National Start-up Policies around the Globe

A review of good practices in innovation funding, start-up visas, e-residency, and venture capital investment from the UK, Estonia, Italy, Tunisia, and Mauritius.

Photo by Kvalifik on Unsplash
Source: Wikipedia

UK

The government offers several funding routes for startups:

· They can apply for government grants run by the Department for Business, Energy & Industrial Strategy or try the Start Up Loans scheme, which offers loans of up to £25,000 at a fixed interest rate of 6% per annum for new business ideas. Successful applicants also receive well as guidance on writing a business plan and up to 12 months of free mentoring.

· A range of funding competitions are offered by Innovate UK, which funds and connects UK businesses to develop new products, processes and services.

· Businesses setting up shop in the capital can seek support from the London Co-Investment Fund, a program established by the London Economic Action Partnership (LEAP), which contributed £25 million to the fund, supported by the Mayor of London, and delivered by Funding London and Capital Enterprise. The money is earmarked for investment in seed rounds of between £250,000 to £1 million.

· Other options include the Seed Enterprise Investment Scheme (SEIS), which offers tax relief to individual investors who buy new shares in a company, Research and Development tax credits, which allows companies to claim back R&D costs up to two years after the end of the accounting period the costs relates to.

Soft support

In terms of soft support, the Department for Business, Energy & Industrial Strategy maintains a database of schemes offering expertise and advice, while the Business is Great website provides information on subjects ranging from how to protect intellectual property to tax advice.

Tech.London offers advice on setting up in the capital, including local workspaces, events, mentorship programs, job boards and funding tips, as part of a collaboration between the Mayor of London, investor portal Gust and lead sponsor IBM.

Overseas entrepreneurs can seek free guidance from the Department for International Trade’s (DIT) Global Entrepreneur Program (GEP), while startups in the capital can apply for a place on Techstars London, an accelerator providing access to investment, mentorship and collaboration with other top entrepreneurs.

Tech Nation is a government-funded body which provides a range of support for technology companies, including:

· Future Fifty, which has given the likes of Just Eat, Shazam and Skyscanner access to expertise across both the public and private sectors, and

· Digital Business Academy, a free online learning platform for budding tech entrepreneurs to learn the skills they need to start, grow or join a digital business.

The government has also tried to attract startups to the country by offering one of the lowest corporation tax rates in the G20 and the ability to register a company within 48 hours.

Startup visas

In 2019, two startup/innovator visa routes with no cap on the number of applicants came into effect as replacements for the Tier 1 (Graduate Entrepreneur) visa: the Start-up visa and the Innovator visa. Applications are assessed by an independent panel of experts against the eligibility criteria in the guidance of Tech Nation, the body designated by the Home Office to endorse visa applications.

Fiscal incentives

Venture capital schemes offer tax relief to individuals to encourage them to invest in companies and social enterprises that are not listed on any recognized stock exchange. The schemes are:

· Enterprise Investment Scheme (EIS)

· Seed Enterprise Investment Scheme (SEIS)

· Social Investment Tax Relief (SITR)

Investors can invest directly in a qualifying company or enterprise using a venture capital scheme if they meet the conditions for investors. The company or enterprise will also need to meet the conditions for the scheme.

Depending on the scheme, investors may be able to claim:

· Income Tax relief against investment in qualifying companies, enterprises or venture capital trusts (VCTs)

· Income Tax relief against a loan or ‘debt instrument’ to a social enterprise

· Capital Gains Tax relief on any gains made on the investment

· Capital Gains Tax relief when they reinvest a previous gain in a scheme

Income Tax relief

Investors can get relief by investing in newly issued shares, or by loaning money to a social enterprise (through a debt instrument) for SITR.

Investors can invest in different companies through different schemes, as long as they keep within the limits for each scheme in that tax year.

How the schemes compare for Income Tax relief

Capital Gains Tax relief

How the schemes compare for Capital Gains Tax relief

Source: Wikipedia

Estonia

An important advantage of Estonia is the positive involvement of the private sector in the state’s policy-making and legislation. Startups have functioning cooperation forms with the state, and the companies themselves interact with each other closely. This policy making process raises awareness and also provides a decent base for supporting business activities both in the initiation phase and in the future.

