Startup law benefits
The law came in force on Jan 1, 2017, and it was a powerful signal to the ecosystem that the government is fully on board. Ever since, the law has been fine-tuned, in order to work better!
The law defines the startup as an innovative scalable business with high economic potential. It also describes three support mechanisms for early-stage startups. In essence: low flat social tax and no individual tax for startup employees, as well as 45% co-financing offered by the government for the highly qualified specialists.
Yes, you heard it right – it’s that good!
Ready to apply? Download Latvian Startup Law Guide in PDF.
Every employee in Latvia (and most of the countries in the world, really) has to contribute to the social security system – it’s a given. At the moment, regular companies apply 35.09% rate: 11% of that is being deducted directly from the employee’s salary, while the remaining 24.09% is paid by the employer separately – and it’s an additional cost which goes on top of the brutto salary.
A simple example: an employee has a brutto salary of EUR 1,000. Every month, 11% of that (or EUR 110) will be deducted as a social tax directly from their salary. On top of that, the employer will pay 24.09% of that (or EUR 240.90) separately from their own pocket. Overall payment to the social security system will, therefore, be EUR 350.90 every month.
The startup law offers eligible startups to fix this cost to a flat low level of EUR 301.77 per month per employee.
This amount is computed as 35.09% multiplied by two minimal wages (currently EUR 430 per month). So: 35.09% x 2 x 430 = EUR 301.77
In practical terms, it means that if a startup pays its employee more than two minimal wages (EUR 860 per month brutto), it saves money!
Since Jan 1, 2018, all companies enjoy a 0% corporate income tax if profits are reinvested back into the company. So, this is out of the way.
Now, it leaves us with the individual income tax, which since the beginning of the year has become progressive:
Latvian residents are liable to income tax on their worldwide income. Non-residents are liable to income tax on their Latvian-sourced income. Personal income tax is charged at 20%, 23% and 31.4% differential tax rate from January 2018 on employment and other income, with the exception of capital gains.
The startup law offers eligible startups’ employees to enjoy 0% individual income tax rate.
In the early days, a solid and diverse startup team is that very thing which can make it or break it. We notice that many startups are in need of a bad*ss programmer, coder, designer – you name it. And brains cost money. We acknowledge that and offer startups some sort of brain subsidy – go ahead, hire superstars, pay them well, and the government will return 45% of the cost of that employee to your startup.
For the sake of demonstration, let’s assume you are hiring an expert who expects to see EUR 2,500 net in his bank account every month. Any regular company would need to cash out EUR 4,964, in order to afford this expert. The startup law offers eligible startups to cut this cost down to EUR 2,730. Impressive, right?
Just make sure this super-start-expert of yours is truly key to the development of your product. Also, one of the two criteria has to be met: either this expert has MSc or Ph.D. degree in the relevant area of studies, or a minimum of three-year experience in the relevant area of work.