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  • Start-up founders are welcome to develop their innovative business ideas in Latvia and use start-up law benefits

Start-up founders are welcome to develop their innovative business ideas in Latvia and use start-up law benefits

22 April 2021

At the end of 2020, amendments to the Law on Aid for the Activities of Start-up Companies were adopted, which significantly facilitate the possibility for start – up companies to apply for state-funded aid. Prior to that, the previous regulation imposed stricter requirements for start-ups to qualify for this aid.

With the new regulation, it is planned that in the future many more start-ups will be able to meet the requirements and obtain the status that will allow them to receive one of the two possible support programs:

  • Support program for making a fixed payment. Start-ups have the right to make a fixed payment of mandatory state social insurance contributions in amount of EUR 340.90 per month per employee. In addition, a worker for whom a flat-rate payment is made has the right not to pay personal income tax.
  • Support program for attracting highly qualified employees. The start-up can receive aid for attracting highly qualified employees under which the state will reimburse up to 45 % of the payments made to the employee. It should be also taken into account that the employer must provide the employee with a salary that is higher than the national average salary compared to the previous reporting year (in 2020, the average salary was 1143 euros before taxes).

It should be taken into account that the aid is granted under de minimis conditions, i. e. up to EUR 200 000 in a three year period.

What is a start-up company?

A start-up is a capital company with high growth potential, whose core business is the development, production or development of scalable business models and innovative products.

Important to note that a “start-up company” does not mean that only recently established companies are eligible. Companies that have been on the market for a long time can also apply, as long as they meet the legal definition of a start-up company.

The uniqueness of a start-up is based on an innovative product that is a product or service with high added value, including technological value, that ensures the development of a certain new product or service or a significant improvement of an existing product or service.

The areas in which start-ups can apply are almost limitless, for example:

  • Online platforms and tools for optimizing various functions or activities;
  • Developers of products and devices and applications in the health sector;
  • Financial service providers.

Criteria for companies eligible for the available support:

  1. Acknowledges receipt of an early stage venture capital investment by a qualified venture capital investor (EUR 15 000 - 30 000 depending on the type of investor); or
  2. Able to demonstrate that an innovative product is being produced, manufactured or developed (compliance is assessed by a specially established evaluation commission).

The age limit of start - ups

Before the new amendments, a criterion was set that takes into account the age of the start-up: a start-up that has been in business for the first five years since its registration in the Commercial Register was eligible for the aid program. At present, there is no longer a legal norm that determines the specific age of a start-up company.

Revenue for the first period of start - ups

Another important criterion that determined the qualification of start-ups for aid programs were the income thresholds set for two periods, above which start-ups could no longer qualify for aid programs:

  • Revenue of the start-up company from economic activity in the first two years since its registration in the Commercial Register <200 000 euros;
  • Revenue of the start-up company from economic activity in the first five years since its registration in the Commercial Register <5 000 000 euros.

The new regulation no longer sets revenue thresholds on which aid would depend. The abolition of this criterion could significantly increase the number of start-ups that will qualify for aid programs and that would only need possible aid funding for the further growth period after a period of rapid development.

Employees’ qualification

The requirement that 70% of all employees in a start-up must have a master's or scientific degree has also been abolished. Now, to qualify for an aid program for attracting highly qualified workers, a worker must meet one of the following characteristics:

  • An employee has an appropriate higher education - at least a master's degree or an equivalent education (including those obtained abroad), or
  • Has at least three years' professional experience in the relevant specialty or field in which the employee is to be employed.

Period of use of the aid program

Start-ups can receive state-funded aid:

  1. For a period of 12 months, in the general case where the Commission for the Evaluation of the Performance of Start-ups has decided to grant aid;
  2. For a period of 24 months, if the start-up initially requests an extended support period and the early-stage venture capital investment in the company is at least 150 000 euros in the last two years.

At the end of the initial period of use of the state-funded aid, the start-up may re-apply for the aid, but the aid period may not exceed five years from the date on which the aid was first granted.

When a start-up company re-applies for the aid program, it will be assessed whether the start-up company has fulfilled the specified obligations in the previous aid program period, as well as compliance with the criteria specified by law for start-up companies will be re-assessed.

Comparison of start-up regulations

Until 16 September, 2020

After 16 September, 2020

  • If a subsidiary or parent company was established abroad, the start-up could not qualify for aid programs;
  • The age limit for start-ups was up to 5 years;
  • Since the registration in the Commercial Register, income thresholds have been set, above which the start-up could not qualify for aid programs;
  • Employees’ qualifications - 70% of employees with a master's or doctoral degree.
  • A subsidiary or parent company may be established abroad to attract significant venture capital investment;
  • There is no age limit for start-ups;
  • Income thresholds for start-ups have been abolished;
  • The percentage of higher education level - master's and doctoral degree holders in the total number of employees has not been determined.
  • Changes in the Cabinet of Ministers’ Regulation No. 74 “Procedures for the Submission of Applications of Aid Programs for Start-up Companies and Administration Thereof”
  • Supplements to application forms.

Start-up VISA

It is worth mentioning one more valuable state aid mechanism – the so-called start-up visa – a temporary residence permit for a period up to three years. It is issued to a foreigner who arrives in Latvia with an intention to develop or create an innovative product. Once the temporary residence permit is obtained, the foreigner has to fulfil several requirements, for example, become a board member of the start-up company.

In general, it must be concluded that the legislator has significantly facilitated the operation of start-up companies in Latvia. These provisions of the law could introduce positive changes that would not only promote Latvia as good environment of start-ups, but would also facilitate obtaining state-funded aid for promising start-ups that were previously unable to qualify for this aid program.

BDO Law keeps up-to-date with the latest news related to start-up companies aid programs and creates the opportunity for more and more companies to qualify for state support and work in more favorable business environment for the development of innovative products. Please contact us to find out more about the special requirements for a start-up company to qualify for state aid.