Latvian government signs off on innovative new startup tax

The Latvian government has approved for debate by parliament an innovative new startup tax, to lighten the burden of the biggest cost at any startup: employee wages. The new law would set a flat monthly tax of €252 per employee for startups, let startup employees enroll in a 'highly qualified workforce' enrollment scheme where the government covers all social tax, at the same time waiving individual income tax for employees and corporate income tax for startups.

Juha Ruohonen, Partner at Superhero Capital: “We think this is a fantastic step forward and will definitely help startups in Latvia survive in a competitive market. Since the majority of an IT startup’s costs are salary, this will more or less double the effectiveness of investments like ours in, which is a huge advantage and will further encourage us to come back again and invest more.”

The tax law has been developed by the Ministry of Economics in close collaboration with Latvian startups, represented by recently formed Latvian Startup Association (Startin.LV). The law will create a procedure to ensure selection only of early-stage startups that will most benefit from the extended runway they can get from reduced taxes. Startups will need to have raised at least 30,000 Euros of venture capital or accelerator program investment in order to qualify for the program.

Arvils Aseradens, Minister of Economics of Latvia: “I am pleased, that this government understands that innovative technology startups have the potential to drive new growth for our economy. These companies, born global from day one, can rapidly build world-class businesses which can create valuable intellectual capital and drive millions of Euros of foreign investment by venture capitalists.

Our startup law will be a very effective way to improve the survival rate of these startups so they can grow up to become like MikroTik, the hugely successful producer of routers and wireless devices, which exports hundreds of millions of Euros worth of goods and services and is a leader in its industry.”

Latvian startups have publicly disclosed raising over €110 million investment to date. Most notable exits include the acquisition of iPhone contact management solution CoBook by American FullContact in January 2014, the sale of social media platform to American in August 2014, and the purchase of nanocoating startup Naco Technologies by German Schaeffler group in December 2015. All companies have kept their core operations and R&D departments in Latvia since exit.

Rolands Mesters, Managing Director, Latvian fintech startup Nordigen: “This will be critical to help us build up our team and enable us to make more traction with client and revenue growth before we have to raise our next investment round.”

This law will follow in the footsteps of a very successful early-stage soft loan program that has helped finance dozens of startups, and will be complemented by tens of millions of Euros in fund of funds programs for accelerators, seed and growth funds which will be released using EU structural funds during the coming few years. 

Daniels Pavluts, Board member, Latvian Startup Association: “There is nothing quite like this elsewhere. The idea comes from many startup people coming together and working to release the full growth potential of our early stage startups. Six months after we formed Latvian Startup Association, we already have our first startup law, thanks to a great collaboration with the Ministry of Economics.

Latvian startups now see that uniting and speaking in one voice pays off. We can also see this result in today's joint announcement about the forthcoming TechChill conference and Riga Venture Summit, where the Association, TechHub Riga, Startup Wise Guys, the Latvian Venture Capital Association and the Latvian Business Angel network are all collaborating to create a coordinate set of events that will have broad regional impact.”