Foreign VCs warn Nigeria’s new capital gains tax could slow investment

Nigeria’s new tax law, which replaces the standalone Capital Gains Tax Act with a unified regime and overhauls how capital gains are assessed, could slow foreign venture capital investment in the country’s startup ecosystem, according to several VC executives who spoke to TechCabal.

The investors say the changes compound existing concerns about regulatory unpredictability and currency risk. 

The Nigeria Tax Act (NTA) 2025 raises capital gains tax for companies from a flat 10% to as high as 30% and introduces an “economic nexus” rule. The rule allows Nigerian authorities to tax offshore share sales if more than half of the underlying value is derived from Nigerian assets.

The changes come at a time when foreign funds already face limited exit pathways, liquidity constraints, and macroeconomic volatility before investing in Nigerian startups. 

A higher tax burden on exit proceeds further compresses returns, increasing the risk that investors redirect capital to other African markets. 

“For founders, this means your exit valuation needs to be 20% higher just to give your investors the same net return they expected in 2024,” said Segun Cole, CEO of Maasai VC, a mergers and acquisitions Software-as-a-Service platform and marketplace. “Investment readiness now includes proactive tax modelling before you even sign a term sheet.”

Under the previous tax regime, Section 46(e) of the Capital Gains Tax Act largely shielded offshore share disposals from Nigerian taxation. If a non-resident company sold shares registered outside Nigeria and the proceeds were not brought into the country, the transaction typically escaped Nigerian CGT, even if the underlying business operated locally.

That shield has now been removed.

Section 46(f) of the new Act introduces a 50% value test. If, within the preceding 365 days, more than half of the value of the shares being disposed of is derived directly or indirectly from Nigerian assets, including shares in a Nigerian company or immovable property, the shares are deemed situated in Nigeria, and the gain becomes taxable locally. 

Section 46(g) expands this further by deeming shares situated in Nigeria if the entity is Nigerian or if the beneficial owner is resident in Nigeria or has a permanent establishment linked to the shares.

In effect, selling a Delaware or United Kingdom holding company will no longer guarantee insulation from the capital gain tax if the business’s value is primarily derived from Nigeria. For venture funds, this closes what policymakers describe as an “offshore loophole” and introduces jurisdictional complexity into cross-border exits. where none existed before.

“Moving from 10% to 30% CGT overnight changes the Internal Rate of Return (IRR) for every VC fund in the market,” said Cole. “For a foreign fund, this 30% ‘toll gate’ at the exit might make Nigeria less attractive compared to Kenya or Egypt, which still maintain more competitive exit taxes.”

Nigeria changed its tax rules to bring in more money for the government because it currently collects very little tax compared to the size of its economy. Still, experts believe the country can increase revenue without discouraging long-term investors.

“Gains should be taxed once realised,” said Oswald Osaretin Guobadia, managing partner at advisory and policy firm DigitA. “But we can offer incentives to defer gains tax if the amounts are reinvested.”

As a former Senior Special Assistant to the Nigerian President on Digital Transformation, Guobadia played an active role in the creation of the Nigerian Startup Act, which grants some level of tax exemptions to startups.

He is not alone in downplaying the tax’s effect. 

“I do not really worry about taxes in Nigeria. Only a successful investment pays tax. I like to focus on making money first before over-focusing on tax. Let me have the win, the government deserves its own portion,” said Ndubuisi Ekekwe, founder and CEO of Tekedia Capital, an early‑stage investment firm with portfolio companies in the United States and Africa.

From 10% to 30%

Equally significant is the higher tax rate on indirect transfers when an offshore parent company sells shares in a foreign entity that, in turn, owns a Nigerian asset.

The old flat 10% CGT for companies has been scrapped. Under the new regime, gains are aligned with standard corporate income tax rates. Large companies now face 30%. For upstream oil and gas firms still assessed under the Petroleum Profit Tax Act, rates can climb as high as 85%.

For individuals, capital gains are no longer taxed separately at 10%. Instead, they are now combined with total income and taxed at progressive rates between 0% and 25%.

“Moving from a 10% to 30% CGT regime overnight fundamentally shifts the Internal Rate of Return (IRR) for every VC fund operating in Nigeria,” said  Maasai VC’s Cole.  “For foreign funds, this 30% toll gate at exit could make Nigeria significantly less attractive than markets like Kenya or Egypt, which still offer more competitive exit tax environments.”

Maasai VC focuses on helping startups secure exits, including getting acquired by larger companies, rather than raising venture funding. Cole noted that if a parent company in London is acquired and it owns a Nigerian subsidiary, that global deal could still trigger a tax event in Lagos. This, he said, adds a substantial layer of complexity and cost to international M&A due diligence.

“Nigeria is saying: ‘If you make money from our market, we are taking our third.’ For founders, this means your exit valuation needs to be 20% higher just to give your investors the same net return they expected in 2024,” he said. “Investment readiness now includes proactive tax modelling before you even sign a term sheet.”

Government officials argue the policy closes loopholes that allow companies to reclassify income as capital gains to secure lower tax rates. It also strengthens Nigeria’s ability to tax offshore transactions that derive value from the local market. From a fiscal standpoint, the shift may be justified, but for the venture ecosystem, it is deeply destabilising.

‘That’s enough for us not to invest’

A general partner at a foreign VC fund focused on Africa, who requested anonymity because of the sensitivity of the matter, said the real problem is the obligation to file Nigerian taxes in the first place. 

Before the capital gains tax came into effect in January 2026, Taiwo Oyedele, chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, had reportedly committed to reducing the rate from 30% to 25%, but that change has not yet materialised.

