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TAX BREAKS & MORE: WHAT THE NIGERIAN STARTUP ACT OFFERS

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BY ADERONKE ALEX-ADEDIPE AND OMODELE FATODU

Introduction

The Nigerian Startup Act 2022 (NSA) is a significant piece of legislation, designed to foster innovation, attract investment, and create a favourable business climate for tech-enabled startups in Nigeria. It aims to position Nigeria as a leading hub for digital entrepreneurship in Africa by removing regulatory barriers and offering targeted incentives.

This newsletter explores key incentives available under the NSA and what they mean for startups and investors.

The Startup Label: A Gateway to Incentives

The NSA introduces the Startup Label, issued by the National Information Technology Development Agency (NITDA) which is a prerequisite for enjoying the incentives available under the NSA. To qualify, a startup must:

  • Be registered as a limited liability company with the CAC, and in operation for less than 10 years.
  • Have its objects focused on innovation, development, production, or improvement of a digital product, service or process
  • Have at least 33% of its shares held by a Nigerian founder or co-founder
  • Be certified by NITDA via the Startup Portal

Only Labelled startups may benefit from the incentives discussed below.

  1. TAX AND FISCAL INCENTIVES

One of the most attractive features of the NSA is its suite of tax incentives designed to encourage startup formation and sustainability:

  1. Pioneer Status Incentive (PSI) – The NSA allows for a Labelled startup to apply for PSI which grants an initial three-year tax holiday, extendable for an additional two years. This exemption from Companies Income Tax is a critical incentive for early-stage businesses as it allows them to reinvest significantly in their growth.
  2. Exemption from Capital Gains Tax – To encourage long-term investment, the NSA provides that angel investors, venture capitalists, private equity firms, and other institutional investors who invest in Labelled startups and hold their equity for a minimum of two years are exempted from paying Capital Gains Tax on the disposal of such investments.
  3. Tax deductions for Investments in Research & Development (R&D) – To encourage investment and innovation in R&D, Labelled startups may claim tax deductions for expenses on R&D which are wholly incurred in Nigeria and restrictions placed by the Companies Income Tax Act shall not apply.
  4. Access to the Startup Investment Seed Fund – The NSA establishes the Startup Investment Seed Fund, to be managed by the Nigeria Sovereign Investment Authority (NSIA). The fund is intended to provide early-stage finance to Labelled Startups, support for technology development, and grants for research and innovation.
  1. REGULATORY SUPPORT AND EASE OF DOING BUSINESS

The NSA introduces measures to reduce regulatory friction:

  1. Regulatory Sandboxes – The NSA empowers regulatory authorities (such as the Naional Insurance Commission (NAICOM), CBN or SEC)  to introduce sandbox programs that allow Labelled Startups to test innovative products or services in a controlled environment without the full burden of regulatory compliance.
  2. Fast-Tracked Approvals and Support – Labelled startups may request expedited approvals, waivers, or forbearances from regulators where traditional compliance requirements are unduly burdensome or incompatible with digital innovation. The NSA requires regulators to consider such requests and respond promptly through designated innovation desks.
  3. Single Window Platform – the NSA mandates the creation of a single platform to streamline startup registration, compliance, and access to government programs which help reduce bureaucratic delays.
  1. CAPACITY DEVELOPMENT AND TALENT SUPPORT

The NSA mandates collaboration between the Federal Government, academic institutions, and the private sector to promote digital training programs, tech-focused curriculum, and upskilling in areas like AI, cybersecurity, and blockchain. Labelled startups may benefit from access to trained talent pools at lower cost.

  1. INTELLECTUAL PROPERTY AND COMMERCIALISATION SUPPORT

The NSA encourages simplified processes for IP registration. Labelled Startups are eligible for reduced fees and technical support in registering trademarks, patents, and copyrights with the National Office for Technology Acquisition and Promotion and the Trademarks, Patents and Designs Registry.

