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Danish Startup Community Unified Against The Entrepreneur Tax

Would you start a high growth company if you knew that if you were to make it to exit, the government could levy a 67% tax? Or would you make any early stage investment in a company facing the same rates?

This is the question pondered by Danish entrepreneurs and angel investors looking at the porteføljebeskatning, or portfolio tax. The tax in question targets an additional 25% on any shareholder with less than 10% ownership of a company. This brings the marginal tax rate up to 67% for an entrepreneur exiting a company, and the same rate for an Angel investor investing in what is a very risky asset -- high growth startups. It's high price on Danish entrepreneurship have earned it the perhaps more aptly named "entrepreneur tax" or iværksætterskat.

The "Entrepreneur Tax" was brought into law in 2010 by the past Minister of Economic and Business Affairs Brian Mikkelsen and the Danish VKO government. At the time it faced stiff opposition from the private sector, with an angrier and vocal movement of criticism growing since its passing. Realizing its negative consequences, Minister Mikkelsen promised to remove the tax not long after it was passed but left office without making any changes.

The new Minister of Economic and Business Affairs, Ole Sohn, has also put the tax "under the microscope" but rather than removing it, the tax has only been re-structured to allow entrepreneurs to exit cleanly under specific circumstances, such as the structure of the company or whether the entrepreneur has been an equity holder for at least three years. A report by Price Waterhouse Coopers determined the exceptions have had little to no effect on the entrepreneurial climate.

"As a result the startup ecosystem in Denmark has stagnated."


As a result the startup ecosystem in Denmark has stagnated. Early stage investors who were willing to invest in less than 10% of a company have taken their money elsewhere. And investors who may be willing to make larger investments still face large uncertainty from the fact that further investments may dilute their shares to less than 10 percent. A DVCA report found that 62 % of angel investors have declined to invest, and more than a third of Danish IT companies reported they have already been affected by the Entrepreneur Tax.

In many cases this tax also makes it impossible for growth companies to accept additional funding -- even if it is offered. The structure of the Entrepreneur Tax makes individuals personally liable to pay capital gains tax from the increased valuation of the company after investment, even if they recieve no additional personal income.

At a time when politicians are more than happy to champion new growth and job creation, why would they implement and maintain a tax they admit was misguided? It's true that the average Dane has grown suspicious of banks and investors after the economic downturn, but Denmark faces systemic issues in fostering new growth. The 2011 GEM report marks Denmark as having the second lowest entrepreneurial activity of any country in the developed world. And ironically, Denmark's politicians have vowed by 2020 to become a leading nation of innovative businesses.

One does not have to search hard at all to find entrepreneurs escaping the Danish startup ecosystem to create jobs elsewhere. "It wasn't as much a matter of moving our activities out of Denmark as it was it was a matter of not placing them there in the first place." says Michael Schmidt, Co-founder of Exit Strategy Entertainment, a Hamburg, Germany based game development studio. "We're an indie game development company and we would really like to stay as independent as possible. Part of being independent is that we would preferably not pull in any large investors but are rather looking at the angels who in general are targeting a sub-10% share."

Other factors in the Danish business climate also led Schmidt to set up shop in Germany and Norway, but it's clear now he has easier access to capital. "We've had a foreign angel compliment us on that fact that we decided not to put the majority of our activities in Denmark. Which, as a native Dane, still somewhat hurts to hear even though I know he is right."

Taxing entrepreneurs to stimulate entrepreneurship


In a speech given in November of 2011, the current Business and Growth Minister Ole Sohn gave a talk on stimulating high growth entrepreneurship in Denmark. There he noted that there is a high potential for growth and jobs in Denmark, yet too few companies are able to make it past the hump into solid growth. To reverse this trend, Mr. Sohn laid out a four step framework to kickstart the Danish economy by reducing bureaucracy, creating a "growth culture," encouraging existing companies to look into foreign markets, and budgeting more money for government investments.

"“The European policymakers are schizophrenic – on the one hand they are speaking the language of growth and innovation, on the other hand they are passing laws like this which are clearly limiting private investment”


This framework misses the core issue. Rather than fixing the problems caused by the poor tax policy, the Danish government should help investors to find Denmark profitable so they may choose to invest in its growth. By giving startups access to capital Mr. Sohn may be surprised to find that Denmark's entrepreneurs are quite willing to grow their companies into large, international business -- if all of Denmark's talent has not expatriated to start companies in friendlier climates. Mr. Sohn's press secretary did not get back to ArcticStartup for comment.

