Tax incentives, European entity and Russian language. What is the attractiveness of Latvia for startups from the CIS and how to transfer business there

By Konstantin Sinyushin, managing partner of the Untitled Ventures fund

I received a residence permit for investors in Latvia a year ago and now I spend most of my time in Riga. Here I meet more and more business immigrants from Russia, Ukraine, Belarus and Kazakhstan, representing the IT sector. The trend is also confirmed by the data of the Ministry of Economy of Latvia, according to which only in the last three weeks 12 Belarusian companies, including those from the IT sector, decided to move their activities to this country, and more than a hundred are considering this possibility.

If you do not delve into the political background of the issue, it is not interesting where these companies are leaving, but where they are going. In the European Innovation Results Scoreboard 2020, which is published by the European Commission, Latvia ranks 23rd and is considered a country with “moderate” innovative development, but shows one of the highest growth rates. Let’s figure out what are the advantages and disadvantages of Latvia for a start-up business, and how, if you wish, you can bring your start-up here.

PROS AND CONS FOR ENTREPRENEURS

If you are a startup in one of the CIS countries and are thinking about expanding to the West, you need a platform for doing business — convenient for you, close to your potential clients and easy in terms of transferring a ready-made business. From this point of view, not only Belarus, but also Russia and Ukraine are inferior to the Baltic countries, in particular, Latvia. Here are just a few of the benefits of this country for startups.

1. State interest

Comprehensive import of investment capital and skilled labor is beneficial for the country. It creates jobs that are paid above average (in Russia — about 1,000 euros per month), brings in revenue from imports and does not create unnecessary competition in the domestic market. This understanding is demonstrated by the Latvian authorities, where companies can apply for support to the Latvian Investment and Development Agency (LIAA).

From September 16, 2020, an updated law on the support of start-up activities has been in effect in Latvia. The main innovation is that companies no longer need to first receive financing in the amount of 15–30 thousand euros in order to receive benefits. Now a startup only needs to prove the fact of developing, creating or developing an innovative product. In addition, the updated law does not provide for an upper limit on the income of a startup in the first five years of operation and reduces the requirements for R&D.

What benefits does this law offer? Startups-residents of Latvia:

· Pay not income tax on salaries in the amount of up to 62.8 thousand euros per year, but a fixed contribution of 302 euros and an additional pension contribution (10%). Tax at the standard rate of 35.09% is taxed only on part of income above the specified level;

· Or receive subsidies for the hiring of qualified employees (the state returns up to 45% of the company’s costs of wages). If you choose this option, the income tax relief does not apply.

· Have the right to quick and easy registration of up to 5 residence permits for founders and investors of companies, as well as European work visas for other employees and visas for their family members.

As a result, the transportation of highly paid and highly qualified employees to the country is interesting both for employers and for the specialists themselves. As the next steps, the Latvian authorities should reasonably secure the local start-up legislation with the proviso that the conditions under which projects have moved to the country cannot change within a clearly agreed period.

2. Favorable tax regime for companies and investors

Latvia maintains a full-fledged holding regime and imposes a single tax on company profits and dividends to shareholders. Thus, there is no re-taxation of business income in the country when it is distributed. This factor is important for business owners who do not need to build complex schemes to withdraw income in the event of a business sale.

Ideally, owners of companies resident in Latvia could be exempted from capital gains tax by the country — at least after several years of owning a stake in the transferred company.

However, even without this measure, the country’s tax regime is beneficial for both business owners and investors, even in comparison with the traditionally low-tax jurisdictions of Belarus, Ukraine and Russia.

3. Geographical location

Latvia’s mild climate attracts those who have long dreamed of living and working by the sea. More importantly, the country has developed air links with all EU countries, where potential clients and startup partners work. Most of the Central European countries are within a 1–2 hour flight.

4. Cost of living

Business founders appreciate the cost to performance ratio of doing business in Latvia. However, even for ordinary employees, the budget for living in the same Riga will be a pleasant surprise in comparison not only with Western Europe, but also with many Eastern European EU member states.

5. Scientific and educational base

According to the Latvian Ministry of Economy, over the past year, public sector investments in science and research have increased by 18% in the country, and the number of companies that invest in the development of computer skills among employees has grown by 35%. The number of registered international patents in Latvia has grown by 30%.