Startup Visa

https://startupestonia.ee/visa

The Estonian Startup Visa program was initiated by the local start-up community and the Estonian Ministry of the Interior, and launched in January 2017. The program is meant for entrepreneurial non-EU nationals who wish to join the Estonian start-up community; and for Estonian start-ups wanting to recruit from third countries. The legislation was amended to allow Estonian start-up companies to employ non-EU nationals without meeting the current salary requirements (that is, depending on the employment field, a minimum pay requirement of 1.24 or 1.5 times the average Estonian salary in case of recruitment of foreign labor) and receiving consent from the Estonian Unemployment Insurance Fund (so-called preferential terms).

The startup visa may be issued for up to 365 days and further extended for up to 183 days (for requirements and application process), thus giving foreign entrepreneurs the opportunity to settle in Estonia for up to 18 months to establish their start-up.). Prospective start-up entrepreneurs who have established their start-up in Estonia and wish to stay longer can apply for a temporary residence permit for business. The general investment requirement (€65,000) to apply for a residence permit for business does not apply to start-ups. Temporary residence permits for business may be issued for up to five years.

While the launch of the scheme in Estonia has been an overall success, it was also noted that there have been some challenges that the Estonian government did not foresee:

· the interest in the program has been greater than was anticipated (200 applications within six months), putting a lot of strain on the system.

· the allocated budget did not support the high ambitions. Although the aim was to keep the system as simple and convenient as possible, there was for instance no budget for developing a web platform. Luckily the problem was solved by the Estonian startup community itself, who developed the necessary platform to attract new startups and diversify the local startup ecosystem.

E-residency

How to apply for e-Residency in Estonia

Estonia is the first country to offer e-Residency, a government-issued digital ID available to anyone in the world. E-Residency enables digital entrepreneurs to start and manage an EU-based company online, from anywhere around the world. The digital ID card and e-services are built on state-of-the-art technological solutions, including 2048-bit public key encryption and a two-stage PIN system.

The E-residency program offers distinctive advantages, such as possibility for accepting online payments through providers like PayPal; owning a company without the need to appoint a local director; signing, authenticating, encrypting and sending documents digitally; declaring business taxes online; accessing EU single market.

More than 62,000 people from 165+ countries have applied for e-Residency, establishing over 10,000 Estonian companies.

It has to be noted that an e-Residency digital ID card provides access to e-services, but it is not a valid form of physical identification and cannot be used as a travel document. e-Residency does not confer citizenship, tax residency, physical residency or right of entry to Estonia or the European Union.

Startup Estonia

Startup Estonia is a governmental initiative that works closely together with the different Estonian ministries and stakeholders with the aim of connecting different sectors with the startup community. Their current focus areas are:

CyberTech: The goal of CyberTech focus is to strengthen the local CyberTech startup ecosystem, grow the number of new CyberTech startups[1] and support the development of existing startups in the sector.

· Cybertech supports the existing startup community by: supporting participation in international CyberTech conferences, fairs and investor meetings; introducing Estonian CyberTech solutions and initiatives locally and internationally; supporting to become an active member in international CyberTech organizations; creating possibilities for finding investors and venture capital companies;

· Cybertech supports new startups by: organizing idea hacks and hackathons; providing post hackathon mentoring sessions; organizing intensive CyberTech startup business training; implementing startup mindset sessions into secondary education and university cybersecurity curriculum.

EdTech: Aims to foster the development of a supportive EdTech startup community. The program aims to bring at least 20 new EdTech startups to the market and support at least10 existing Estonian EdTech startups to go global and become the next success stories from Estonia. It is financed by Ministry of Education and Research and by European Regional Fund.

Accelerate Estonia: A platform for different ministries, the public and the private sector, experts and leaders to join forces and build new innovation. It has 5 main pillars: Nomad Security (social services in the form of health insurance and pensions to the underserved digital nomad community); Excess Materials Flow (a centralized online database with live streams of manufacturing by-products and leftover materials); KYC (know your customer) service; and e-CMR (a paperless real-time e-logistics ecosystem, a data exchange platform that streamlines the supply chain and makes services transparent).

