The Latvian parliament passed a new tax arrangement into law Wednesday that the Latvian Startup Association says will “effectively double venture capital investors’ money.”
“When investors decide to risk money backing a startup in Latvia, almost half of their money goes to pay social and personal income taxes, even if the founders and early employees are paying meager salaries because their shares and options are the financial upside they hope for,” said Latvian Startup Association’s co-founder, Andris K. Berzins, in a press release.
It comes with two tax plans, one a flat tax of €252 per employee, per month, plus a second tax arrangement that would applies to PhDs, MAs, and people with more than five years experience. The hope is that by lowering the tax burden on companies coming from retaining certain employees. As a consequence, the law’s proponents think this will protect those employees as the company grows.
“This is because in most startups there are few other costs aside from salaries. So together with the Ministry of Economics, we decided to tackle this cost directly and the result is this new tax regime,” Andris said. “As it stands, if the total tax burden on those employees is almost equivalent to their net salary cost, then this tax regime will have the effect of almost doubling the runway that a startup has, for the same amount of investment money, meaning that they are more likely to survive to the next round of funding (or revenues) and be successful in the long term.”
Besides being less than five years old, candidate companies will need to have less than €200,000 in revenues in their first two years of business, to have already secured 30,000 EUR in venture funding, to have already introduced an “innovative” product or service, and not be paying dividends.
Baltic states have taken a number of measures to increase the competitive features like EIF’s region-specific investment pot that covers Latvia, Estonia, and Lithuania called the Baltic Innovation Fund (BIF) that is investing €130 million across the region. Estonia introduced a new €60 million venture fund earlier this year, as well. Other efforts Latvia has in store include a special startup visa and rideshare legalization, according to the same release.
The biggest event in the Nordic-Baltic region (perhaps Europe), Slush, will take place in Helsinki next week. Latvia has its own pair of major event, TechChill and the Riga Venture Summit, which organizers hope will double in size in this coming year. TechChill takes place February 9-10, 2017.
“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,” Berzins continued. “A mechanism to also include business angels as qualifying funding is already planned for the next revision of this law.”