Conclusion

The NSA is a forward-thinking legislative framework that provides critical incentives to drive innovation and entrepreneurship. However, these incentives are contingent on obtaining the Startup Label and remaining compliant with the NSA’s requirements. As the implementation of the NSA continues, stakeholders are encouraged to engage actively with the Startup Portal, monitor new guidelines from NITDA and NSIA, and seek legal advice to ensure eligibility and access to full benefits.

Tax Reforms: Guidelines on Advance Pricing Agreements in Nigeria

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BY ADERONKE ALEX-ADEDIPE AND EBIKENIYE BEST

Tax Reforms – Guidelines on Advance Pricing Agreements in Nigeria

Introduction

On November 27, 2024, the Federal Inland Revenue Service (FIRS) issued the Guidelines on Advance Pricing Agreements (“the Guidelines”) pursuant to Section 8(1)(u) of the FIRS (Establishment) Act, 2007 and Regulation 9(12) of the Income Tax (Transfer Pricing) Regulations, 2018 to clarify the procedures and conditions for obtaining APAs, thereby enhancing tax compliance and reduce transfer pricing disputes.

In this newsletter, we have highlighted some of the key provisions of the Guidelines.

What is an Advance Pricing Agreement (APA)?

An APA is a formal agreement between a taxpayer and the tax authority that establishes the transfer pricing methodology, defines relevant comparables, and specifies any necessary adjustments for future transactions between the taxpayer and related parties. The purpose of the APA is to determine the transfer prices for future transactions in compliance with the Arm’s Length Principle, for a fixed period[1], based on the fulfillment of the agreed terms and conditions.

What are the types of APA?

As indicated in the Guidelines, an APA may be unilateral, bilateral or multilateral.

Unilateral APA – this is an agreement between the FIRS and a taxpayer concerning the transfer pricing of related -party transactions.

Bilateral APA – this involves the FIRS, a taxpayer, its connected person(s) resident in a foreign country and the competent tax authority in that country.

Multilateral APA – this involves the FIRS, a taxpayer, its connected persons resident in two or more countries and the competent tax authorities in those countries.

What are the eligibility criteria and threshold for an APA application?

To be eligible to apply for an APA, a taxpayer must be a resident or a non-resident company that has a taxable presence in Nigeria and the commercial transactions that have occurred or contemplated must meet the following minimum thresholds:

  1. Single Transaction – the equivalent of $10 million for each commercial transaction in each year; or
  2. Group Transactions: the equivalent of $50 million in the case of a group of commercial transactions (group of transactions) in each year.

What is the application process and costs?

Taxpayers who meet the eligibility criteria are required to begin the application process by submitting a proposal for an APA to the FIRS. Once the proposal is submitted, the application proceeds through the following stages:

Stage 1: Pre-filing Meeting

A mandatory pre-filing meeting must be held at least 30 days after the submission of the APA proposal, between FIRS and the applicant. The purpose of this meeting is to discuss the feasibility of a successful APA and to address key issues such as the nature and scope of the proposed APA, the transfer pricing method to be used, and any other relevant matters. This meeting must take place before the formal APA application is submitted.

Stage 2: Formal Application

Where the FIRS agrees that the APA is feasible, the taxpayer can proceed with the formal application within the agreed timeline. This application must be comprehensive, outlining the type of APA sought, the entities involved in the commercial transactions, any relevant treaty partners (if applicable), a general description of the market conditions, the proposed transfer pricing method, and any other relevant terms and conditions including key assumptions.

At this stage, the taxpayer is required to pay a non-refundable application fee of $20,000 and the evidence of payment is to be included in the APA application.

Stage 3: Analysis and Evaluation

Following the submission of the formal application, the FIRS will analyze the documentation, assess the data provided, and request additional information or documents if necessary to make an informed decision on the APA.

Stage 4: Negotiation and Agreement

At this stage, the FIRS will enter into discussions with the taxpayer to align and finalize the terms of the APA. If the APA is bilateral or multilateral, discussions will also involve the tax authorities of the relevant treaty partners.