Previously Startup Estonia had a 2-year pilot program cooperation with the Estonian Ministry of Environment for the cleantech focus. Since 2017 the cleantech focus initiatives were taken over by CleanTech ForEst, an Estonian non-profit supporting and funding early stage green technology startups, advancing environmental education and energy experts.

Source: Wikipedia

Italy

The Act provides support to innovative startups across all sectors until the fifth year of activity since incorporation. The regulatory mechanism is voluntary and opt-in. The Act defines eligibility criteria for identifying innovative startups: the company should be operational for less than 5 years, be headquartered in Italy or another EU country, have an annual turnover below € 5 million, not be the result of branch split or merger from a previous company, have a statutory mission explicitly related to innovation, be a limited company and not publicly listed, and should not have distributed profits. The innovative character of the enterprises is identified by at least one of the following criteria:

· at least 15% of the company’s expenses can be attributed to R&D activities;

· at least 1/3 of the employees are PhD students, the holders of a PhD or researchers; or, alternatively, 2/3 of the employees must hold a Master’s degree;

· the enterprise is the holder, depositary or licensee of a registered patent (industrial property), or the owner and author of a registered software.

Innovative startups incorporated as LLC are also allowed to: i) create categories of shares with particular rights (e.g. the creation of shares without right to vote); ii) execute operations on their own shares; iii) issue financial issue participative instruments and offer capital shares to the public.

The Italian legislation in support of innovative startups, far from being static, has been strengthened in the last few years by several subsequent legislative interventions. The Decree-Law 76/2013, known as “Decree on Labor” and the Decree-Law 3/2015, known as “Investment Compact”, and the 2017 Budget Law[4], have improved and broadened the range of benefits in favor of innovative startups provided in the original Act. The Budget Law also provides for fiscal incentives for investment in innovative startups:

· 30% deduction from gross income tax (IRPEF) on the sum invested (seed and early-stage investments) in innovative startups by individuals, up to a ceiling of €1 million

· 30% deduction on taxable income (IRES) on the sum invested by companies, up to a ceiling of €1.8 million.

The minimum holding period allowed for the incentivized investment is 3 years (the incentive can be claimed before that date, but will have to be repaid in case of noncompliance).

The legislation has proven successful in Italy, putting aside a few logistic challenges. The most prominent challenge is validating startups in the database, which should prove easily solvable via a relevant algorithm on a functioning platform.

The policy appears to be positively linked with increase in venture capital (VC) deals. A review conducted by the OECD shows that firms that registered into the policy were more than twice as likely to receive VC financing, within the first 3 years of founding the startup. However, the total amount of VC investments in Italy does not appear to have increased significantly since the implementation of the policy, especially when compared to the growth trends in other EU countries of similar size. To address this issue, additional policy action might be needed “upstream” at the investment phase — where the lack of critical mass of investment is evident, and “downstream” — in order to foster demand of innovative goods and services produced by startups.

Source: Wikipedia

Tunisia

In 2018 the Tunisian parliament unanimously passed a new startup law, part of the government’s broader “Digital Tunisia 2020” strategy to boost socioeconomic development and expand technological infrastructure. Widely celebrated, the Startup Act is expected to increase the number of startups, especially in the high-tech sector, making innovative entrepreneurship in Tunisia more competitive internationally and potentially increasing economic growth and employment, especially among youth.

With at least 17 tech hubs and a large number of funding and mentoring programs, Tunisia is one of the more dynamic locations for startups on the African continent. The broader digital strategy comprises 64 projects, most of which are to be implemented as public-private partnerships. They include e-government projects, expanding households’ and schools’ digital infrastructure (for example by improving broadband technology), strengthening the e-business sector through such mechanisms as promoting online payment systems, and encouraging foreign businesses to outsource digital services to Tunisia. Their aim is to strengthen the digital sector as a future cornerstone of the Tunisian economy, which currently largely relies on agriculture and tourism.

Tunisian entrepreneurs had long lobbied for changes to a regulatory system which they said curbed competitiveness; and members of the local start-up scene played a key role in drafting the new legislation in what’s being praised as an example of “bottom-up, participatory policymaking”.[5]

Label and governance

· The Startup Act defines a startup as any company that is: no more than eight-years old; has an annual revenue, and total balance sheet of less than 15-million Tunisian Dinar (about $6-million) and fewer than 100 employees.

