Tax Exemption For Finnish Startups

By Ville Vesterinen, December 14, 2009, 14 Comments

taxation Today The Finnish Software Entrepreneurs Association issued a press release (here in Finnish) demanding tax exemption for Finnish startups. Jaakko Salminen, head of the Association, argues that the current Finnish tax legislation is not fair for startups in comparison to the BigCo. To fix this the Association proposes that those startups that fund their operations from their own profits and are owned by the entrepreneurs themselves should be exempted from the corporate income tax. This of course means that those startups are profitable. Further, the tax legislation should promote all the measures that lead to M&A activity that increases the size of the company. The Finnish Software Entrepreneurs Association also go on to argue that such measures push up the employment figures and increase the tax revenue in the long run.

Currently the heaviest burden from the Finnish taxation is felt by the early stage startups that don't use debt leverage as much as BigCo, are owned by the entrepreneurs themselves and fund their day to day straight from the accrued revenues. Salminen goes on to argue that being exempted from corporate income tax would incentivise exactly these types of companies to leave the money in the company to fuel the growth, instead of taking out every last penny through dividends.

We concur, but can't see how this helps the pre-revenue stage companies that are not profitable, which is the type of startup where the need for tax, or any break, is the biggest. Profitable and promising startups should not have trouble getting investors interested in the. Conversely, even the promising, but riskier pre-revenue ones do.

Much has been done in Finland in the name of the employment policy and a lot of this has made little or no sense for the startups themselves, at times even crowding out the private early stage capital or increasing the burden of red tape, but tax breaks are possibly the best area where the government should innovate and be proactive. That said, not all tax breaks are equal.

Countries that already support startups through such tax exemptions include Ireland, Singapore and France. Given the very low number of successful growth companies we currently have, Nordics and Baltics should follow suit, but be smart where they draw the line and which type and stage they target.

The Finnish Software Entrepreneurs Association goes on to argue that such tax exemptions would nicely fit the current support mechanism. Given the amount of money that the various support systems dole out, we on our part argue that the system should be re-examined, slimmed down and the money channeled to further tax exemptions to entrepreneurs in order to build a healthy grounding for market driven growth entrepreneurship.

To top it off, The Finnish Software Entrepreneurs Association argues that due to the risk averse nature of the local venture capital many Finnish startup won't get funded, when at the same time they are too small for the foreign VCs to get interested in. To cure this, The Association would invest public money to foreign VC funds with the requirement that it will be invested back to Finnish companies. A nice idea that can yield a nice profit, and even work to an extent by making sure the big money is available for those who qualify. That said, I'm not sure this would turn a bad startup into a successful one, and manipulating the choice will almost always lead to an adverse selection, which influences the signal of what is needed to win in the market.

We believe that quantity will also bring quality, and once that happens, the foreign VCs will arrive over night. The hurdle is to get more people interested in entrepreneurship in large, and then to go from pre-revenue to revenue. If entrepreneurship is also financially rewarded by the taxation (which it currently is not) and supported by the policy and regulation, then it will start to influence the culture and the wider structures, and ultimately lead to the very thing that all of the support mechanisms have tried to achieve but haven't been able to: A thriving entrepreneurial ecosystem and a country where people see entrepreneurship as the ideal employment and a life style. A situation in which foreign students will save up to be able to move to Finland to start a business and where VCs have to set up a shop if they want to stay in game. A culture of entrepreneurship.

TOPICS entrepreneurship finland taxation the finnish software entrepreneurs association venture capital

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Timo Ahopelto December 15, 2009

I tend to agree with the blogger here. It would be more important to find ways to get more growth funding to the (inevitably non-profitable) potential future big winners than the already profitable IT services companies with very limited break-through potential.

jkaljundi December 15, 2009

In Estonia we have no corporate income tax at the moment of profit generation, instead only profit distribution (dividends etc) is taxed when it happens. Until you re-invest your profits, it's not taxed. Same for all companies. But like you say, that's absolutely irrelevant for startups in their first years of operations. There are no profits.

The only thing that would help startups would be either abolishing or capping taxes on salaries (social tax, healthcare etc) which is one of the highest costs for any startup. I would like this to happen for any IT/high-tech company in Estonia and why not the Nordics, if it is an business are the government wants to grow.

