Latvia launches an innovative Startup Law and Startup Tax

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Just a year after non-governmental organization “Latvian Startup Association” was conceived, it has already succeeded with mobilizing government support to make important changes in Latvian legislation. The Latvian parliament has just approved a Startup Law and new tax regime, that is unique in whole Europe! 78 Saeima deputies voted for the new legislation, five abstained, and nobody voted against it.

The law foresees two complimentary types of tax support for qualified startups:

  • a special flat Startup Tax regime that is currently €252 per month per employee, regardless of salary paid and for minimal social benefits (in case monthly salary exceeds €4,050, there is going to be the additional solidarity tax applied for the excess amount);
  • a special tax regime for highly qualified employees with PhD, whereby all social contributions and salary taxes are covered by the state from EU funds.

The new Startup Law includes several other important ingredients such as the 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 tax plans. It should be less than 5 years old, have earned less than € 200K in revenues during the first two years and less than €5 million 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 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. He continues: “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.

Chairwoman of the Board of Latvian Startup association Jekaterina Novicka: “We all did it together! I would like to thank all startups 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 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.