneer Status Incentive Scheme.

Labelled startups that fall within industries provided under the list of Pioneer industries and products as provided under the List of Pioneer Industries and Products, 2017 or any subsequent law may apply to the Nigerian Investment Promotion Commission (NIPC) for the grant of reliefs and incentives under the scheme. An example of startups that may benefit from this Scheme are companies involved in the development of ready-made software. A startup qualified to benefit from this scheme may enjoy a renewable 3-year tax holiday.

2. Four years tax holiday.

Labelled startups may be exempted from any form of income taxation for a period of four (4) years from the date of the issuance of the startup label. The Ministry of Finance is expected to provide simplified requirements for startups to benefit from this incentive.

3. 5% tax relief on assessable profits.

To benefit from this additional tax relief, the labelled startups is to have at least 10 employees of which 60% are employees without any form of work experience and who are within 3 years of graduating from school or any vocation within the assessment period. This tax relief is valid for a maximum period of five years.

4. Export incentives for labelled startups involved in exportation of products and services.

Startups deemed eligible under the Export (Incentives and Miscellaneous Provisions) Act are also entitled to export incentives and financial assistance from the Export Development Fund, Export Expansion Grant, and the Export Adjustment Scheme Fund.

5. Investment Credit Tax.

This relief is applicable to angel investors, venture capitalists, private equity fund, accelerators or incubators of a labelled startup and entitles them to tax credit equivalent to 30% of their investment.

6. Exemption from Capital Gains Tax (CGT) on disposal of assets by investors.

The Act exempts investors from taxation upon the disposal of its assets in a startup.

7. Exemption on the Personal Income Tax of employees.

The Act exempts eligible employees from remitting 35% of their personal income for a period of 2 years from the date of engagement by the labelled startup. However, the Act does not provide the requirements for eligibility but gives the Secretariat and the Joint Tax Board the responsibility of determining  the requirements for eligibility.

8. Reduction of withholding tax for foreign entities who are service providers of labelled startups.

Foreign entities that provide technical, consulting, professional or management services to a labelled startup is required to pay 5% withholding tax as opposed to the 10% withholding tax applicable to service providers. This tax shall be the final tax to be paid by the foreign entity.

Funding for Startups under the Act

Some of the funding arrangement provided under the Act are:

1. The Startup Investment Seed Fund (‘the Fund’).

The Act establishes the Fund which is to be managed by the Nigeria Sovereign Investment Authority (‘the Fund Manager’). A sum of at least N10,000,000,000 (Ten Billion Naira) is to be paid annually into the Fund which would be utilized to provide financial support to startups and reliefs to accelerators, incubators and hubs.

2. Access to Government funds and the Credit Guarantee Scheme (CGS).

The Act establishes the CGS with the primary objective of providing accessible financial support to labelled startups. The Act also directs the Secretariat to ensure that labelled startups have access to grants and loan facilities administered by the Central Bank of Nigeria (CBN) and other bodies empowered to assist MSMEs.

The Startup Portal as a One-stop Shop for Labelled Startups.

The major function of the Startup Portal to be set up by the Secretariat is to act as a one-stop shop for startups to register with the MDAs regulating some sectors in Nigeria. The Act charges the Secretariat to collaborate with some regulatory bodies in setting up sections on the startup portal for the registration and administration of the activities of labelled startups with these bodies. These regulatory bodies are the Corporate Affairs Commission (CAC), the National Office for Technology Acquisition and Promotion (NOTAP), the National Copyright Commission and the Trademark, Patent and Designs Registries, the Nigeria Export Processing Zone Authority, the Central Bank of Nigeria (CBN) and the Securities Exchange Commission (SEC). The aim of this exercise is to ensure swift and seamless registration processes for startups. For instance, the Secretariat is to work with CBN and SEC to create a section on the startup portal to ease the licensing procedure for financial technology (Fintech) companies. The Secretariat in conjunction with the NEPZA is also to establish a Technology Development Zone to spur the development of startups, accelerators and incubators.

The startup portal is also to have a section through which labelled startups who intend to participate in CBN’s sandbox or SEC’s regulatory incubator or in any other sandbox may fast track their application process. The labelled startup must however meet all the requirements to participate in the sandbox or regulatory incubator.

Repatriation of Capital and Profits.

In order to encourage foreign investments in startups, the Secretariat is to work with the CBN to ensure the repatriation of the proceeds of investments by foreign investors through an authorized dealer at the prevailing CBN rate. The repatriation is to be done on freely convertible currency of dividends or profits attributed to the foreign investor net all applicable taxed; and the proceeds in the event of sale or liquidation of the labelled startup, net all applicable taxes. To benefit from this arrangement, the investor would be required to present its Certificate of Capital Importation (CCI) as proof of injection of funds into the labelled startup.

Conclusion

The signing of the Nigerian Startup Act is no doubt a welcome development in Nigeria.  The provisions of the Act when implemented would encourage innovation and investment in the Nigerian startups especially in the FinTech space. There are many tax and fiscal incentives that are available to labeled startups including investors, foreign entities and employees. There are however concerns that this Act is yet another layer of bureaucracy in the already over regulated Nigerian business environment.

 

Please note that the contents of this article are for general guidance on the Subject Matter. It is NOT legal advice.

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