THE NIGERIAN VENTURE CAPITAL (INCENTIVES) ACT

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INTRODUCTION

Funding of Startups globally hit an all-time high in 2021 with a total investment of approximately $454 billion recorded in just the 1st to 3rd quarter; as compared to investments recorded by Startups in 2020.1

In view of the crucial role VCs are playing in funding Startups, it is useful to know the available incentives for such VCs in Nigeria. In this article, we highlight these incentives that are available to VCs under the Venture Capital (Incentives) Act of 1993.

  1. Why is the Venture Capital Incentives Act relevant today?

The Venture Capital (Incentives) Act (the “Act”) grants tax reliefs and other incentives to VCs  that invest an amount not less than 25 per cent  of the total funding required for the venture project. This is relevant today because most Startup projects fall within the definition  of a Venture Capital Project set out in 2 below; and therefore, VCs that invest in such Startups  (“Qualifying Startups”)  would be entitled to  take advantage of the incentives contained in the Act.

  1. What is a Venture Project under the Act?

The Act lists the following as Venture Projects:

  1. projects that are capable of accelerating industrialisation by nurturing innovative ideas, projects and techniques to fruition;
  2. projects which commercialise research findings with high potential for far-reaching forward or backward linkages;
  3. projects which promote self-reliance through the establishment of resource-based and strategic industries, through the provision of risk guarantee and insurance;
  4. projects which encourage indigenous processes and technologies; and
  5. projects which promote the growth of small and medium scale enterprises with emphasis on local raw materials development and utilisation.
  1. What are the Incentives that accrue to Venture Investments?

 

Incentive Details of Incentives available to VCs
Capital Allowances  Up to 30 per cent Capital Allowance on equity investments, shall be available to VCs that invest in qualifying Startups.

 
Exemption from Capital Gains Tax Exemption from capital gains tax of up to 100% upon disposal of equity interest by the VC.
Reduction of Withholding Tax A 50% reduction of withholding tax payable on dividends received from Qualifying Startups within the first five years of the investment.
Application of the Industrial Development (Income Tax Relief) Act

 

 Incentives contained in the Industrial Development (Income Tax Relief) Act will apply to a Qualifying Startup.

 
Application of the Export (Incentives and Miscellaneous Provisions) Act

 

 The provisions of the Export (Incentives and Miscellaneous Provisions) Act will apply to a Qualifying Startup to the extent of the involvement of the Qualifying Startup in the exportation of products (e.g. Startups in the Agricultural sector exporting products).

 

  1. Which Regulator is Empowered to Grant these Incentives?

The Federal Inland Revenue Service (FIRS) is empowered to certify that a proposed venture project fulfils one or more of the above criteria to qualify for the incentives under the Act.

Conclusion

At a glance, the Act aims to encourage VCs to invest in Startups and this is applaudable.  It however, needs to be reviewed in light of more recent development in the Startup/Investor ecosystem and updated to provide more practicable and easily accessible incentives.

 

1. Gene Teare, ‘The Q3 2021 Global Venture Capital Report: Record Funding Trend Held Strong’ Crunchbase News’ (6 October 2021) https://news.crunchbase.com/news/q3-2021-global-venture-capital-report-record-funding-monthly-recap/ accessed 9 December 2021.