Startups can be lots of fun but it all stops when it comes to compliance. For Lovable, an artificial intelligence (AI) powerhouse recently thrust into the spotlight, this reality has hit close to home after allegations surfaced around its unconventional tax arrangements. While Lovable’s meteoric rise has been lauded across Europe, the fallout from these revelations may serve as a case study on the pitfalls of scaling without adequate foresight. As someone who has founded multiple startups and navigated the challenges of running international businesses, I, Violetta Bonenkamp, see valuable lessons here for entrepreneurs, especially those aspiring to operate ethically in a global market.
The Lovable Tax Controversy: Navigating the Layers
Originally celebrated as a European startup success, Lovable’s structure came under scrutiny when it was revealed that the company isn’t truly European on paper, it’s incorporated in Delaware, USA. This strategy is hardly unique; a slew of European startups, from Amsterdam’s Adyen to Berlin’s Rocket Internet ventures, have similarly opted for U.S. incorporation due to its founder-friendly tax and legal frameworks. However, Lovable’s case extends beyond incorporation, it involves accusations of tax avoidance through an opaque legal structure that exploits American tax laws while dodging European Value Added Tax (VAT) liabilities.
The issue isn’t just bureaucratic missteps, it’s a deeper question of ethics, sustainability, and how startups can live up to their global reputation while staying compliant with local laws.
Key Takeaways from Lovable not paying VAT for Startup Founders
For founders and entrepreneurs, there are several clear lessons to take from the Lovable tax story:
1. Understand the Nuances of Tax Structures
Before expanding across borders, ensure that your tax structures align with the regulations of each jurisdiction where you operate. Platforms like EU VAT Guidelines are invaluable resources for understanding tax obligations, especially for digital platforms or SaaS companies. Many founders underestimate how the regulatory landscape differs from the favorable environments of Delaware or Singapore.
2. European Operations Demand European Accountability
More often than not, European startups benefit from local subsidies, tax incentives, and EU programs. Lovable, for instance, reportedly accessed European support structures while structuring its revenue streams to avoid VAT contribution to the same economies that fostered its growth. As tempting as avoidance strategies may seem, founders should adopt the perspective that paying taxes in operating regions isn’t just a legal duty, it’s a social one.
3. Incorporation is Only the Beginning
While Delaware incorporation simplifies shareholder agreements and investor terms, it shouldn’t be a “get-out-of-tax-free” card. The complexity exponentially increases when operating internationally, and relying solely on legal loopholes detracts from long-term scalability. Trust-based ecosystems, whether between founders and regulators, or startups and investors, are built on transparency.
4. Leverage Technology to Stay Compliant
With growing scrutiny on startups, tax compliance tools like Avalara VAT Compliance and Stripe Tax can automate filing processes and reduce costly errors. AI-enhanced tools, specifically tailored for startups, streamline tax submissions based on real-time insight into regulatory frameworks.
Common Mistakes When Scaling Globally
Entrepreneurs often fall prey to pitfalls that can lead to situations similar to Lovable’s. From my own experience, here’s what to watch out for:
- Assuming Legal Exemptions Apply Worldwide: Tax breaks in one jurisdiction don’t usually cross borders. Transparent agreements and VAT registration in each country are non-negotiable for global SaaS startups.
- Ignoring Cross-Border Protocols: Operating internationally requires a dedicated team or advisor to monitor compliance across various regions.
- Failing to Consult Experts Early: Tax audits can be both expensive and the death knell of investor confidence. Consulting specialized accountants and legal experts during early scaling can save years of headaches.
- Underestimating Reputational Risk: The moment tax evasion becomes public, even unintentional non-compliance can alienate customers, investors, and potential acquirers.
- Assuming Investors Don’t Care: Modern investors increasingly factor Environmental, Social, and Governance (ESG) into decisions. Tax practices are a critical part of what defines ESG maturity.
How to Steer Clear of Regulatory Backlash
Navigating these complexities might seem intimidating, but as a founder, there are clear, actionable steps to avoid missteps:
- Conduct a Global Tax Audit: Before going global, assess your tax footprint. Tools such as PwC’s Tax Function of the Future offer clarity on handling international tax challenges.