· The Act also defines startups as companies that have an “innovative business model, and significant growth potential”.

· The startup label will be assigned to companies by Tunisia’s Ministry of Communication Technologies and Digital Economy, based on the advice of a Labelling Committee. The committee will consist of 10 members including a president, five venture capitalist (VC) fund, and startup accelerator representatives, as well as two public sectors officials.

· Companies that have secured funding from approved VC funds will be fast-tracked through the labelling process.

Encouraging entrepreneurship

· The Act aims to encourage innovators to start enterprises through four way: a startup leave, a stipend, employment programs and patents.

· Employees who wish to found a startup will be granted a one-year long “Startup Leave”. The leave, which is extendable to two-years, will only be granted to employees with “at least three years of experience within their initial company”.

· Up to three founders per startup will be granted an as yet unspecified stipend. The amount of the stipend is to be calculated “based on the average previous income for employees and a fixed allowance for those unemployed”.

· In a bid to reduce the cost of hiring employees, the act will also maintain employment programs like the Stage d’initiation à la vie professionnelle (SIVP[6]) “for graduates who launch a startup, or join one as an employee”.

· In addition, the act also aims to cover patenting fees for startups locally, and internationally.

Creation, development, and liquidation

· Four of the Act’s measures are based around making it easier to start, run and end a business. The law will do this through the setting up of a startup portal, reform of the Commercial Companies Code and tax exemptions

· The startup portal will be a “point of contact” for startups where administrative and regulatory processes around the creation, development, and the liquidation of startups will be settled.

· Under the new act, the country’s Commercial Companies Code will be reformed to allow for simplified share companies, preferred shares, free shares, and warrants.

· The act also stipulates that startups be exempt from corporate tax. In addition, the state will also take charge of employer, and employee social taxes for startups.

Financing startups

A total of 5measures in the act cater to issues around funding for startups.

· A tax relief for individuals and entities that directly invest in startups or that subscribe to venture capital funds investing in startups, “within the limits of income or profit subject to taxation”.

· A tax relief on capital gains, exempts investments into startups from capital gain taxation. The act also has a provision allowing startups to issue “several convertible bonds, regardless of the option period for conversion”.

· In addition, startups that opt to raise capital via contribution in kind will be authorized to designate themselves their own contribution auditors.

· Another measure meant to ensure startups have access to funding “guarantees VC funds investment in startups for up to 30% of the amount invested”.

· Under the new law, startups will be considered as small business as per Tunisia’s Article 20 of Decree 2014–1309,” for which any public purchaser must reserve 20% of the annual budgeted amount of its good, services and studies contracts”.

Access to international markets

· The startup act raises the maximum amount startups can pay through a prepaid card that allows web users to pay for online transactions in foreign currency.

· The startup act raises the maximum amount startups can pay through the card — the International Technology Card (launched in 2015 by the country’s postal service) — to Tunisian Dinar 100 000 ($39 000) per year.

· In addition, the act has a provision allowing for each startup to open a “special foreign exchange account” in the country.

· Startups will be allowed to use the accounts meant for capital contributions, quasi-capital, and revenue in foreign currencies. Moreover, companies will be able to invest the assets of these accounts abroad “freely and without any authorization”.

· The law also classifies startups as “zeconomic operators” under its customs code, with the companies being exempt from certain imports and customs procedures, particularly around telecoms, and electronic equipment.

Challenges in implementing the Startup Act

· The expansion of the digital sector, in which the Startup Act is only one element of the broader Digital Tunisia 2020 strategy, requires additional important reforms. From an economic angle, Tunisia will need to reform its foreign exchange policy and e-commerce legislation. In particular, the government’s regulations that limit the convertibility of the dinar into foreign currencies prevents small innovative companies from entering the global market. Allowing startups to set up a foreign currency account can only be an interim solution. But monetary and financial policy reforms are more likely to face greater political resistance than a law, such as the Startup Act, limited to a specific target group.

