Two consultants, a CEO, and an investor offer their perspectives on the Startup Law for the Portuguese ecosystem, which has been in effect since November 2023. Of particular focus are its impacts on taxation, talent retention, and the maintenance of company headquarters in Portugal.
The "Startup Law" stands as a cornerstone legislation for the Portuguese startup ecosystem, representing a concerted effort to align with the leading EU member states. Within this legislative framework, two key measures have garnered significant attention:
- Recognition Criteria: The law distinguishes between startups and scaleups. Startups must meet certain criteria, including being less than 10 years old, having fewer than 250 employees, and generating revenue below 50 million euros. Scaleups, if they fail to meet these criteria, must qualify to receive workers under the Tech Visa Program.
- Revised Tax Treatment for Stock Options: This addresses a crucial mechanism employed by startups worldwide to incentivize employees. Previously, the holding of stock options was subject to taxation by the Portuguese State regardless of activation. Under the new law, taxation occurs at a fixed rate of 14% in Corporate Income Tax (CIT) only upon liquidation.
To gain deeper insights into these measures and others constituting the new "Startup Law," The Next Big Idea engaged with AGPC (a consultancy specialising in investment projects in Portugal), the Portuguese startup Avenidas, and the venture capital firm Bynd Venture Capital.
A Broader Perspective on the "Law"
AGPC, founded by Catarina Almeida Garrett and Filipa Pinto de Carvalho, leverages their international expertise in legal and fiscal matters to support entrepreneurs and investors in Portugal. Consequently, the Startup and Scaleup Law has already begun to impact their daily operations.
In terms of the certification process, what is the expected timeline for a company to attain startup or scaleup status?
Despite the proposal's familiarity since late 2022, the formal enactment of the Startup and Scaleup Law in May 2023, alongside the subsequent regulatory ordinance effective from November 2023, renders it premature to ascertain an average certification timeline. However, the law stipulates the issuance of digital certificates within five working days post-form submission. To date, approximately 60 companies have secured this status.
The key challenge lies in the preparatory phase preceding the application submission, ensuring that requisite criteria are met and necessary documentation is in order. These criteria include innovative company status recognized by the National Innovation Agency (ANI), completion of investment rounds under specified conditions, or receipt of investment from the Portuguese Development Bank. These procedural aspects, along with negotiations, may extend over several weeks or months. For startups lacking these conditions, Startup Portugal may issue a declaration, provided the entity demonstrates an "innovative business model, products, or services," or rapid scalability. In such cases, the declaration is issued within 30 working days. For scaleups, securing Tech Visa certification presents a significant challenge.
Is the certification process document-heavy or relatively straightforward?
Typically, 8 to 10 documents, alongside form completion and entity registration on the platform, are requisite.
What are the primary benefits for a certified startup or scaleup?
Certification impacts taxation and talent retention or attraction. Moreover, undergoing certification by regulatory bodies enhances a company's credibility, attesting to its innovative nature and growth potential, both domestically and internationally. Tax benefits accrue to both startups and investors.
In simplified terms, available benefits include the Fiscal Incentive for Scientific Research and Innovation (IFICI), Stock Options Plans, and the Fiscal Investment Code (CFI). These provisions foster innovation, talent retention, and operational growth.
How does this Startup Law compare to others in Europe?
While representing a significant stride in aligning with other EU members in terms of worker benefits and investor appeal, the law falls short of certain European standards. Notably, the inclusion of corporate bodies in most tax benefits pertaining to Income Tax remains a disparity. Nonetheless, it marks a commendable advancement in fostering entrepreneurship and international market integration.
Certification Significance and Business Analysis
Bynd Venture Capital, a prominent venture capital fund in Portugal, primarily focused on early-stage companies, perceives the law as pivotal for the ecosystem's development. However, it emphasises the continued importance of rigorous business analysis in the investment process.
Does certification clarity enhance transparency in investment rounds?
Certification delineates a company's typology, unlocking a suite of benefits inaccessible otherwise. However, investment analysis remains incumbent upon investors, necessitating the same diligence and professionalism irrespective of certification status.
How might the law impact the Portuguese market in investment terms?
The law aims to furnish a legal framework akin to more developed ecosystems, fostering startup and scaleup growth. Additionally, it may enhance Portugal's appeal to entrepreneurs and talent, bolstering market attractiveness.
Is the law sufficient to retain more startups' headquarters in Portugal?
The new legal framework could bolster headquarters retention or prolongation, especially if regulatory processes are streamlined. This approach may augment Portugal's attractiveness for innovative projects, catalysing ecosystem dynamism. Nonetheless, factors such as commercial strategy, talent access, funding, and investor demands influence relocation decisions.
Enterprise Perspectives with Avenidas
Avenidas, a Portuguese startup specialising in mobility and logistics, anticipates a positive impact from the law upon completion of the certification process.
What was the certification process like?
Avenidas did not undergo the certification process because it requires meeting mandatory criteria such as receiving funding from development banks, business angels, or recognition from ANI. However, there is another avenue for obtaining this certification, which involves direct engagement with Startup Portugal, a process we are currently exploring.
Nevertheless, we had the opportunity to delve into the process, and it appears to be well-structured, relying on tools familiar to most entrepreneurs or ones they can quickly learn to navigate, such as eportugal.gov.pt.
Can certification have a positive impact on both business and the startup ecosystem?
This official certification for startups will undoubtedly have a significantly positive impact, both on the companies themselves and on the ecosystem as a whole. It's not merely a stamp, but rather a validation that lends legitimacy and recognition to startups in the eyes of investors and potential clients. This, in turn, enhances our credibility and facilitates access to much-needed funding and business opportunities. Furthermore, certification opens doors to various support and incentive programs, including those offered by incubators, accelerators, mentorship programs, and fiscal benefits. Clearly, these resources make a significant difference in the growth of startups, enabling us to tackle challenges more optimistically and increase our chances of success. As stakeholders in the Portuguese startup ecosystem, we recognize that this certification can contribute to greater transparency in the sector by establishing criteria that define a startup's DNA, thereby promoting a more competitive and sustainable environment for innovation and entrepreneurship. Additionally, recognition of this status may foster collaboration among companies, further enhancing a collaborative ecosystem. This is a clear investment in what Portugal does best: innovation and entrepreneurship. Considering that the majority of our country's business fabric consists of startups and scaleups, certification is a long-overdue measure that will undoubtedly contribute to the development of a more robust ecosystem.
How does the new stock options regime compare to others you're familiar with, and how might it positively impact talent attraction and retention?
The new stock options regime offers distinct advantages that could have a significant impact on talent attraction and retention. Firstly, it's more favorable in terms of taxation, as the option to defer taxation prevents employees from being burdened with upfront taxes, making stock options more attractive compared to other forms of compensation. Moreover, the new regime provides greater flexibility in eligibility criteria and the types of companies that can participate, resulting in more accessible and adaptable stock option programs tailored to each startup's needs. This measure not only supports the startup ecosystem in attracting and retaining talent by offering more attractive remuneration packages but also positions the Portuguese regime at the forefront of Europe in the long term. By providing a flexible form of compensation, the regime offers companies an opportunity to create a more conducive environment for attracting highly qualified talents and incentivizing them to contribute positively to business growth.
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