- Foster Alignment Across Teams: Every department, accounting, legal, and operations, should be aligned on compliance priorities.
- Stay Informed on Policy Changes: Subscribe to resources like OECD updates on Global Tax Policy to track upcoming changes in digital services tax laws.
- Proactively Communicate with Investors: Ensure transparency at every investment round. Emphasize tax due diligence during presentations to maintain credibility.
Final Thoughts: Building Ethical and Scalable Businesses
The Lovable tax example is a cautionary tale, but it doesn’t have to define your journey as a founder. Incorporation strategies and legal loopholes might offer short-term benefits, but the long-term vision of a business should be grounded in ethical practices. Tax compliance, far from being a burden, can be an enabler for collaboration, trust, and global partnerships.
As entrepreneurs, particularly those striving to make their mark in the intricate fields of AI and deeptech, we have a responsibility to model the change we want to see in the world. The startups I’ve built, small as they are, rest on the core belief that transparency is not just good for my reputation, it’s a strategy for growth and sustainability.
Learn more about modern tax compliance for startups and scaling businesses through actionable resources like the Stripe Tax Guide or explore the OECD’s Global Taxation Guidelines. The future belongs to those brave enough to challenge the status quo while honoring it.
For founders everywhere: embrace the challenge, it’s part of the entrepreneurial journey.
FAQ
1. What is the Lovable tax controversy about?
The Lovable tax controversy revolves around the company’s alleged use of its Delaware incorporation to avoid paying VAT in European markets, raising questions regarding its compliance with EU regulations and ethical practices. Explore the full story on Sifted
2. Why is Lovable incorporated in Delaware?
Lovable chose Delaware because of its founder-friendly legal and tax frameworks, similar to many European startups seeking simplified operations and investor agreements. Check out Sweden’s AI Darling Lovable
3. How has Lovable’s structure impacted tax compliance in Europe?
While Lovable has taken advantage of European subsidies, its legal structure reportedly grew to exploit U.S. tax benefits while sidestepping European VAT liabilities. Learn more about tax avoidance trends in Sifted’s detailed piece
4. What broader issues does this tax case highlight for startups?
It underscores challenges startups face in balancing global scalability with transparent and ethical tax practices, emphasizing the importance of aligning operations with local compliance laws. Explore Martin Coulter’s insights on Sifted
5. What lessons can founders learn from Lovable’s case?
Founders should carefully navigate incorporation strategies, understand tax obligations in operating regions, and leverage compliance tools to avoid legal and reputational pitfalls. Discover compliance lessons from Sovereign Magazine
6. Why is VAT compliance critical for digital startups in the EU?
The EU mandates VAT collection for digital platforms operating across member states. Ignoring these regulations risks significant penalties and damaged trust among stakeholders. Understand EU VAT regulations
7. How can startups ensure global tax compliance?
Startup founders can use automated tools like Avalara or Stripe Tax, and consult with international tax professionals to stay updated and aligned across jurisdictions. Leverage Stripe Tax tools
8. Is investor scrutiny increasing around tax practices?
Yes, modern investors now prioritize transparent Environmental, Social, and Governance (ESG) factors, which include tax compliance, as part of due diligence before funding startups. Find related investor insights on Forbes
9. What regulatory trends are shaping the future for European startups?
Stricter enforcement of cross-border tax rules and tighter regulatory scrutiny are becoming more common for startups operating on a global scale. Read about OECD tax policy developments
About the Author
Violetta Bonenkamp, also known as MeanCEO, is an experienced startup founder with an impressive educational background including an MBA and four other higher education degrees. She has over 20 years of work experience across multiple countries, including 5 years as a solopreneur and serial entrepreneur. Throughout her startup experience she has applied for multiple startup grants at the EU level, in the Netherlands and Malta, and her startups received quite a few of those. She’s been living, studying and working in many countries around the globe and her extensive multicultural experience has influenced her immensely.
