The Nigeria Finance Act of 2020 introduced several key provisions aimed at fostering innovation and supporting startups in the country. Recognizing the crucial role startups play in economic growth and job creation, the Act provides tax relief measures tailored to encourage entrepreneurship, promote innovation, and enhance the overall business environment in Nigeria. In this article, we will delve into the tax relief measures that startups and innovative businesses can leverage under the Nigeria Finance Act 2020.
1. Reduction in Minimum Tax Rate
One of the significant tax relief measures introduced by the Nigeria Finance Act 2020 is the reduction in the minimum tax rate. Prior to the Act, all companies operating in Nigeria were required to pay a minimum tax based on a percentage of their gross turnover, regardless of whether they made a profit or not. However, the Act reduced the minimum tax rate from 0.5% of gross turnover to 0.25%, providing relief to startups that may still be in the early stages of their business and not yet generating substantial profits.
2. Pioneer Status Incentive
The Act also offers a “Pioneer Status” incentive to promote investment in specific industries and sectors. Under this provision, qualifying innovative startups can enjoy a tax holiday for an initial period of three years, with the possibility of an extension for an additional two years. This exemption covers several taxes, including company income tax, withholding tax on dividends, and value-added tax (VAT). Startups that qualify for this incentive can reinvest their saved taxes into their businesses, fostering growth and expansion.
3. Exemption from Capital Gains Tax
Capital Gains Tax (CGT) is a tax levied on the profit made from the sale of capital assets, such as property or investments. The Nigeria Finance Act 2020 grants startups an exemption from CGT if they reinvest the proceeds from the sale of assets into acquiring new assets within 365 days. This measure aims to encourage startups to reinvest in their businesses, fueling innovation and modernization.
4. Extension of Tax Loss Relief Period
Startups often face challenges in their initial years and may incur losses during the early stages of business development. The Finance Act 2020 addressed this concern by extending the tax loss relief period for startups. Previously, startups could only carry forward tax losses for four years, but the Act now allows them to carry forward tax losses for up to five years. This extension gives startups more time to recover from losses and eventually turn a profit.
The Nigeria Finance Act 2020 introduced a range of tax relief measures specifically tailored to support startups and innovation in the country. By reducing the minimum tax rate, providing the Pioneer Status Incentive, exempting startups from Capital Gains Tax when reinvesting, and extending the tax loss relief period, the Act aims to foster a thriving entrepreneurial ecosystem.
These tax incentives not only stimulate the growth of startups and innovative businesses but also contribute to overall economic development and job creation. As Nigeria continues to position itself as a hub for innovation and entrepreneurship, these tax relief measures serve as a catalyst for attracting investments and nurturing a dynamic and competitive business landscape.
For startups and innovative ventures looking to take advantage of these tax relief measures, seeking guidance from professional accounting firms with expertise in Nigerian tax laws is essential. Understanding and correctly applying these incentives can significantly impact the financial health and success of startups, propelling them towards a prosperous future in the ever-evolving business landscape of Nigeria.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.