A state that pays software devs' tax bills? Here's how Latvia is aiming to lure startups

In Baltic terms, Estonia may lead the pecking order in technology, but ambitious new tax initiatives show neighboring Latvia is breathing down its neck.

Riga Latvia

Latvia's startup community is based in the capital Riga, where there are plenty of hubs, accelerators, and entrepreneurial events.

Image: Valerijs Kostreckis., Getty Images/iStockphoto

In the past decade, the Baltic region has enjoyed a boom in startups and technology investments. So far, Estonia has been the frontrunner in the region, driven by the successes of Skype and TransferWise, among others.

But now its southern neighbor, Latvia, birthplace of Ask.fm and Infogr.am, is taking big steps to reduce the gap.

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At the end of last year, Latvia's parliament passed a new law and tax regime, aimed at turning the country into a more attractive base for startups and at luring investors to the country.

The law introduces two tax plans for startups: first, there's a special flat tax regime with limited social benefits currently of €252 ($268) per month, regardless of salary paid, up to a monthly salary of €4,050 ($4,302). Exceeding that sum incurs additional tax.

Secondly, for more highly qualified employees with a PhD or Master's degree, or more than five years' experience, there's a new tax regime where all social and personal taxes are covered by the state, and these employees receive full social benefits.

Obviously, there are a few rules that startups have to follow to qualify for the tax support: the company has to be less than five years old, and its revenue can't exceed €200,000 ($212,430) during its first two years, and €1m ($1.06m) in the first five years since its incorporation.

It can't be paying dividends and must have secured at least €30,000 ($31,865) of third-party venture-capital funding. And, of course, it must have produced an innovative product or service. The venture-capital funds must also pass a one-time qualification procedure.

The goal of the new legislation is to have at least 20 new startups each year in Latvia and 120 new jobs annually.

Local startup entrepreneur Janis Krums believes that the new law will indeed increase the number of new startups in the country significantly.

"[It will help] the very early-stage startups first. It'll help them attract money and then extend their runway once they do. Gradually the program should be expanded," he tells ZDNet.

Krums himself is an example of a new generation of entrepreneurs who are at the center of developing the emerging Latvian startup scene. After his business studies in the US, he co-founded a few companies there and over the years has invested in a few others. Now he is running a business network startup called Opportunity, which he founded in 2013.

"My co-founder Bill Jula and I had a standing Sunday basketball game that we both were part of before working together. The idea for Opportunity started over beers. We were talking about what was happening in social and dating and how that could translate to connecting professionals," Krums says.

"Initially, it was something that we were building on top of LinkedIn, but as we grew, we realized that it needed to become its own network. Now we've built something that's resonating with people and we are excited to keep making the product better and connecting more users with new opportunities," he explains, adding that of the more than a million users Opportunity already has, about 50 percent are situated in the US.

The working pattern of the company is similar to many other Baltic startups. The development of the platform is being done locally and the rest of operations, including marketing and sales, occur in the US, which means the startup's team of 10 people is split between Riga, Latvia, and Sarasota, Florida.

Krums believes that although the Latvian tech scene is still pretty new, it has the potential to rise to the number one spot in the region, passing Estonia.

"Skype propelled [Estonia] ahead and now they're the leader in the region. Latvia is on the right path, but it will take time for everything to start to mature and then we'll see an ecosystem that can compete on the world stage."

One of the key factors is education, and in Krums' opinion, IT should be widely promoted on all education levels.

"There is progress. IT and math are popular, though we could have more. A good program has been started by Accenture, helping bring IT into school education. There are also many robotics clubs. That's a particular strength here, both at schools and universities. The Riga Technical University robotics club is world class. They beat the Japanese in competitions," he says.

Latvia's startup community is based in the capital Riga and there are plenty of hubs, accelerators, and startup events to keep an eye on.

Krums cites the examples of TechHub, Miit, and Startup Wiseguys, a startup accelerator founded in 2012 in Estonia and expanded to Latvia last year, which just finished with a class of eight startups.

Local startups are attracting more and more foreign investors. But compared with the Estonian scene, there is one significant difference. While Estonian startups have relied on Western investors, in Latvia, Russian investors are also active.

"They are a significant pool of money," Krums says.

The local investor scene in Latvia is small but is making strides. There are small local angels and also organizations, such as the Latvian Angel group and VC Fund. Krums is or has been an angel investor in several companies himself.

According to the Latvian Start-up Association, there is a plan to introduce a mechanism to include business angels as qualifying for funding in the next revision of Latvia's startup law.

Several other regulatory initiatives are also in the pipeline, such as a startup visa program, amendments in tax legislation and commercial code to facilitate use of the employee shares, simplified liquidation procedures, and others.

What the results of these changes will be remains to be seen, but local entrepreneurs are already getting excited about giving Estonia a run for its money.

"It will take a while. Skype really helped propel Estonia ahead. We need a consumer brand success story that everyone in the country knows and that everyone connects to a better future. Yes, more capital, yes, some better legislation, but mainly we need to have some teams succeed and share in that success," Krums says.

Read more about tech in Estonia and the Baltic region

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