Startups are prime drivers of growth and development, particularly in a developing nation like Nigeria. Startups across various sectors of the Nigerian economy have huge potential for providing new jobs, attracting foreign direct investment as well as local investments, and improving the standard of living. But challenges such as high business costs and multiple taxes may stifle the full realization of startups’ potential in Nigeria. Tax incentives can provide a conducive business environment for startups, stimulate the expansion of domestic production and protect existing investments from unfair competition, without having a direct drain on government funds. The tax incentives available for startups in Nigeria would be discussed in this article.
This is a list of tax incentives for startups in Nigeria:
Startups eligible for pioneer status in Nigeria enjoy tax holidays in their formative years. If eligible startups are established in economically disadvantaged areas where necessary infrastructures such as access roads and electricity are lacking, they get to enjoy a seven-year tax holiday. For startups established in areas with infrastructure, the pioneer status grants a five-year tax holiday. This implies that for the given period, whether five or seven years, eligible startups are exempted from paying company income tax (CIT) so that the profit generated can be reinvested back into the business.
To enjoy the privileges of pioneer status, a startup, which must be a joint venture, must have incurred a minimum capital expenditure of N5,000,000 by the wholly owned company and N150,000 by the indigenous company. And for the startup to qualify for pioneer status, an application must be made within one year of the start of operation. Startups must be from the following industries to be eligible: tourism, infrastructure, services, oil and gas, telecommunication, manufacturing, pharmaceutical and construction.
There are some parameters to be met for a startup to access the pioneer status tax incentive. One is, that the startup should have the potential to provide jobs in the economy, transfer technology and the developing of local know-how of their Nigerian workforce. Other parameters include the startup’s export potential, value addition, utilization of local content, investment in infrastructure and corporate social responsibility.
Tax Incentives for Startups in Telecommunications Subsector
To encourage and guide investment in the telecommunication sector, the Federal Government of Nigeria has put in place certain tax incentives for startups in this sector to enjoy. As we’ve stated earlier, startups in the telecommunication sector that meet the parameters are eligible for pioneer status. Other incentives include an exclusivity period for licenses, a guarantee of long-term and low-interest loans for telecommunication startups, and measures to ensure goods belonging to telecom operators are readily cleared at the ports. In addition, telecommunication startups have unconditional transferability of funds in and out of Nigeria as long as it’s done by an authorized agent, as well as benefitting from reduced import duty on telecom equipment.
Tax Incentives for Startups in the Agricultural Subsector
The agricultural subsector contributes immensely to the Gross Domestic Product of the Nigerian economy and is responsible for the employment of sixty percent of the country’s workforce. To boost the agriculture sector, certain tax incentives are available to startups. Startups that meet the parameters for accessing pioneer status are eligible to enjoy a five-year exemption from company income tax. In addition, agricultural machinery and equipment enjoy minimal duties, as well as the privilege of the ability of losses to be carried forward indefinitely. Startups in this subsector also enjoy unrestricted capital allowances.
Tax Incentives for Startups in Manufacturing Subsector
The Federal Government of Nigeria has mapped out incentives for companies in the manufacturing sector to stimulate the growth of the industry, job creation, value addition, industrialization and increased investment. The tax incentives startups in the manufacturing industry stand to benefit from include capital allowance, reduced income tax, reinvestment allowance and corporate tax incentives rebate of 12 percent. In addition, startups can benefit from the Manufacture-in-Bond Scheme wherein raw material inputs and intermediate products to be used for the production of exportable goods are imported duty-free. The startup would need a bond issued by a recognized financial institution to enjoy this incentive.
Tax Incentives for Startups in the Oil and Gas Industry
The oil and gas subsector is Nigeria’s highest contributor to the Gross Domestic Product. And as such there are several tax incentives aimed at making the industry more conducive for investors and existing companies to thrive. Startups in the oil and gas sector that are under a Joint Venture (JV) enjoy reduced tax rates through a sector-specific incentive known as Tax Inversion. Also, startups in the oil and gas subsector enjoy restrictions on penalty charges and capital allowances claimable when capital expenditure is directed to building works of permanent nature, pipelines and storage tanks, drilling activities and plants and machinery.
Tax Incentives for Startups in Power Subsector
Startups in the power subsector are eligible for tax holidays during their formative years. Startups involved in the manufacture of electrical products are exempt from paying income tax or enjoy a graduated tax holiday of ten to twenty years if their investment is between USD 50 million to USD 200 million. Also, if startups in this industry provide infrastructure in the area they are established, they are eligible to enjoy tax concession of up to thirty-five percent of the cost of providing such infrastructure. This tax concession from providing infrastructure is spread over five years.
Startups in the power sub-sector that invest in the training of the indigenous workforce are also eligible to enjoy tax concessions. Manufacturing startups in the power sector that directly or indirectly employ a minimum of hundred Nigerian employees get a twenty percent tax deduction. Depending on the quantum of investment of a startup in training the indigenous workforce, a two percent tax concession would be spread between five and fifteen years. Other tax incentives for startups in the power sub-sector include tax relief for research and development and zero percent import duty on power generation equipment that makes use of Nigerian gas as the power source.