Ville Vesterinen December 15, 2009

Timo,

The initiative is good, so I should not whine about it, but its really just a start that addresses only the later part of the 'entrepreneur life cycle'. Just as you said, the very early stage 'infra' is another which is screaming to get more attention (and which Vigos are fortunately addressing), but I believe equally if not more important is the cultural foundation which starts at the university if not earlier. It should be seen as a ecosystem where one part can't prosper without the other in the long run, and we should not patch each symptom in a vacuum just because that might be the part that's most visible or makes the most noise.

Ville Vesterinen December 15, 2009

Jüri,

It's hard to get through a tax code like the Estonian one in countries with dramatically different economic history, but see your point.

I'd be interested to explore and idea of deferred taxes. Just as some law firms and/or accountants defer payments for promising startups until they raise their A-round, we could defer taxes until the A round and/or in the later stages incentivice the entrepreneur to grow to business into a real company that would create sustaining value instead of selling it early to a what is many times a US giant. This would allow Europe to slowly grow giants of its own, which are the best 'schools' for future entrepreneurs. These giants would also create an exit market for other local players that they would acquire. An incentive system that currently hardly exists.

Jaakko Salminen, December 17, 2009

Thanks for the comments. We do realize that this initiative does little to startups that don't yet have a revenue stream. The key goal here is to encourage and help any company to invest in growth, and we will support any sensible scheme aligned with this goal. We are in discussions with several players in this field, and will drive

The rationale behind these proposals was that they are relatively straightforward to explain, will not require complex actions (other than the political one, which is quite a task in itself..), and will have fast effect for the companies. Also, the discussion on tax reforms is obviously very lively right at this moment, and we wanted to have the voice of growth companies heard better. Frankly, there's not enough actions for growth companies, despite the fancy talks. Social and employment issues are always more tempting politically than supporting entrepreneurship.

In all, we feel that our proposals were important to bring to the public at this point. Of course, they are not enough by themselves, but this is one the important ways to foster the emerging entrepreneurial culture in Finland.

I'd be more than happy to hear any comments and discuss these proposals, and to hear what else we should doing. Let's keep it lively..

/jaska

Ville Vesterinen December 17, 2009

Thanks for dropping in Jaakko. Kudos to The Finnish Software Entrepreneurs Association for walking the talk. While we're at it, let's push this through if it makes sense for everybody. Everybody?

Jaakko, who do we need to write/meet to make this happen?

Timo, how would you go about "finding ways to get more growth funding to the (inevitably non-profitable) potential future big winners"?

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Jaakko Salminen, December 21, 2009

Ville,

I'm pushing these issues forward with like-minded key people from Federation of Technology Industries, Ministry of Employment and Economy, and Tekes, among others. I't will certainly help if you keep the discussion going at Arctic Startup, it would be extremely interesting to hear the views of those involved in startup companies.

/jaakko

Reygi Robisson, February 02, 2010

I am looking to get connected with a scandinavian startup. I have worked with the largest software companies in the world(3 of the largest). I have a great deal of IT, App Dev, Business Experience. I speak some swedish and Finnish.

Obviously, no corporate tax will make entrepreneurial dollars go a long way. Locating base ops in such a place has ups and downs. The reality is that tax breaks and non-existant corp tax base signal that the location may be developing or even trying to battle a recession/stagflation. But it does signal a willingness to support business by te locale!

If you know of anyone who can use an expreince architect and business person especially in web based technologies, IT, or health related services who is looking to do something new or boost their existing direction.... let me know, i have extremely awesome ideas that could tranform Europe and the US. Let me know.
Reygi.

Reygi Robisson, February 02, 2010

(email was entered incorrectly on first post). I am looking to get connected with a scandinavian startup. I have worked with the largest software companies in the world(3 of the largest). I have a great deal of IT, App Dev, Business Experience. I speak some swedish and Finnish.

Ville Vesterinen February 02, 2010

@Reygi,

You might want to try out setting up a profile/application here http://www.arcticindex.com/jobs/

You can either look for a startup to join and/or co-founders to set up a company based on your idea.

Hope that helps!