Stage 5: Drafting, Execution, and Monitoring

Once the terms are agreed upon, the APA will be executed. Upon execution, the APA will be subject to ongoing monitoring to ensure compliance with its terms. Additionally, the FIRS will verify that the facts, assumptions, and circumstances remain consistent.

The taxpayer is responsible for all costs related to the processing of the APA by FIRS, including but not limited to travel expenses for field visits and consultancy fees (where the FIRS engages an expert). If the costs incurred by the FIRS exceed this amount, the taxpayer must reimburse the additional costs directly related to the processing of the APA.

What is the timeframe for applying for an APA?

The Guidelines specify that the APA application process in the case of a unilateral APA may be completed within 24 months from the acceptance of a taxpayer’s formal application, and within 36 months for bilateral or multilateral APAs. However, the actual timeframe may vary depending on factors such as the prompt submission of required information, the complexity of the issues involved, and the pace of negotiations with treaty partners.

What is the term of an APA?

An APA becomes effective from the date specified in the agreement and remains valid for up to three (3) years, with a possible rollback of up to three (3) prior years if conditions are met.

In what instances can an APA be terminated?

In line with the provisions of Regulation 9(9) of the Income Tax (Transfer Pricing) Regulations, 2018, an APA may be terminated by either the taxpayer or the FIRS through the issuance of a notice of termination, in the event of a change in the nature of the covered transaction(s), any alteration to the critical assumptions supporting the APA, or a change in tax laws that significantly impacts the terms of the APA.

What other regulatory requirements must be fulfilled by a taxpayer under the Guidelines?

Once a taxpayer has successfully negotiated an APA with the FIRS, it is required to prepare and submit an Annual Compliance Report (ACR) for each year covered by the APA. The ACR must be submitted by the deadline for filing the taxpayer’s annual Companies Income Tax returns. This report should provide comprehensive details of the taxpayer’s actual financial outcomes for the year and demonstrate full compliance with the terms outlined in the APA.

Conclusion

Given the increasing concerns among taxpayers regarding the uncertainties around transfer pricing, driven by the complexities and subjectivity in transactions, as well as the potential tax liabilities arising from transfer pricing disputes, the Guidelines, which took effect on January 1, 2025, represent a welcome development for eligible taxpayers. It is hoped that the implementation of these Guidelines will significantly reduce the occurrence of tax disputes.Bottom of Form

[1] For more information on transfer pricing, please see our newsletter at https://pavestoneslegal.com/the-arms-length-principle-and-its-implication-on-taxation-in-nigeria/

REGULATORY UPDATE: THE NEW WITHHOLDING TAX REGIME (DEDUCTION OF TAX AT SOURCE REGULATIONS 2024)

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By Seun Timi-Koleolu and Kofoworola Ayoola

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Introduction

Withholding Tax (WHT) is an advance payment of income tax that is deductible at source on specific transactions. In simple terms, where Party A and B enter a transaction for which payment is to be received and income tax is payable, Party B is required under the law to deduct a percentage before payment to Party A for remittance to the tax authority as an advance payment of income tax for Party A. Amounts withheld can be applied as tax credit during tax return filings to reduce the overall income tax liability of Party A.

The concept of WHT was introduced into Nigeria’s tax system in 1977 to curb tax evasion, reduce tax leakages and to gain insights on the commercial activities of resident and non-resident businesses. Prior to now, the WHT regime presented challenges for businesses due to ambiguities in applicable provisions of law, burdensome compliance requirements, irregularity of the WHT credit system and inconsistent practices by tax authorities. Recognizing this, the Ministry of Finance recently issued the Deduction of Tax at Source (Withholding Tax) Regulations 2024 (the “Regulations”), effective 1st of July 2024. These regulations aim to streamline the withholding tax process in Nigeria, making it more business-friendly and efficient.

In this newsletter, we highlight the key changes and the benefits of the new Regulations for businesses.

