Angel Investment Tax Deduction

One interesting piece of legislation that might become Swedish law later this year is the Angel Investor Tax Deduction (Investeraravdrag). An individual investor would be able to make a tax deduction of up to 650 000 SEK (50 % of her angel investments in a year in qualifying startups up to 1.3 million SEK). It seems to be similar to the British Enterprise Investment Scheme, as the idea is to attract more risk-willing equity investments into young companies.

The legislation seems to be able to support the growth of the Swedish and Stockholm startup ecosystem, as it would incentivize individuals to invest in the very early stages of company's life. The tax deduction might pour some needed fuel on the fire.

A deduction in itself doesn't solve the issue that there are very few angel investors active in Stockholm at the seed stage (liquidity events/exits are a bigger help). But a deduction would hopefully increase the amount of capital an angel investor on average would put into companies, as the same net outlay for the investor would mean a larger cash infusion for the company. As the difference between 1.5-2.5 million SEK and 3-5 million SEK in the bank is significant to a startup in its first year, the overall effect could be very good for company formation and job creation.

The legislation has gotten somewhat poor feedback, as it introduces an exception to tax law (which generally is a bad thing) and would introduce the need for control processes. That might lead to the legislation not becoming law. We will have to wait and see.

However, basing angel investments on a tax deduction doesn't sound like a winning strategy. Rather one should search for investments where you have domain knowledge, the team is strong and the product and business models are great (or at least good). If you've found such a company, consider investing. If Angel Investment Tax Deduction has become law at the future date you've found the investment, consider putting in a little more money than you otherwise would have.