The Latvian government approved an innovative new startup employee taxation, lightening the tax cost for qualifying startups – a move which could give a significant boost to the early-stage startup ecosystem.
The new law – which goes next to the parliament – would set a flat monthly tax of 252 euros 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.
“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 Dripit.io, which is a huge advantage and will further encourage us to come back again and invest more,” said Juha Ruohonen, Partner at Superhero Capital.
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.
“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,” said Arvils Aseradens, Minister of Economics of Latvia.
Latvian startups have publicly disclosed raising over 110 million euros 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 Ask.fm to American Ask.com 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.
“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,” said Daniels Pavluts, Board member at Latvian Startup Association.