· The startup scene and the digital sector face heightened expectations. The small community cannot meet the demands of creating a multitude of new jobs, at least not in the near future. Even if the sector grows quickly, business activity remains highly concentrated in Tunis and a few other coastal cities, leaving it unable to remedy high youth unemployment in the country’s marginalized southern and interior regions, where programs to promote entrepreneurship in the digital sector are only starting slowly. The enormous inflow of funds from foreign development organizations focusing on entrepreneurship and startups as a means for development appears to be rather counterproductive. The high density and low coordination of funding programs distorts the market by keeping some companies afloat and making them more dependent on outside funding than on maintaining a competitive edge.

While groundbreaking — especially for the process of drafting it and gathering support to pass it — the Startup Act can only be a first step towards a thriving digital economy. Far-reaching reforms in areas such as monetary and financial policy and the education system will also be necessary. However, the participatory nature of the legislative process to pass the Startup Act can set new standards for political dialogue and public–private cooperation that can shape the necessary further reform process.

Source: Wikipedia

Mauritius

· Zero tax on innovation startups: In sweeping reforms introduced in Mauritius in 2017, income generated by any company set up in Mauritius on or after 1 July 2017 that is involved in innovation-driven activities and where the IP assets are developed in Mauritius is exempt from tax. This exemption will apply for eight tax years, starting from the tax year in which the company starts its innovation-driven activities. For existing startups or companies, the eight-year tax holiday would be on income derived from intellectual property assets developed in Mauritius after June 10, 2019. All internet-driven startups will pay zero tax for eight years notwithstanding the size of their income.

· There is also tax incentive on research and development (R&D) to the effect that during a period from 1 July 2017 to 30 June 2022, if a person has incurred any qualifying expenditure on R&D that is directly related to one’s existing trade or business, one may, in the tax year in which the qualifying expenditure was incurred, deduct twice the amount of the expenditure, provided that the R&D is carried out in Mauritius and no annual allowances have been claimed on the same. The term ‘qualifying expenditure’ means any expenditure relating to R&D, including expenditure on innovation, improvement, or development of a process, product, or service as well as staff costs, consumable items, computer software directly used in R&D, and development and subcontracted R&D.

· There is also a five-year tax holiday for a startup or company setting up an e-commerce platform provided the company is incorporated in Mauritius before June 30, 2025. Also within the five-year bracket are peer-to-peer lending operators, provided the company starts its operation prior to December 31, 2020.

· Under the Mauritius Green Tax regime, tax exemption is granted for interest derived by individuals and companies from debentures or bonds issued by a company to finance renewable energy projects (the issue must be approved by the Director General of the MRA). This is a big incentive for startups in the renewable energy sector.

· For investment funds such as private equity companies and venture capital firms, effective January 1st, 2019 they would be taxed at the rate of 3% (unlike regular business entities that attract a tax rate of 15%), provided the fund managers satisfy key conditions relating to their activities being carried out in Mauritius, and that they meet the minimum annual expenditure and minimum employment expected of their funds.

· At 15% Mauritius has the lowest corporate tax rate in Africa. The consequence of that is that even after the expiration of all the tax holiday periods, the amount paid as tax for companies is still negligible. Moreover, effective January 1, 2019, there is the introduction of an 80% exemption regime on the following income: Foreign dividend, subject to amount not allowed as deduction in source country; Foreign-source interest income; Profit attributable to a PE of a resident company in a foreign country; Foreign-source income derived by a Collective Investment Scheme (CIS), Closed End Funds, CIS manager, CIS administrator, investment adviser or asset manager licensed or approved by the FSC; Interest income derived by a person from money lent through a peer-to-peer lending platform operated under a license issued by the FSC after the five-year tax holiday.

· Another incentive to foreign startup investors could be found under the Mauritius Investment Promotion Act of 2000 which provides that where an investor is a company only individuals actively involved in the management of the company and holding occupation permits would be considered for permanent residence permit of the country, provided that the company is making an annual turnover exceeding 15 million rupees ($ 406,989). Also qualified for a permanent residence permit are self-employed non-citizens, holding occupation permits and having an annual income exceeding 3 million rupees ($ 81,397).