6. Language and mentality

For Russian-speaking founders and investors, the obstacle to international expansion is often linguistic and cultural. In this sense, Latvia is a kind of buffer zone, where about 40% of the country’s population is Russian, and the majority of its inhabitants speak Russian at the everyday level.

Of course, this does not exclude the need for knowledge of English to effectively do business with other countries in Europe and the world. In addition, if you decide to obtain citizenship after five years of residence in the country, you will need to master the initial level of the Latvian language. However, initial adaptation in Latvia is easier.

HOW TO TRANSFER BUSINESS TO LATVIA

So, you have studied all the pros and cons and decided that Latvia is the right country to develop your business. Let’s take a look at the step by step relocation process in the most frequently asked questions.

· What exactly do we transport? Decide what exactly you want to locate in Latvia — parent or subsidiary company, head office or back office, or the whole business. Asset restructuring may be required to facilitate relocation.

· What documents are needed? To begin with, I recommend creating a description of the company on one page — business direction, turnover, list of partners, investments, structure. This document will be submitted to the LIAA and the bank to open an account, therefore it is worth correcting the description with a lawyer. A competent lawyer will also help to collect a preliminary set of documents for registration as a Latvian startup — the set of documents may differ depending on the type and structure of the business.

· How to open a bank account? Opening a bank account is one of the sensitive areas of the startup ecosystem in Latvia. To prevent money laundering, the country’s financial regulators have tightened checks on the beneficiaries and the transparency of the company’s financial transactions since last year. As a result, it is no longer so easy for foreign investors and entrepreneurs to open an account in a Latvian bank. However, there is a workaround for startups — you can fill out a form on the origin of funds in advance and send it to the LIAA for consideration before contacting the bank. This will shorten the period for consideration of the application in the bank. Depending on the bank, opening an account will take from two days to three weeks.

· How to register a company? So, you have in your hands a prepared package of documents and the preliminary consent of the bank to open an account. Next, you need to establish a new legal entity in the form of SIA (analogue of a Russian limited liability company, LLC). To establish an SIA, a legal (and postal) address is required, for which the consent of the owner of the premises is required.

At this stage, you decide whether to create an SIA with full fixed capital (minimum 2800 euros, at least 50% paid before registration) or with small capital (from 1 to 2799 euros, 100% paid before registration). The second option is easier for non-residents — there is no need to open a temporary account in a Latvian bank, but only individuals can establish it.

The package of documents is submitted to the LIAA, where the company is registered as a startup — this process will take 2–5 working days. Then the company is registered in the register of enterprises in Latvia, which also takes 2–5 working days.

· How do I get startup incentives? It should be understood that not all transported companies have the right to receive the same benefits as small and medium-sized innovative businesses. Therefore, for their registration, after the final registration of the company, you must again submit documents to the LIAA to obtain the status of facilitated taxation.

· Do I need to be present in Latvia for registration? In general, it is not necessary to come to Latvia to register a company, all documents can be drawn up in your country and sent by mail. However, with a personal presence (or the presence of local lawyers), the process will go faster.

· Do I need to have a residence permit to register a company? There are no restrictions for foreign citizens to become founders, participants or shareholders of SIA. However, the residence permit card greatly simplifies the paperwork, as it gives the right to electronically sign. In addition, a “green corridor” has been organized in the Latvian embassies for founders and investors of startups.

· What personal documents are needed to obtain a residence permit and work visas? Detailed information can be found on the website of the Latvian Embassy. On my own behalf, I recommend preparing in advance and affixing an apostille on a police clearance certificate, translated and a diploma of education, and in case of moving with a family — certificates of marriage and birth of children. You will also need a medical certificate of absence of tuberculosis and insurance for a foreigner. Collecting these documents is not a matter of one day, so it is worth starting as early as possible.

Summing up, Latvia really has every chance of becoming an Eastern European innovation hub, especially in the current economic and political situation. For this, the country has already done a lot in terms of the ease of migration of a ready-made business and the convenience of expanding this business to the West. Therefore, the relocation of business to Latvia is one of the most promising solutions for startups from the CIS.

Authored by Konstantin Sinyushin, Managing Partner, the Untitled Ventures Fund