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Dear clients and cooperation partners,
We are pleased to present this newsflash focusing on the most recent issues plus regulatory changes related to startups and related venture capital initiatives.
The following headline topics are covered:
- NEW REGULATION TO SUPPORT STARTUPS IN LATVIA
- NEW REGULATIONS TO SUPPORT STARTUPS IN ESTONIA
- OTHER NEWS FROM ESTONIA
- NEW REGULATIONS TO SUPPORT STARTUPS IN LITHUANIA
- OTHER NEWS FROM LITHUANIA
NEW REGULATION TO SUPPORT STARTUPS IN LATVIA
Latvian Ministry of Economics collaborating with Latvian Startup Association to develop new law
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.
NEW REGULATIONS TO SUPPORT STARTUPS IN ESTONIA
Relaxing immigration quotas
A bill regarding amendments to the Aliens Act is under consideration in the Parliament. The amendments would exclude information technology and communication employees from immigration quotas. Currently the bill is under second reading in the Riigikogu and is expected to be adopted shortly.
If these changes are adopted, it will be easier for Estonian startups to hire more qualified foreign specialist, while foreign startups will have less bureaucracy as to widening their activities to Estonia.
In addition, the amendments would create an investor resident permit similar to many other jurisdictions. To qualify, an investor has to invest at least EUR 1 million in investment funds or Estonian enterprises, which in turn invest in the Estonian economy. This is intended as a convenience for investors to enable them to better manage their investments and contribute to the Estonian economy.
Finally the amendments will ease some of the bureaucracy involved with travelling while holding an Estonian residence permit. An extended stay outside Estonia will no longer have to be registered. Information from Äripäev, article as of 26 May 2016 available in Estonian here.
OTHER NEWS FROM ESTONIA
Startup Estonia restructure
As of 1 July 2016, Startup Estonia has merged with KredEx, which aims to improve support for startups and to facilitate funding options in all stages of growth. This is only one part of a bigger merger – the intention is that
Smartcap will also continue its operations under KredEx in the future.
The more specific purpose of this merger is to create a more favourable environment for startups, which enable faster development, improve funding options, knowledge and investor contact-sharing. Until now, this role has been fulfilled by SmartCap, but the opportunities available to entrepreneurs are about to widen thanks to new accelerators and cooperation programmes as well as sub-funds created in the framework of EstFund.
As to further plans, in the second half of 2016, a programme for developing sales skills for startups is due for launching and a partner found for a cooperation programme between businesses and startups plus counselling for the founders of startups. Additionally, the final round of European green technology will be brought to Estonia, along with promotion of Estonian startups at conferences abroad. By autumn, partners will be selected with whom negotiations will begin to create new accelerators.
Startup Estonia stands for maintaining Estonia’s position as a known and attractive destination among startup entrepreneurs in Europe, so that by 2020 it could become one of the leading centres for startup businesses in Europe
According to the Startup Compass survey, Estonia had 500-700 startups at different stages of development as at the end of 2015. Altogether, Estonian startups provide nearly 2,300 jobs, more than 80% of which are in Estonia. In 2015, startups paid over EUR 20 million to the state budget in employment-related taxes. Information from KredEx article as of 30 June 2016 available here.
EstFund launched
EIF launched in March 2016 in co-operation with KredEx and an Estonian Ministry of Economic Affairs and Communications EUR 60 million Fund-of-Funds initiative to stimulate equity investment in innovative and high growth-focused enterprises in Estonia. EstFund is a fund-of-funds, which means that enterprises are not financed from EstFund directly, but investments go to funds which invest in enterprises.
EstFund will invest in several risk capital funds, which will then invest primarily in Estonian enterprises. The new fund-of-funds will support smaller risk capital funds targeting smaller and often earlier stage investments, operating in a complementary way to the existing successful Baltic Innovation Fund initiative, which targets larger and later-stage deals in the Baltics. Approximately EUR 100 million in equity investments is expected to be made available to Estonian enterprises in the coming years.
The fund managers will be selected by an open call for expressions of interest. The selected fund managers will receive a cornerstone investment in their fund from the combined resources of EstFund and co-investment by EIF allocated indicatively as follows:
- EUR 30 million Venture Capital Fund;
- EUR 15 million Expansion Capital Fund;
- EUR 15 million Business Angels Co-Investment Fund.
