Are startups about to migrate to Latvia?

After making a good start and having facilitated a particularly successful development of the startup ecosystem over the past years, creating conditions for startups to thrive, Lithuania is likely to be gradually losing its positions in the competitive struggle to its neighbours. When the Latvian Parliament approved tax advantages for innovative businesses a few days ago, the tax rate charged on startup salaries in Lithuania became three times as high as in Latvia.

Latvia-based seed startups will pay a fixed monthly levy of EUR 252 on salaries below the threshold of EUR 4 050 per month. On a EUR 1 200 salary paid to an employee a startup in Latvia will be charged tax at a rate of 21% (income and social insurance tax). Meanwhile, the same amount of salary in Lithuania would be subject to tax at a rate of 54.98% (income and social insurance tax).

Elena Vėgėlytė, tax adviser at COBALT, commented: “Startups are often a product of cosmopolitan and highly mobile young entrepreneurs. It will definitely come as no big surprise to us if Lithuanian startups, just as foreign startups, choose Latvia as a place where they want to develop their ideas. If this is the case, the process will be very painful for Lithuania, which has the ambition to position itself as the startup hub in the Baltics.”

Belarus offers exclusive conditions

The conditions that Lithuania can offer seem far worse compared to those that Belarus has created for early stage high added value generating businesses. The High Technology Park in Belarus offers significant tax advantages to IT companies registered within the Park – 9% personal income tax and social insurance tax below EUR 100 (34% of the average salary, which currently is approx. EUR 330). The Park applies the status of a virtual resident, meaning that in practice the advantage applies to all high tech companies throughout Belarus.

According to Elena Vėgėlytė, tax adviser at the Law Firm COBALT, the main point when advising foreign investors, and early stage startups in particular, is the burden of future employment-related taxation.

“As they hear that a 55% tax rate on salary is charged in Lithuania, the other conditions we use to tempt startups – modern public authorities, the country’s well-developed infrastructure, a convenient banking system and other conditions particularly favourable to foreign investments become not so relevant anymore,” Elena Vėgėlytė, tax adviser at COBALT, said.

It’s about a complex of conditions

Rimantė Ribačiauskaitė, Head of the Startup Lithuania platform, says that cooperation is maintained and experience and good practices are exchanged with Latvia, Estonia and other countries, with special focus on young tech businesses.

“We welcome Latvia’s decision to apply a fixed charge – this tax advantage will be significantly helpful during first years of a startup’s activities, when the company needs highly qualified talents, but has very limited financial capacity to attract and retain them,” Rimantė Ribačiauskaitė, Head of the Startup Lithuania platform of Enterprise Lithuania, said.

She notes, however, that governments should adopt an integrated approach to building the startup ecosystem and promoting startup activities – stand-alone tax advantages or initiatives may be not all what it takes.

“The Lithuanian Seimas has approved the so-called “startup visa”, but this project will also be launched in Estonia next year and is currently in the plans of Latvia and a large number of other countries. As a result, we encourage adopting a broad, integrated and strategic approach to the development of the startup and innovations ecosystem, which we expect from the new Government as well,” Rimantė Ribačiauskaitė said.