BY ISIMEME ANDREW
The Startup Act 2022 started as a joint project of the Nigerian tech startup ecosystem and the Presidency to harness the potential of our digital economy to create an enabling environment to grow, attract and protect investment in tech startups. This is more so as Out of about $4 billion startup funding that Africa, especially attracted in 2021, Nigeria earned the largest, chunk of $1.37 billion, impacting significantly on the Nation’s economy. From 2014 to 2020, for instance, Fintechs in Nigeria raised about $600 million in funding, attracting 25 per cent ($122 million) of the $491.6 million raised by African tech startups in 2019 alone – second only to Kenya, which attracted $149 million. [1]
With the sector largely unmotivated the main objective of the Start Act is to create an enabling environment for the formation, development and operation of start-ups in Nigeria, to promote the development and growth of technology-related talent, and to promote Nigeria’s start-up ecosystem as a leading center for digital technology to be positioned in Nigeria Africa has excellent innovators with cutting-edge skills and exportable capacities[2].
We will now explore some of the important provisions of the Act.
The Act seeks to cater for the following:
- The council for Digital innovation and entrepreneurship;
- The start up support and engagement portal;
- Startup labelling;
- Startup investment seed fund;
- Training, capacity building and development;
- Tax and fiscal incentives;
- Regulations support;
The National Council for Digital Innovation and Entrepreneurship
The Council for Digital Innovation and Entrepreneurship is established as a body under the Act to primarily administer the provisions of the Act and, among other things, to ensure, support, monitor and encourage the development of start-up companies in Nigeria. The Council also ensures the implementation of rules by the Secretariat and the harmonization of laws and regulations affecting start-ups.[3].
The composition of the council are as follows:
- the President of the Federal Republic of Nigeria;
- the Vice-President of the Federal Republic of Nigeria;
- the Minister for Communications and Digital Economy;
- the Minister responsible for Finance, Budget and National Planning;
- the Minister responsible for Industry, Trade and Investment;
- the Minister for Science, Technology and Innovation;
- the Governor of the Central Bank of Nigeria;
- the Director-General of NITDA;
- a representative of the Nigeria Computer Society; and
- a representative of the Computer Professionals (Registration Council of Nigeria)
Definition of Startups under the Act
According to the Act, startups are defined as companies that have not existed for more than 10 years and whose objectives are the creation, innovation, production, development or introduction of a unique digital technological innovative product, service or process.[4]
What this definition implies is that the law will apply to tech-enabled startups, i.e. Companies that leverage existing innovative technological advances to solve operational problems or improve customer experience. It would therefore not apply to small and medium-sized enterprises (SMEs) that are not technology-enabled.
Startups Labelling : To enjoy any of the incentives under this Act, you will have to obtain a certificate from the Nigerian Startup Act Secretariat, which will grant you the label of “startup”.[5]
The law is aimed at start-ups who meet the following requirements:
- You must be a registered limited company that has not been in existence for more than 10 years.
- Its objectives are innovation, development, production, improvement and commercialization of an innovative digital technology product or process.
- It is an owner or custodian of a product or process of digital technology, or the owner or author of digital software.
- At least 51% of the shares are held by one or more Nigerians.[6]
From the moment you receive the startup label, you will be required to produce annual reports on the number of employees, total assets and revenue generated. They must also report on the incentives received and the progress made through those incentives[7].
Tax and Fiscal Incentives
To reduce the cost of doing business, the Act makes provision for several tax incentives.
Under the law, tax incentives are available to Labeled Startups, investors investing in Labeled Startups, employees of Labeled Startups, and external service providers of Labeled Startups
In some situations, startups can be exempted from paying income tax for five years, and all startups are eligible for full deduction of all Research and Development expenses incurred entirely in Nigeria.[8]
Incentives for a labelled start up under the pioneer status incentives scheme:
- A labelled start-up that falls under the existing Pioneer Status Incentives (PSI) may apply to the Nigerian Investment Promotion Commission (NIPC) for tax relief under the PSI scheme. Your startup can be exempt from paying taxes for four years from the date you receive a startup label. Startups within the meaning of this law may be eligible for a Pioneer Status Incentive.[9].
- Labelled start-ups with at least 10 employees, 60% of whom have no professional experience and are within 3 years of completing school or vocational training, receive a 5% tax reduction on their taxable profit.
- Access to government loans, grants and facilities.