1. What is Withholding Tax?

WHT is not another form of tax, rather it is an advance payment of income tax deducted at various rates, now ranging from 2% to 20% depending on the transaction. WHT cannot be used to offset any other type of tax liability, except income tax liabilities. Also, WHT is first used in the year of assessment to which an income relates before it can be used to settle future tax liabilities.

2. What are the Transactions Subject to WHT and Applicable Rates?

The transactions subject to WHT and the applicable rates are as follows:

Corporate Recipients Non-Corporate Recipients
Transactions Resident Non-resident Resident Non-resident
Dividend, Interest 10% 10% 10% 10%
Royalty 10% 10% 5% 5%
Rent, Hire or Lease 10% 10% 10% 10%
Commission, consultancy, technical, management, and professional fees 5% 10% 5% 10%
Supply of goods or materials other than by the manufacturer or producer 2% N/A 2% N/A
Co-location and telecommunication tower services 2% 5% 2% 5%
Supply or rendering of services other than those specifically listed in the Schedule 2% 5% 2% 5%
Construction of road, bridges, building and power plants 2% 5% 2% 5%
Any other form of construction and related activities 5% 10% 5% 10%
Brokerage fee 5% 10% 5% 10%
Directors’ fee N/A N/A 15% 20%
Compensation for loss of employment N/A N/A 10% 10%
Entertainers and sport persons N/A 15% N/A 15%
Winnings from lottery, gaming, reality shows, etc. N/A N/A 5% 15%

3. What is the Scope of Application of the Regulations?

The new Regulations will apply to all WHT payments made under the following laws:

● Capital Gains Tax Act (CGTA)
● Companies Income Tax Act (CITA)
● Petroleum Tax Profits Tax Act
● Personal Income Tax Act (PITA)

4. What Transactions are exempted from WHT?

A few transactions exempted from WHT are: distributions or dividend payments to a real estate investment trust or real estate investment company; across-the-counter transactions; interest and fees payable to a Nigerian bank through direct debit of funds domiciled with the bank; goods/materials manufactured or produced by a supplier; imported goods from a foreign supplier with no taxable presence in Nigeria; winnings from a game of chance or reality show exclusively promoting entrepreneurship, academic, technological or scientific innovation, amongst other transactions listed in the new regulation.

5. What are the Key Changes and Benefits for Businesses under the Regulations?

a. Clear Unified Rules Guiding WHT Implementation

Prior to the issuance of the Regulations, businesses struggled to understand their withholding tax obligations as the rules guiding the implementation of WHT in Nigeria were ambiguous and fragmented. Although WHT provisions are still contained in various Acts, the Regulations now provide clear and simplified rules for its implementation.

b. Clarification on Persons Required to Deduct at Source

The Regulations introduce a single, clear list of entities required to deduct WHT at specific rates on eligible transactions, explicitly excluding individuals. This list applies uniformly across all Income Tax Acts covered by the Regulations. They are:

  • body corporate or unincorporate, other than individuals
  • governments, and their Ministries, Departments and Agencies (MDAs)
  • statutory bodies
  • public authorities
  • institutions, organizations, establishments and enterprises
  • payment agents on behalf of those listed above.

c. Exemption of Small and Medium Enterprises (SMEs) and Farmers from WHT Compliance

Section 2(2) of the Regulations exempts small companies and unincorporated bodies from the requirements to deduct WHT from any transaction, provided however that the value of the transaction during the relevant calendar month, is not above Two Million Naira and the supplier they are dealing with has a valid Tax Identification Number (TIN).

d. Improved Utilization of Tax Credits

Previously, entities from whose payments WHT had been deducted (“Tax Beneficiaries”) could not claim WHT tax credits from the Federal Inland Revenue Service (FIRS) against their eventual tax liabilities if the person who deducted WHT from the payments (the “Tax Agent”) failed to remit the tax to the authorities. However, Section 6(3) of the Regulations now permit Tax Beneficiaries to claim WHT tax credits through receipts issued by Tax Agents, regardless of whether the agents have remitted the deducted amounts. These unremitted amounts become the tax liability of the agents and are recoverable with applicable penalties and interest.

e. WHT to Function as an Advance Tax Payment and not an Additional Contract Cost

While it is common practice for contracting parties to adjust negotiated contract price upwards to account for anticipated WHT deductions, in a bid to shift the burden of WHT payment to the other party to the contract (i.e. Gross Up provisions in contracts), the Regulations now expressly state that a WHT payment should not be treated as an additional cost of a contract or transaction and therefore should not be included in the contract price as an additional cost.