What's most perplexing is that this tax is only actively bringing in an estimated 150-200 million DKR (€20-27 million) a year while foregoing around 3.5 billion DKR (€470 million) in lost investments. In the short-term, policymakers may find it difficult to balance the books by recovering any income generated by startups and job creation especially as the ecosystem recovers from the damage already caused. But there is no logical long-term strategy keeping this tax in place.

"The European policymakers are schizophrenic - on the one hand they are speaking the language of growth and innovation, on the other hand they are passing laws like this which are clearly limiting private investment," says Nikolaj Nyholm, Partner at Sunstone Capital, a Copenhagen-based venture capital firm with €500 million in funds under management. The Entrepreneur Tax has not had any direct effect on Sunstone due to the structure of venture funds, but Nyhom continues, "That said, it's a ridiculous tax which is inhibiting early stage investment and thus limiting much needed funding at those stages."

Digital pitchforks


Gathering in opposition to this tax, the founders and CEOs of high profile Danish growth companies have put together a public forum at WeStart.dk to voice their concerns. There they lay plainly their request for the tax be removed and back up their arguments. The website also encourages entrepreneurs to sign a petition, share stories, and to write to Ole Sohn.

David Mariner, CEO and Cofounder of AppSponsor posts on WeStart.dk, "Our business at AppSponsor exists on a global stage, but was founded in Denmark. We do not wish to be forced to move our business overseas in order to take investment, but we are faced with little choice."

The co-founder of Everplaces, Christoffer Kaalund, expresses the same opinion. "This tax will effect us directly and needs to be removed if we are to be able to stay in Denmark as a company. This is not a threat, this is the sad truth."

The WeStart.dk online campaign considers itself apolitical and has been publicly supported by neary every influential startup, founder, or CEO with Danish affinity.  A quick glance includes names like Tradeshift, Memolane, GraduateLand, Jubii, Issuu, Hello Group, Aasger Aamund, Martin Thorborg, AppHarbor, Ge.tt, Zecco, Everplaces, CanvasDropr, Shape, Seed Capital, Sitecore, Venture Cup, Silicon Vikings, Conferize and many more are represented either by company or individuals from those companies.

Co-founder Martin Ferro-Thomsen of Issuu can only wonder why the current government is not seizing this opportunity to clean up this admitted mistake put into place by the past VKO government. But he remains positive that Ole Sohn, the new Minister of Business and Growth is able to listen and embrace change, at least to a certain extent.

Until then Ferro-Thomsen says they will be accumulating and communicating the frustration until change happens. Their overall message: "We demand that the Entrepreneur Tax is completely removed. Period. No patch up improvements or quirky exceptions. We will accept no more vague promises. Will keep going until Entrepreneur Tax actively is removed."

Image by Lewis Martin

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Navid Ostadian-Binai April 05, 2012

It is quite annoying that this topic takes the energy and time from the startup community.

We in Silicon Vikings support the abolishing of the Entrepreneur Tax, so we can all go back to spending our times on innovating world-leading products as well as creating growth in Denmark.

Politicians, act before additional entrepreneurs leave Denmark and more investors place their money elsewhere!

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Kasper April 05, 2012

Politicians have to act now, not tomorrow or next month. The primarily reasons for staying in Denmark as an entrepreneur are hard to come by and will mostly be related to personal matters.

Tax issues might be one of the issues, but this is just one out of many to come, and this stands for all the Western countries. Emerging markets are getting more and more stable and will soon become the central hub for innovation, growth and a mecca for Entrepreneurs.

I've just recently moved away from Denmark after seeing everyone around me taking the plug. Currently residing in Mexico City, a city who strive to be the next Silicon Valley and it very well could, within a couple of years. But they're are not alone for trying to capture the title, the competition is strong. Chile who are offering investments and great work environments for foreigners and entrepreneurs all financed by the government. Brasil who are offering tax reducting for entrepreneurs. But the same stories goes for most of Latin America, Asia and India.

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, April 07, 2012

Come on.

Iværksætterskat is the same as taxing capital gains made from stocks!
You are talking about personal capital gains tax, which can be as high as you state (in practice it's not more than 50%). However, in this country you would create a Holding company that then in turn owns your part (stock) in the startup. Then when you "flip it" then your Holding company would only be taxed 25%. Denmark has one of the lowest company taxes in the world (apart from Cayman, switzerland, Ireland etc).