- Access to financial support through guaranteed credit system.
- This Pioneer incentive offers companies in critical industries such as technology, agriculture and others a tax break of up to three years and a possible two-year extension.
Tax incentive for employees: Employees of labelled startups may be entitled to Personal Income Tax relief of 35% of their income for two years after being employed.
Tax Incentives for external service providers: foreign service providers shall be subjected to 5% withholding tax on income derived from the provision of services to a labelled start up.
Tax incentive for investors: Angel investors, accelerators, and venture capitalists can enjoy tax credits of up to 30% of their investment in a startup. Capital gain tax shall not be charged on gains that accrue from the disposal of an asset by an investor with respect to a labelled start up.[10]
Trainings and capacity building and development
The Act makes provision for startups to assess trainings and capacity building workshops within the eco system by establishing digital technology acquisition center within the 6 geo political zones to promote digital technology usage, managerial competency and information system, designing and implementing a training and capacity building program for start up, issuing a framework for talent and development and collaborate with relevant agencies and private sector to establish parks and hubs for digital technology innovation, support the activities of an academic research institution to the development of a start up
More so, the council plans to work with universities, colleges, and polytechnics to train students with the requisite knowledge to start and run a startup[11].
Seed funding for startups
The law provides for the establishment of a Startup Investment Seed Fund managed by the Nigeria Sovereign Investment Authority (NSIA). [12] The seed fund will be used to provide funding to a certified start-up, and provide early stage financing for start up’s on the recommendation of the Fund Manager (NSIA) and support technology labs, accelerators, incubators and hubs.
Regulatory assistance
The council will create a startup portal that will encourage startups to collaborate with relevant government agencies such as the Corporate Affairs Commission (CAC), the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC).[13]
A major challenge for fintech startups is the difficulty faced in an attempt to secure licenses from relevant authorities like CBN and SEC.
Young aspiring fintech operators have the opportunity to connect with these agencies and simplify their registration process.
Recall that the CBN has already created a regulatory sandbox to help startups learn, test and discover new products.
Intellectual property protection
The law recognizes the role that Intellectual Property (IP) plays in the life of a startup and therefore provides that the Secretariat is to assist startups in protecting and commercializing their IP rights. It is also designed to support startups intending to register international trademarks and patents; and also support startups that intend to take legal action for violating their IP rights. Provide technical support to featured startups so they can commercialize their research.
In addition, the Secretariat works with the National Office for Technology Acquisition and Promotion (NOTAP) to ensure technology transfer registrations and other related activities are seamless and expeditious, and consistent with the provisions of this Act
Conclusion
It is interesting to know that the Nigerian government has finally recognized the potential of tech startups in Nigeria to lead and dominate Africa’s digital economy. The Startup Act has spurred collaboration between the private sector and government, particularly regulators, to ensure the country’s laws support the growth of its tech ecosystem. This indeed deserves a fitting round of applause. This welcome development will no doubt boost the creativity and entrepreneurial spirit of Nigerian youth.
DISCLAIMER: This article is only intended to provide general information on the subject matter and does not by itself create a client/attorney relationship between readers and our Law Firm or serve as legal advice. We are available to provide specialist legal services on specific circumstances.
[1] https://guardian.ng/technology/nigerian-startups-retain-1-37bn-of-africas-4b-funding-in-2021/
[2] Section 1 of the Nigerian Start up Act 2022
[3] Section 4 – 7 of the Act.
[4] Section 47 of the Act.
[5] The Nigerian Startup Act Secretariat is located at the HQ of the Nigerian Technology Development Agency (NITDA).
[6] Section 13 (2) of the Act.
[7] For sole proprietors and partnerships that meet the other criteria but are not limited liability companies, they are granted a “pre-label status” for a period of six months so they can enjoy the incentives under the Act and subsequently incorporate a company. Where they fail to incorporate a company at the end of the six months period, the pre-label status would be revoked.
[8] Section 25 of the Act- Section 25(2) of the Act. A labelled Startup may be entitled to exemption from the payment of income tax or any other tax chargeable on its income or revenue for a period of three years and an additional two years if still within the period of a labelled startup, provided that the commencement date of the tax relief shall be the date of the issuance of the startup label.
[9] Section 24 of the Act
[10] Section 29 of the Act.
[11] Part vi of the Act.
[12] Section 27 of the Act.
[13] Section 35(1) of the Act.
