Tax Exemption For Finnish Startups

taxationToday The Finnish Software Entrepreneurs Association issued a press release (here in Finnish) demanding tax exemption for Finnish startups. Jaakko Salminen, head of the Association, argues that the current Finnish tax legislation is not fair for startups in comparison to the BigCo. To fix this the Association proposes that those startups that fund their operations from their own profits and are owned by the entrepreneurs themselves should be exempted from the corporate  income tax. This of course means that those startups are profitable. Further, the tax legislation should promote all the measures that lead to M&A activity that increases the size of the company. The Finnish Software Entrepreneurs Association also go on to argue that such measures push up the employment figures and increase the tax revenue in the long run.

Currently the heaviest burden from the Finnish taxation is felt by the early stage startups that don’t use debt leverage as much as BigCo, are owned by the entrepreneurs themselves and fund their day to day straight from the accrued revenues. Salminen goes on to argue that being exempted from corporate income tax would incentivise exactly these types of companies to leave the money in the company to fuel the growth, instead of taking out every last penny through dividends.

We concur, but can’t see how this helps the pre-revenue stage companies that are not profitable, which is the type of startup where the need for tax, or any break, is the biggest. Profitable and promising startups should not have trouble getting investors interested in the. Conversely, even the promising, but riskier pre-revenue ones do.

Much has been done in Finland in the name of the employment policy and a lot of this has made little or no sense for the startups themselves, at times even crowding out the private early stage capital or increasing the burden of red tape, but tax breaks are possibly the best area where the government should innovate and be proactive. That said, not all tax breaks are equal.

Countries that already support startups through such tax exemptions include Ireland, Singapore and France. Given the very low number of successful growth companies we currently have, Nordics and Baltics should follow suit, but be smart where they draw the line and which type and stage they target.

The Finnish Software Entrepreneurs Association goes on to argue that such tax exemptions would nicely fit the current support mechanism. Given the amount of money that the various support systems dole out, we on our part argue that the system should be re-examined, slimmed down and the money channeled to further tax exemptions to entrepreneurs in order to build a healthy grounding for market driven growth entrepreneurship.

To top it off, The Finnish Software Entrepreneurs Association argues that due to the risk averse nature of the local venture capital many Finnish startup won’t get funded, when at the same time they are too small for the foreign VCs to get interested in. To cure this, The Association would invest public money to foreign VC funds with the requirement that it will be invested back to Finnish companies. A nice idea that can yield a nice profit, and even work to an extent by making sure the big money is available for those who qualify. That said, I’m not sure this would turn a bad startup into a successful one, and manipulating the choice will almost always lead to an adverse selection, which influences the signal of what is needed to win in the market.

We believe that quantity will also bring quality, and once that happens, the foreign VCs will arrive over night. The hurdle is to get more people interested in entrepreneurship in large, and then to go from pre-revenue to revenue. If entrepreneurship is also financially rewarded by the taxation (which it currently is not) and supported by the policy and regulation, then it will start to influence the culture and the wider structures, and ultimately lead to the very thing that all of the support mechanisms have tried to achieve but haven’t been able to: A thriving entrepreneurial ecosystem and a country where people see entrepreneurship as the ideal employment and a life style. A situation in which foreign students will save up to be able to move to Finland to start a business and where VCs have to set up a shop if they want to stay in game. A culture of entrepreneurship.