Nigeria's New Capital Gains Tax Rattles Foreign VCs as Investment Climate Faces Fresh Headwinds
Foreign venture capital firms are sounding the alarm over Nigeria's recently enacted capital gains tax regime, warning the policy could throttle investment flows into Africa's largest startup ecosystem just as the sector seeks recovery from a funding downturn.
Syntheda's AI technology correspondent covering Africa's digital transformation across 54 countries. Specializes in fintech innovation, startup ecosystems, and digital infrastructure policy from Lagos to Nairobi to Cape Town. Writes in a conversational explainer style that makes complex technology accessible.
Nigeria's ambitious tax overhaul is putting the country's $2 billion startup ecosystem on edge. Foreign venture capital firms are warning that the new capital gains tax structure—which consolidates previously separate tax regimes into a unified framework—could significantly reduce their appetite for backing Nigerian tech companies at a moment when the sector desperately needs capital.
According to TechCabal, the new tax law replaces the standalone Capital Gains Tax Act with a unified tax regime that fundamentally changes how capital gains are assessed. For foreign VCs, this means potentially higher tax bills on exits and reduced returns on successful investments—a calculation that directly impacts whether they deploy capital to Nigerian startups or redirect those funds to competing markets like Kenya, South Africa, or Egypt.
The timing couldn't be worse. African startups raised just $2.9 billion in 2024, down from $4.6 billion in 2022, according to Partech data. Nigeria, which typically captures about 30% of total African venture funding, has been fighting to maintain its position as the continent's leading tech hub. The new tax regime adds friction to an already challenging environment where foreign exchange volatility, regulatory uncertainty, and macroeconomic instability have made investors cautious.
The VC Calculation Changes
Venture capital operates on a simple math: invest in ten companies, expect seven to fail, two to break even, and one to deliver outsized returns that make the entire fund profitable. When governments increase the tax take on those rare successful exits, the entire model becomes less attractive. Foreign VCs are now recalculating whether Nigerian deals pencil out compared to alternative markets with more favorable tax treatment.
The unified tax regime also introduces complexity. Where VCs previously navigated a single capital gains framework, they now face a more intricate system that requires additional legal and accounting resources to ensure compliance. For smaller funds or those making their first African investments, this added complexity can be a dealbreaker.
Nigerian fintech companies—which attracted $1.3 billion in 2023 alone—are particularly vulnerable. These companies often require multiple funding rounds before reaching profitability, meaning VCs need clear visibility on exit economics years in advance. Tax uncertainty disrupts that calculus. If foreign capital flows slow, Nigerian startups may struggle to scale, potentially ceding ground to competitors in other African markets.
Regional Competition Intensifies
Nigeria doesn't operate in a vacuum. Kenya has aggressively courted foreign VCs with relatively stable tax policies and a government that positions itself as startup-friendly. South Africa offers sophisticated financial infrastructure and regulatory clarity. Egypt provides access to North African and Middle Eastern markets. When Nigeria increases the cost of doing business, these alternatives become more attractive.
The policy also arrives as global VC firms are becoming more selective about emerging markets generally. Rising interest rates in developed economies have made safer investments more appealing, and funds are scrutinizing returns more carefully. African markets must compete not just with each other but with opportunities worldwide.
Nigerian policymakers face a difficult balance. The government needs tax revenue to fund infrastructure and services, and there's a legitimate argument that the tech sector should contribute its fair share as it matures. But if the tax regime drives away the foreign capital that fuels growth, the government may collect more per transaction while presiding over a shrinking ecosystem—a classic case of winning the battle while losing the war.
The coming months will reveal whether VCs follow through on their warnings or adapt to the new regime. Some firms may restructure their investments through different vehicles or jurisdictions to minimize tax exposure. Others may simply reduce their Nigerian allocation. Either way, the country's startups are watching nervously, knowing their access to growth capital hangs in the balance as foreign investors reassess the risk-reward equation in Africa's most populous nation.