“As an international investor, we would have to file taxes in Nigeria. Even if it was a very low tax rate, most international investors who don’t have to invest in Nigeria would say that is enough for us not to do the investment,” the partner said.

The second concern is the tax rate itself. The partner said that applying a high capital gains tax in an already risky environment pushes investment thresholds beyond what most funds can justify. 

“We already model potential currency devaluation and lack of liquidity. We generally put a 20% discount based on international comparatives,” the partner said. “Adding another 27.5% markdown for potential capital gains makes the hurdle too high.” 

The implication is that even Africa-focused funds may begin to underweight Nigeria, while global funds without continental mandates may simply opt out.

Timi Olagunju, a policy expert, believes the provisions are not unreasonable in principle but may have come at the wrong time.

“VCs are all about exit ease and perception,” he said. “Perception can have consequential effects on reality. Stock prices rise and fall by this alone.”

He pointed to Nigeria’s already volatile foreign exchange environment, policy uncertainty and security challenges: “Most investors are already wary. This may have come too early.”

Nigeria’s exit environment further complicates matters. Unlike developed markets, where IPOs offer a clear path to liquidity, most Nigerian startup exits occur through trade sales. As of February 2026, the Nigerian Exchange (NGX) Technology Board, created in 2022 to attract high-growth technology companies, has yet to record a single listing.

“Our exits are mostly trade sales, not IPOs,” Olagunju said. “So adding extra layers of taxation makes it undesirable for VCs.”

In a market where liquidity events are rare, increasing friction at the point of exit strikes at the heart of venture economics.

A government source, speaking on condition of anonymity because he is not authorised to comment officially, framed it as a matter of fairness. 

“If an asset derives its value from the Nigerian market, why shouldn’t Nigeria earn revenue when that asset is sold?” the official asked. “Profit made here should generate returns for the country?”

The second leg of the argument lies in the integration of incentives from the Nigeria Startup Act (NSA) into the NTA framework.

Under the Startup Act, capital gains from the disposal of shares in a labelled startup can be exempt if held for at least 24 months. However, qualification for labelling requires, among other conditions, that at least one-third of ownership be held by Nigerians.

“If you have one-third Nigerian ownership, you can get the exemption,” the official explained. “So there is an exception.”

Yet VCs argue that this threshold is unrealistic for venture-backed companies that typically rely on international capital. Many foreign investors are reluctant to cede 33% ownership simply to secure tax relief.

“If you ask me,” the government source admitted, “where Nigeria is in terms of capital inflow needs, we should have opened it up. For technology, where we are still trying to attract money, maybe we should have dropped that provision.”

Kenya as a contrast

Nigeria’s approach contrasts sharply with Kenya’s evolving tax regime. In 2023, Kenya increased its CGT rate from 5% to 15%  and expanded its ability to tax indirect transfers. However, it maintains CGT as a separate final tax. Once paid, the obligation ends.

Nigeria, by contrast, integrates capital gains into standard income taxation at up to 30% for companies.

Kenya has also faced litigation, including the high-profile case involving private equity firm ECP over the sale of Java House, where the tax authority argued the gains constituted business income taxable at 30% rather than capital gains at the preferential rate.

Nigeria’s alignment removes that classification dispute, but at the cost of a higher effective burden.

As one VC puts it, “A 27.5% capital gains tax is high no matter where you are.”

Diversification as workaround

The most immediate behavioural response may not be withdrawal, but diversification.

If the 50% rule hinges on value derived from Nigeria, companies may seek to dilute their Nigerian exposure.

“Our portfolio companies are already thinking about making sure less than 50% of value is coming from Nigeria,” the foreign GP said. “Right now we assume ‘value’ means revenue.”

That could translate into accelerated expansion into Kenya, South Africa, Egypt or Francophone West Africa, not purely for growth, but for tax positioning.

Another VC executive, who also requested anonymity due to the sensitivity of the issue, echoed the concern.

“You’ll start seeing companies place less of their operations in Nigeria,” the executive said. “If by the time of exit, Nigeria is only 10% of the portfolio value, then practically they’ll operate outside.”

The clarity problem

The lack of clarity around what constitutes value is even a deeper problem than the rate and nexus. It could be revenue, earnings before tax, assets, intellectual property, headcount or some combination. Right now, no one knows for sure. 

If a startup’s holding company is domiciled in Delaware, its intellectual property sits offshore, and its Nigerian subsidiary generates only part of its revenue, how will CGT be calculated?

“Will it be applied to the entire holdco sale or just the Nigerian component?” one VC asked. “Who makes that determination?”

The absence of detailed guidance heightens compliance risk. For global funds with strict internal controls, uncertainty itself can be disqualifying.

“Anything that feels non-standard and unclear makes investors outside Nigeria uncomfortable,” the executive said. “Foreign investment is hard enough already. Layering on complexity does not help.”

Short-term gain, long-term risk

Another VC executive questions the immediate fiscal upside.

“How many exits have really happened?” he asked. “It’s all theoretical. In the short term, yes, they might get something. In the long term, it might reduce FDI and put everything on a negative tailspin.”

Imposing higher taxes before significant exit volume materialises may generate limited revenue while altering investor psychology.

As one executive puts it, “Risk, reward. Why take all this risk for a reward I can get in the US with risk I understand?”

If foreign VCs pull back, local investors cannot step in at scale.

“Anytime there’s capital flight, local investors suffer,” a VC said. “There’s no country in the world that says foreign capital should leave.”

Venture capital is inherently high risk. Even small percentage reductions in exit proceeds materially affect fund performance.

“If returns are already hard, any percentage that comes out of it does not help,” the executive added.