Government-backed funds

Although year on year, the Mauritius startup ecosystem is not often in the news for much of the startup investment that comes to Africa, the country has a lot of funds for its business ecosystem. Among the notable government-backed funds are:

· SME Development Scheme: The SME Development Scheme is a private company wholly owned by the Government of Mauritius and was incorporated in July 2017. This institution has taken over the role and functions of the Small and Medium Enterprises Development Authority (SMEDA). The company encourages the development and expansion of small and medium enterprises. Under the SME Development scheme, eligible SMEs are granted a SME Development Certificate and are entitled to incentives and facilities, such as Income Tax holiday for the first 8 years and other tax concessions.

· National SME Incubator Scheme (NSIS): The National SME Incubator Scheme (NSIS) promotes the establishment and reinforcement of a sustainable entrepreneurial ecosystem in the Republic of Mauritius. Accredited Private Sector Incubators will provide all the infrastructural support, training and mentoring to the Projects accepted at Pre-Incubation, Incubation and Acceleration phases.

· Maubank Financing Scheme: Loans to Individuals under Maubank Financing Scheme Loans are granted for project up to a maximum Rs250,000 under Maubank Financing Scheme. Maximum Loan Amount: 90% of project value. Interest Rate is presently 3% per annum for the first 4 years, then interest rate at 6% per annum for the remaining years.

· The SME Equity Fund Ltd (SEF): SEF is a Closed-End Fund (Single Fund) under the Collective Investment Scheme, licensed by the Financial Services Commission. Its objective is to provide equity, quasi-equity financing to local companies. The Board of Directors comprises of members appointed by the Government of Mauritius and members appointed by the Mauritius Bankers’ Association. SEF invests in start-ups, expansion projects and new lines of business. It provides equity financing to SMEs established in Mauritius, and where the majority shareholder of the SME is a Mauritian national. The investment range starts at Rs 500,000 and can reach up to Rs 25m. The financing it provides to companies should not exceed 49% of the business’ equity capital — which means that the entrepreneur, must invest in at least 51% of the share capital.

[1] CyberTech startups develop technologies, processes, and practices that are designed to protect networks, computers, programs, and data from attack, damage, or unauthorized access, including application security, information security, network security, disaster recovery/ business continuity planning, operational security, and end-user education.

[2] Decree-Law 179/2012 (“Decreto Crescita 2.0” (“Growth Decree 2.0”) on “Further urgent measures for Italy’s economic growth”, converted into Law 221 the 18th December 2012)

[3] For more information it is possible to look at the Consob regulation 18952/2012 as modified by the statement 18952 dated 26/06/2013.

[4] (“legge di bilancio”) 232/2017

[5] The legislative process for passing the Startup Act is groundbreaking for its participatory nature. In February 2016, a group of 70 entrepreneurs, investors, and representatives of banks and accelerators held an initial brainstorming session. Together with then-Minister of Technology Noomane Fehri, a task force made up of members of the startup ecosystem formulated a draft law and ensured that the ratification process moved forward even after a ministerial reshuffle in August 2016. To inform parliament and gain its support for the bill, the task force used social media as well as the new “Parliamentary Academy” — a training module for members of the Tunisian Parliament established in 2016 — to articulate their interests and increase pressure on decisionmakers. Within this legislative process, the newly founded interest group TunisianStartups handled public relations. Some of the features of this process can serve as a model for further bottom-up legislative processes to encourage awareness, transparency, and stakeholder participation. In particular, the establishment of an advocacy organization specific to the target group allows more flexible forms of political advocacy beyond the often static structures of two of the large employer and employee organizations, the Tunisian General Labor Union (UGTT) and the Tunisian Union of Industry, Trade, and Handicrafts (UTICA). Moreover, the use of both digital communication channels and direct dialogue with parliamentarians maximizes the visibility of the project and thus the interest of both decisionmakers and the target group itself.

[6] http://3ieimpact.org/en/evidence/impact-evaluations/details/2974/. For years, SIVP has been one of Tunisia’s largest active labor market programs. The initiative incentivizes employers to take on new employees by initially offering them hiring credit, and from 2004 by paying the subsidy directly to graduates.

Lawyer 4 the creative arts & innovative tech that save the world. Can be reached at mirjana.stankovic@fulbrightmail.org

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