More Favourable Conditions for Investment in Startups
Since 2020, an amendment to the Corporate Tax Law initiated by the Ministry of the Economy and Innovation has entered into force, allowing Lithuanian and foreign investors to more flexibility invest in start-ups. The corporate tax relief now applies to venture capital and private equity entities which invest in both shares and convertible bonds. This amendment is expected to encourage increased investment by private and venture capital funds in early-stage start-ups.
Until now, only venture capital and private equity entities that invested 70 % of the capital value in equity securities (shares) have benefited from the corporate tax relief. Under the newly adopted legislative amendment, the 70 % limit applies to both equity securities and convertible bonds together or if the investment portfolio is formed by only one of these investments.
‘This is a more flexible and attractive investment instrument and we hope that these regulatory changes will encourage Lithuanian and foreign investors to invest more in innovative early stage companies,’ says Vice-Minister of the Economy and Innovation Marius Skuodis.
Business practice shows that previously the way of investing in equity securities was not attractive to start-ups or investors because the start-up would lose part of the company’s control and the investor faced the risk that, in the event of a failure of the start-up, it would be difficult or practically impossible to recover the investment.
Currently, the model of investment in convertible bonds is widespread, which is particularly attractive to growing companies which seek to attract investors but do not have much capital yet. The acquisition of convertible bonds gives the right to convert them into shares in the company, so this type of securities may have significant potential in case of the company’s success. Such a model allows start-ups to retain more control over their company, facilitates the valuation of the company and enables investors to better protect their investments.
According to Director of the Lithuanian Private Equity and Venture Capital Association Skaistė Budbergytė-Zabielaitė, efforts made by the State to improve the legal and fiscal environment for venture capital and private equity entities make a significant contribution to the development of investment.
‘In recent years, the State has made significant efforts to improve the legal and tax environment for venture capital and private equity entities. This significantly contributes to the development of investment, i.e. every year we monitor the increasing volume of investment from venture capital and private equity funds. I am delighted that this year an improved Law on Corporation Tax has entered into force, which extends the scope of the corporate tax relief. For risk management and other reasons, convertible bonds (rather than shares) are the financial instrument that makes it easier for start-ups to raise investments from funds,’ says Ms Budbergytė-Zabielaitė.
Roberta Rudokienė, Head of the start-up ecosystem development department Startup Lithuania at public body Enterprise Lithuania, also agrees that the amendment to the corporate tax law will bring significant economic benefits to both Lithuania and start-up companies. She says that future investments in high value-added enterprises (start-ups) will help create new jobs, increase the amount of taxes paid into the state budget and open up opportunities for start-ups to expand in Lithuania and beyond.
‘We welcome the initiatives by public authorities to improve the business environment of Lithuanian start-ups; initiatives like this strongly contribute to the growth of the start-up ecosystem. Today, we already have more than 950 start-ups in Lithuania, which are attracting more investment every year and, as tendencies show, Lithuanian and foreign funds are increasingly competing for innovative businesses established in our country. We believe that this amendment to the law will make it easier for Lithuanian venture capital and private equity funds to invest even more in early stage start-ups,’ adds Ms Rudokienė.
It is preliminary estimated that venture capital and private equity entities are now ready to invest EUR 22 million in start-up convertible bonds. It is also calculated that the funds that currently form capital for investment may be ready to invest up to EUR 56 million in start-ups in the form of convertible bonds.
According to the Lithuanian Private Equity and Venture Capital Association, in 2018 alone, start-ups which received investments form venture capital and private equity funds paid more than EUR 271 million of taxes to the national budget. The entry into force of more favourable conditions for investment in start-ups will further increase budgetary benefits.