Applications closed on 29 August 2016. Fund managers will be selected by the end of 2016. Information from the European Investment Fund article as of 29 June 2016. Available here.
NEW REGULATIONS TO SUPPORT STARTUPS IN LITHUANIA
Law on partnerships – new amendments on the way
Since limited liability partnership is one of the most common legal forms of private equity and venture capital investment activity, the outdated Lithuanian Law on Partnerships (the Law) was reviewed and amended some years ago to adjust its provisions to the structuring needs of venture capital and private equity funds. The amended Law still shows its drawbacks in practice, such as requirements for public disclosure of the identities of limited partners and the investment amounts they are committed to, disclosure of confidential internal management procedures, distribution waterfall, and so on. The second round of amendments to the Law aimed at addressing these obstacles has been prepared and is expected to be approved in the second quarter of 2017. One key change expected is the possibility to keep some competitive and confidential information undisclosed to the public by entering into double layer agreements, ie:
- a limited partnership agreement (in Lithuanian: bendrijos veiklos sutartis) which should be notarised and filed with the Company Register and
- a partnership agreement (in Lithuanian: dalyvių sutartis) which would be entered into simple written form with no notarisation and no registration requirements.
Start-up visa plans in Lithuania
Lithuania is introducing new amendments to the Law on the Legal Status of Aliens. This is likely to give significant impetus to efforts to attract start-ups to Lithuania along with a highly-skilled workforce from non-EU countries. Major changes are that the amendments will introduce:
- special permits for start-ups: the possibility to reside in Lithuania and start a business without investing a fixed minimum amount in the capital of a company and without hiring a mandatory minimum number of employees;
- more flexible requirements for highly-skilled personnel holding the so-called EU Blue Card;
- the possibility to speed up recruitment of professionals in short supply;
- no need for students to obtain work permits and other changes that are expected to come into force from the beginning of 2017.
OTHER NEWS FROM LITHUANIA
New co-investment funds launched by Invega
UAB “Investicijų ir verslo garantijos” (Invega) has announced plans to launch two new risk capital financing instruments, “Co-Investment Fund I” and “Co-Investment Fund II” aimed at facilitating financing to start-ups and SMEs and contributing to the development of the “First North” alternative market.
The plan is that funds will be managed by a subsidiary company of Invega which will pre-select private investors (risk capital funds and groups of business angels) for prospective co-investment opportunities suggested and brought by private investors.
“INVEGA fund” plans to allocate EUR 11 million to “Co-Investment Fund I” from proceeds that have been or will be returned from other financial engineering programmes. More information about the initiative can be found here (available in Lithuanian only).
“Co-Investment Fund II” will be financed from another source – the Business Financing Fund (Verslo finansavimo fondas) – with a contribution of EUR 11.6 million. The fund will focus on investments in R&D, innovation and smart specialisation5. More information about the initiative can be found here (available in Lithuanian only).
Lietuvos Energija – fund/acceleration initiative
Lietuvos Energija UAB, a state-controlled company has announced plans to establish an Innovations Fund “Lietuvos energijos inovacijų fondas I” and a related startup accelerator and/or incubator with a view to involving talent in the energy sector and promoting innovation by providing funding for start-ups. Lietuvos Energija is currently pursuing the selection process for a financial partner who would be the founder and manager of the fund and the related accelerator and/or incubator. The selected fund manager is expected to be announced by the end of this year.
UPCOMING FUND TENDERS
On 4 October 2016, Invega and EBRD signed a cooperation agreement that will expand Invega’s competences as a national financial institution responsible for implementing risk capital funds in Lithuania. These instruments will be implemented with funding from the 2014-2020 EU Structural and Investment Funds programme. The financing programme will be used to create four risk capital funds via selected financial intermediaries (fund management teams):
- Development Fund I (up to EUR 14.51 million);
- Development Fund II (up to EUR 16.18 million);
- Venture Capital Fund II (up to EUR 13.76 million);
- Business Angels Co-Investment Fund (up to EUR 10.23 million).
The terms and conditions for selection of management teams have been published for market participant review and comments and can be found in English here. |
