Together with the 2019 elections, FiBAN puts out its own tax incentives proposal for TEM (Work and and Economic Affairs and Employment of Finland), which would not only benefit individual angels, but the startup ecosystem as a whole. Startup Genome’s 2017 Global Startup Ecosystem Ranking puts in order 20 strongest ecosystems in the world. Out of those 20 countries, 19 have tax incentives for investments in startups and growth companies. From Finland, Helsinki area is one of the eight runner-ups (21-28). This clearly shows that with tax incentives, we could be not just the happiest, but one of the strongest ecosystems, as well.
Here’s the proposal in a nutshell. For the full proposal in Finnish, visit the FiBAN webpage.
According to ETLA’s study on ‘Startups in local economy’ (2018), small amount of potential growth companies are responsible for a great deal of economic growth within private sector. As FiBAN statistics show, angel investors are greatly involved financing a big number of early stage companies. Only in 2018, FiBAN angels invested in 435 companies with 36 million euros. Between years 2010-2015, when economic growth was very slow, there has been over 13.000 jobs created in companies mentioned in FiBAN’s surveys after they have received angel investments. Thus, as angel investing has a straight correlation with economic growth in the local market, making angel investing more profitable to the society as a whole.
Well, why tax incentives?
According to EU Comission’s study on tax incentives for venture capital and business angels, high taxation on capital gain lowers both the number and quality of angel investing rounds. However, with tax incentives its possible to lower the marginal costs of investing, making it more profitable and thus, appealing. In 12 EU countries a variety of tax incentives for investments in startups and growth companies are being used. Mostly they are tax exemptions or tax credits, but also postponing taxation and loss deduction are widely used. The incentives are only approved to those investors and for investment target companies, who meet with certain criterias, although each case is assessed individually. Criterias variate from investor criteria to investment vehicles and holding periods, as well as round sizes.
Angel investing is a high-risk, high-reward business. Most FiBAN investors want to give back to society after their own personal successes, but at the same time, make their efforts profitable. To lower the barrier for angels to do multiple investments, tax efficiency is important.
When choosing the correct incentive, we need to take into consideration the fact that majority of active business angels do their investments through a holding company - thus, the incentive should work for both angel investments by an individual and through a holding company.
In FiBAN’s code of conduct, responsible investment practices are enforced. Therefore, we favor tax incentives which don’t support aggressive tax planning. Two models have been put out as our proposals:
Model 1: Postponing taxation on reinvested capital gains
In this model, capital gain is not taxed if the proceeds are reinvested into startups within the first three fiscal years from the exit. This model would postpone taxation, where gains are only under taxation once the investor decides not to reinvest. Very similar model is used in the UK.
Model 2: Tax loss carry back
This is a so-called loss carry back model, where losses would be carried back and offset against capital gains from previous fiscal years. Similar model is used in Canada, Germany, the Netherlands, and in France. Equity investments in early stage companies are very illiquid and, thus, investors in this asset class have less options to offset their gains against losses that other investors. A loss carry back would make this offsetting easier, increasing the lucrativity of early stage equity investments.
FiBAN strongly believes that with right tools, angel investing can become more feasible to a larger crowd of potential investors. With healthy angel investor pool, smart money can be invested in large quantities to the best startups that the New Nordic area can offer. Reasonable tax incentives are in the core of building a strong ecosystem. Effective and professional investing scheme enables Finnish investors and startups alike compete in the global market. A sound tax incentive for angel investments can be created with very little effect on tax income of the state. Thus, as angel investments create growth and new jobs, the overall impact of said incentive for the Finnish economy should be strongly positive.
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