Determining the future of the seed enterprise investment scheme for fintech start-ups in the income tax, act for fy2020/21

By Obedgiu Samuel

Hitherto, it has come to the notice of the few Fin-tech venture capital funded start-up companies that the current Income tax laws only frustrate our operations here in Uganda.

If Uganda is to compete in this current industry 4.0, which deals with cyber-physical systems, the Internet of things, cloud computing and cognitive computing, then a conducive tax environment should be given to such small Fin tech starts to innovate and easy create Fin-tech businesses in this county.

At the moment venture capital from places like silicon valley and other venture capital funds for such Fin tech business investments is going to Nigeria, South Africa, Kenya and Botswana because those countries have progressive laws that favour such investments. 

I therefore, note that Section 25 of the ITA Cap. 340 that limits deduction for interest on loans and other swaps instruments and 19 (g) of the ITA that deals with employee share schemes should exclude infant Fin tech companies. The later 19 (g) of the ITA has a double taxation element on employee stock options that start-ups use to compensate their employees. Fin tech start-ups normally don’t have enough money to compensate their employees so they use such derivative contracts like stock options in their articles and memorandum of association.

In addition, Section 75 of the ITA Cap 340  that states that where income has been derived from the direct or indirect change in ownership by 50% or more of a person (other than an individual, a government, a political subdivision of government and a listed institution) located in Uganda there is a tax. This greatly impedes venture capital and equity investments in small start-up companies. Venture capital investments largely depend on granting a stake in the existing businesses. Ownership repeatedly changes in a bid to raise more money. I believe, this has largely impeded venture capital flows in Uganda. 

Suggestions.

Based on the above, therefore, suggest the following reform in our Income Tax Act, Cap 340 for the benefit of fin-tech startups.     

Introduce Seed Enterprise Investment Schemes (SEIS). There is a precedent for this in other commonwealth jurisdictions like the UK, Canada, India, Kenya, Nigeria Singapore South Africa and many more. This has help tech-entrepreneurship grow.

About Seed Enterprise Investment Schemes (SEIS)

The Seed Enterprise Investment Scheme (SEIS) should offer great tax efficient benefits to investors in return for investment in small and early stage startup businesses.  

SEIS is designed to boost economic growth by promoting new enterprise and entrepreneurship.

In the UK, a similar scheme was introduced. The Chancellor George Osborne’s 2011 Autumn Statement which heralded a big shake up of tax incentives for investors, with the Enterprise Investment Schemes and Venture Capital Trusts also being revamped   in the UK the Seed Enterprise Investment Scheme has become one of the most revered government-backed schemes ever created.

Nigeria has even gone further to promulgate the Venture Capital (Incentives) Act, 2004  

Some of the most important points to consider are:

1. Investors can receive up to 50% tax relief in the tax year the investment is made, regardless of their marginal rate.
2. SEIS investors can place a maximum of $200,000 in a single tax year, which can be spread over a number of companies.
3. A company can raise no more than $150,000 in total via SEIS investment.
4. Investors cannot control the company receiving their capital, and must not hold more than a 30% stake in the company in which they invest.
5. The company seeking investment must be based in the Uganda, and have a permanent establishment in Uganda.
6. The company must have fewer than 25 employees. If the company is the parent company of a group, that figure applies to the whole group.

• The company must be no more than 6 years old.
• The company must have assets of less than $200,000.
• The company has to trade in an approved sector – generally not in finance or investment, for example, a property company can’t raise capital through SEIS.

THIS WOULD GO A LONG WAY TO HELP FINTECH INVESTMENTS IN UGANDA.