Conclusion

The Withholding Tax regime has been the most complex aspect of tax compliance in Nigeria. The new Deduction of Tax at Source (Withholding Tax) Regulations 2024, represent a significant step forward for the tax authorities to address long-standing challenges faced by businesses in Nigeria. While more work remains to be done, particularly with respect to some ambiguities still within the WHT regime, we expect that the implementation of these Regulations will foster a more business-friendly environment, allowing businesses to thrive in Nigeria.

Procedure For Registration Of A Limited Liability Partnership In Nigeria

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By Seun Timi-Koleolu and Praise Adetunmibi 

 

Introduction
In our article on the Companies and Allied Matters Act (CAMA) 2020 (the “Act”), we had highlighted some of the key developments introduced by the Act. A significant development was the introduction of a Limited Liability Partnership (LLP) as an entity that can be set up in all states in Nigeria. At the time the Act was signed into law, the procedure to be adopted by the Corporate Affairs Commission (CAC) for the implementation of the changes introduced by the Act (including the LLP) was yet to be provided.

The Nigerian Ministry of Industry, Trade and Investment has now published the Companies Regulation 2021 (the “Regulation”) which provides details and clarity on the implementation of the changes introduced by the Act.

In view of the substantial requests we have received, with respect to how an LLP can be incorporated in Nigeria, we are pleased to set out below, the process for the incorporation of an LLP as detailed in the Regulation.

 

The LLP Structure
An LLP is a body corporate with perpetual succession and a separate legal personality from its partners. It is a structure that combines the benefits enjoyed by the business name structure and the limited liability status enjoyed by companies limited by liability.

By Sections 747 and 748 of the Act, every LLP is to have at least 2 partners who may be an individual or body corporate, provided such person has not been found by a court in Nigeria or elsewhere to be of unsound mind and is not an undischarged bankrupt.

 

Procedure for registration of an LLP

  1. A name availability check should be conducted at the CAC and when the proposed name is available, the name is to be reserved.
  2. A Form CAC/LLP 01 is to be completed with the following information:
  1. the approved name of the LLP;
  2. the proposed business of the LLP;
  3. the proposed registered address of the LLP;
  4. the full name and particulars of each partner and their contribution;
  5. the full name and particulars of each person who is to be a designated partner (a designated partner is a partner that will be responsible for compliance with the provisions of the Act and will be liable for all penalties imposed as a result of a contravention of the law). There must be at least 2 (two) designated partners who are individuals and at least one of them must be resident in Nigeria;
  6. details of any partner in the LLP that will have significant control (i.e. an individual, company or other entity that directly or indirectly holds at least 5% of the interest or voting rights or holds the right to appoint or remove a majority of the partners or has the right to exercise significant control or influence over the LLP); and
  7. any other information as may be prescribed by the CAC from time to time.

 

3. The required fee for registration is to be paid to the CAC.

4. Where the above requirements have been complied with, the CAC shall within 14 days of the submission of the application register the LLP and issue a certificate of incorporation stating the name, date, and registration number of the LLP.

Conclusion
In addition to the foregoing, it is useful to note that a foreign LLP may apply to the Minister of Industry, Trade and Investment for exemption from incorporation in Nigeria where the LLP is: (i) invited by the Federal Government to execute a specified individual project; (ii) in Nigeria to execute a specific individual loan project on behalf of a donor country or international organisation; (iii) owned by a foreign government and engages solely in export promotion activities; or (iv) an engineering and technical expert engaged by any government of the federation or its agencies to carry out any individual specialist project.