“We all did it together!”: Latvia launches an innovative Startup Law and Startup Tax

Just a year after non-governamental organization “Latvian Start-up Association” was conceived, it has already succeeded with mobilizing government support to make important changes in Latvian legislation. Parliament has just approved Startup Law and new tax regime, that is unique in whole Europe. 78 national parliament members voted for the new legislation, five abstained, and no MP voted against it.

Most governments prefer to support their start-ups by providing various grant programmes and venture capital investment subsidies, but start-up specific tax breaks are rare. Latvian Ministry of Economics, with direct support from the Minister Arvils Ašerādens has made this new bold step in an attempt to realise a shared vision to make Latvia a perfect place to launch globally competitive startups.

“We all did it together!” emphasises Chairwoman of the Board of Latvian Startup association Jekaterina Novicka: “I would like to thank all start-ups and ecosystem players that took part in our initiative to establish and ecosystem association. Currently more than 60 startups and organizations have joined association on this journey. This is just the beginning!”

The law foresees two complimentary types of tax support for qualified start-ups:

  • a special flat Startup Tax regime that is currently 252 euro per month per employee, regardless of salary paid and for minimal social benefits (in case monthly salary exceeds 4050 euro, there is going to be the additional solidarity tax applied for the excess amount);
  • a special tax regime for highly qualified employees with PhD or Master’s degrees, whereby all social contributions and salary taxes are covered by the state from EU funds.

The Startup Law includes several other important ingredients such as first ever definition of a startup in Latvian legislation, which will allow referencing future legislation and support programmes, and building public awareness.

A startup will have to meet some basic criteria to qualify for one of the special tax plans. It should be less than 5 years old, have earned less than 200k euro in revenues during the first two years and less than 5 million euro during five years since incorporation, not be paying dividends, and have produced an innovative product or service. Also startups will have to provide assurances that they have secured at least 30,000 euro or more in qualified third party venture capital funding.

The venture capital funding serves as gatekeeper mechanism to focus the benefit on those startups that really have potential, as evidenced by their ability to attract outside funding,” says Member of the Board of Latvian Startup association Andris K. Berzins. “A mechanism to also include business angels as qualifying funding is already planned for the next revision of this law.”

The Law provides a one-time qualification procedure for venture capital funds as well as setting up a Startup Commission to be run by the Latvian Investment and Development Agency. The Startup Commission will administrate tax support programmes by ensuring qualification process and maintaining public database of qualified investors and startups.

The law is going to enter into force from 1 January 2017. The goal with these changes in legislation is to have at least 20 new startups each year in Latvia and 120 new jobs annually. “It is very reassuring that in this short period since founding the Association and launching dialogue start-up friendly regulation we have been met with such understanding and support from Ministry of Economics and other government bodies,” says Member of the Association’s Board and former Minister of Economics Daniels Pavļuts.

“Sometimes startups have to spend half of their money on early stages on labor taxation. We certainly didn’t have the highest tax rate in Europe as it was, but now start-ups are going to be able to focus on that, which matters the most – fast growth of their business. What the Law effectively does – it almost doubles the impact of pre-seed and seed stage investment to qualified startups. This increases the chances of success so that more startups make it to the top, create many well-paid jobs and pay full amount of taxes once they succeed.”

Startup Law is clearly the greatest success of Association so far, yet there are several other regulatory initiatives in the pipeline, such as Start-up Visa program, amendments in tax legislation and Commercial Code to facilitate use of the employee shares, simplified liquidations procedures and others.

Long-term goal of the Association by 2020 is to help the ecosystem to reach the level when Latvia is recognized as a perfect launchpad for startups to go global. It means that country’s ecosystem should be capable of providing an unparalleled mix of reasonable costs, access to international entrepreneurial talent and capital as well as startup-friendly regulations on top of excellent geographical connections.