Dealing with taxes and bureaucracy is perhaps the worst nightmare for startups from any industry. This is no different for energy startups who have to go through countless hurdles when it comes to getting their products on the market.
When it comes to climate change, the time is now to start doing something about it. New technology through renewable energy startups has the potential to reduce the damage caused by climate change. But governmental collaboration is essential for these small startups to survive – especially when you consider that almost no startup is profitable in the first few years.
With that being said, let’s have a look at the startup capitals around the world and their willingness to promote the advancement of new technology, from Silicon Valley to South Korea.
Silicon Valley needs no introduction as it’s the most well-known startup hub in the world. In recent years, The Silicon Valley government has made it even easier for tech startups to ply their trade there.
With the Qualified Small Business Stock (QSBS), tech companies are able to partially or even completely wipe out their tax bills. While this does benefit more established tech companies such as Uber and Lyft, early startups are able to take advantage as well.
QSBS is eligible for any share issued when a company has assets grossing $50 million or less. If the stock is held onto for five or more years, businesses are able to avoid taxes on as much as ten times the initial investment. This means that an investor that puts $5 million on an early renewable energy startup can make $50 million in tax-free gains.
This especially impacts renewable energy startups, many of which are in highly vulnerable early stages where any slipup could be catastrophic. QSBS gives them a greater chance to make it past the difficult early stages and work on their product until it’s ready to go to market.
Nearly 3000 startups currently reside in Vancouver, largely due to unlimited access to world-class talent pools. Slack, Hootsuite, and Unbounce are some of the bigger companies based out of the city. Additionally, Vancouver retains companies due to its top-of-the-line entrepreneurial culture, affordable market, and access to premier universities.
For startups, real estate prices are a major factor. Currently, it costs less than half as much money to start a company in Vancouver than San Francisco. Even before tax implications, Vancouver offers much of what other cities provide at a fraction of the price.
In terms of tax initiatives, there are several options for federal funding. Most significant are the two Industrial Research Assistance Program (IRAP) funds, which can add up to $10 million in support of technological research. Additionally, the Strategic Innovation Fund (SIF) can potentially cover up to 50% of expenses related to tech development.
Lastly, the Scientific Research and Experimental Development program (SD&ED) gives additional federal support to tech startups, encouraging businesses to conduct research and development within Canada. SR&ED provides tax credits at 15% and 35% to all qualified expenditures.
Dubbed by some experts as the “Silicon Valley of the Middle East,” Israel has gained the reputation as an economic miracle. There are myriad reasons for this success.
The Israeli government has created multiple interesting tax incentives for the technology sector to support investment. From a corporate tax perspective, any company that derives income from a “preferred enterprise” can reduce its tax rate from 23% to 16%, a sizable decrease for a young startup.
Another incentive is governmental funding through Chief Scientist Grants, available to companies developing new technologies or manufacturing processes. Any company based out of Israel undertaking research and development of a renewable energy technology is eligible for this grant.
For investors, the incentives to fund companies based out of Israel are also fruitful. The Israel Capital Gains Tax exempts US investors from paying capital gains taxes. Furthermore, Israeli Angel Tax Laws incentivize Israeli investors by allowing them to take an income deduction against any source of income of up to $1.4 million.
Lastly, a recent change to the PATH Act allows startups with less than $5 million in gross receipts to offset up to $250,000 of payroll taxes. Under the PATH Act, startups with $50 million in average annual gross receipts or less are able to use research credits against their tax liability.
Estonia has become a startup paradise in recent years. Currently, they have the highest rate of startups per capita in the world. And these aren’t empty statistics either – Skype, TransferWise, Taxify, and many other large companies base their operations out of Estonia.
The recipe to the Estonian success story is simple: ease of doing business, highly digitized environment, startup oriented community, entrepreneur-friendly tax policies, and government laws centered on attracting foreign investors.
Estonian tax laws encourage businesses to grow first and think about paying later when they are more established. This is critical as many small renewable energy companies struggle through their first years, not becoming profitable until much later.
Furthermore, with easy, straightforward tax laws, companies in Estonia don’t have to worry about hidden fees or loopholes as they would in other countries – startups simply pay taxes on what they earn or invest. Young companies can generate income, build customer bases, and other growth strategies without paying anything excessive.
The South Korean government is making major strides towards turning Seoul into a regional startup hub. Renewable energy startups could find South Korea to be a rewarding home base as they build upon their technology into a viable product.
South Korea currently has the highest government backing per capita for startups, with the government pledging to create a whopping $9 billion venture fund for both public and private finances. Additionally, the government matches funds with international investors and provides partnerships with universities to provide entrepreneurship opportunities for tech startups. Furthermore, the government also allows engineers to serve their state-mandated government service at a tech startup.
Another extraordinary part of South Korean government’s collaboration with startups is the implementation of “second-chance startups.” Pointing out that the vast majority of startups fail – in many cases due to a lack of knowledge of the industry – these programs give failed startups a chance to try again.
With the right combination of incentives and support, governments around the world can allow for these startups to survive and thrive in the face of the rising threat of climate change. Moving into the future, further collaboration will be vital in mitigating the worst effects of climate change and building a more sustainable world.
Main image picture credits: Gorodenkoff/Shutterstock
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