The aim of the new law is to support activities by startups and to promote their development in Latvia. The draft law sets a number of measures to be introduced as of next year to support startups. Under the new law, startups would pay a fixed tax of EUR 252 a month (calculated as the amount of two mandatory state social insurance contributions) for each employee, to be paid into the social budget. Startups will also be exempt from paying corporate income tax (although losses may not be carried forward) and personal income tax with respect to those employees for whom the fixed tax is paid. Moreover, startups may apply for a governmental support programme to attract highly qualified employees.
The law will create a procedure for selecting early-stage startups that will be entitled to the benefits outlined above. In order to qualify for the programme:
- A startup will need to have raised at least EUR 30,000 of qualified venture capital investment and money used for investment may not be derived from activities qualified as criminal under the Law on Prevention of Money Laundering and Terrorist Financing.
- A startup will need to be performing commercial activity for not more than five years as of its incorporation.
- The Articles of Association will need to indicate that the company performs startup activities within the respective business area.
- 4. A startup will need to have annual income below EUR 5 million for the first five years and below EUR 200,000 for the first two years as of its incorporation.
- As of incorporation of a startup, its profit may not be distributed in dividends and must be used for developing the business.
- A startup company must not have been split or merged with any other company and its shares must not have been disposed of (except disposal to a venture capital investor or employees).
- A startup’s tax debt may not exceed 150 EUR.
- Startups must be owners of innovative products or at least 70% of their employees should hold a master’s or doctoral degree or 50% of all a startup’s expenses should be used for R&D.
The draft law defines qualified venture capital investment as alternative investment funds, other funds and companies, provided that during the last three years these funds or companies have invested in the share capital of at least three startups in amounts between EUR 30,000 and EUR 200,000 but not exceeding 20% of the total share capital of the startup. Global leading seed funds and startup venture capital funds and investors with a good reputation on the international market will also qualify as venture capital investors.
Support will be granted for one year after which the decision will be regularly reviewed. Support can be granted for five years as of registration of a startup in the commercial register.
The Ministry of Economics intends to create a separate supervising institution to supervise supported startups. The plan is that a special register will be developed where all startups that have received governmental support as well as all qualified venture capital investors will be registered. The register (both the register of startups as well as the register of qualified venture capital investors) will also be published on the web page of LIAA.
The intention is that the new law will enter into force starting from 1 January 2017.
The draft law still needs to be approved by the Latvian parliament.