Violetta Bonenkamp’s expertise in CAD sector, IP protection and blockchain
Violetta Bonenkamp is recognized as a multidisciplinary expert with significant achievements in the CAD sector, intellectual property (IP) protection, and blockchain technology.
CAD Sector:
- Violetta is the CEO and co-founder of CADChain, a deep tech startup focused on developing IP management software specifically for CAD (Computer-Aided Design) data. CADChain addresses the lack of industry standards for CAD data protection and sharing, using innovative technology to secure and manage design data.
- She has led the company since its inception in 2018, overseeing R&D, PR, and business development, and driving the creation of products for platforms such as Autodesk Inventor, Blender, and SolidWorks.
- Her leadership has been instrumental in scaling CADChain from a small team to a significant player in the deeptech space, with a diverse, international team.
IP Protection:
- Violetta has built deep expertise in intellectual property, combining academic training with practical startup experience. She has taken specialized courses in IP from institutions like WIPO and the EU IPO.
- She is known for sharing actionable strategies for startup IP protection, leveraging both legal and technological approaches, and has published guides and content on this topic for the entrepreneurial community.
- Her work at CADChain directly addresses the need for robust IP protection in the engineering and design industries, integrating cybersecurity and compliance measures to safeguard digital assets.
Blockchain:
- Violetta’s entry into the blockchain sector began with the founding of CADChain, which uses blockchain as a core technology for securing and managing CAD data.
- She holds several certifications in blockchain and has participated in major hackathons and policy forums, such as the OECD Global Blockchain Policy Forum.
- Her expertise extends to applying blockchain for IP management, ensuring data integrity, traceability, and secure sharing in the CAD industry.
Violetta is a true multiple specialist who has built expertise in Linguistics, Education, Business Management, Blockchain, Entrepreneurship, Intellectual Property, Game Design, AI, SEO, Digital Marketing, cyber security and zero code automations. Her extensive educational journey includes a Master of Arts in Linguistics and Education, an Advanced Master in Linguistics from Belgium (2006-2007), an MBA from Blekinge Institute of Technology in Sweden (2006-2008), and an Erasmus Mundus joint program European Master of Higher Education from universities in Norway, Finland, and Portugal (2009).
She is the founder of Fe/male Switch, a startup game that encourages women to enter STEM fields, and also leads CADChain, and multiple other projects like the Directory of 1,000 Startup Cities with a proprietary MeanCEO Index that ranks cities for female entrepreneurs. Violetta created the “gamepreneurship” methodology, which forms the scientific basis of her startup game. She also builds a lot of SEO tools for startups. Her achievements include being named one of the top 100 women in Europe by EU Startups in 2022 and being nominated for Impact Person of the year at the Dutch Blockchain Week. She is an author with Sifted and a speaker at different Universities. Recently she published a book on Startup Idea Validation the right way: from zero to first customers and beyond, launched a Directory of 1,500+ websites for startups to list themselves in order to gain traction and build backlinks and is building MELA AI to help local restaurants in Malta get more visibility online.
For the past several years Violetta has been living between the Netherlands and Malta, while also regularly traveling to different destinations around the globe, usually due to her entrepreneurial activities. This has led her to start writing about different locations and amenities from the POV of an entrepreneur. Here’s her recent article about the best hotels in Italy to work from.
About the Publication
Fe/male Switch is an innovative startup platform designed to empower women entrepreneurs through an immersive, game-like experience. Founded in 2020 during the pandemic “without any funding and without any code,” this non-profit initiative has evolved into a comprehensive educational tool for aspiring female entrepreneurs.The platform was co-founded by Violetta Shishkina-Bonenkamp, who serves as CEO and one of the lead authors of the Startup News branch.
Mission and Purpose
Fe/male Switch Foundation was created to address the gender gap in the tech and entrepreneurship space. The platform aims to skill-up future female tech leaders and empower them to create resilient and innovative tech startups through what they call “gamepreneurship”. By putting players in a virtual startup village where they must survive and thrive, the startup game allows women to test their entrepreneurial abilities without financial risk.
Key Features
The platform offers a unique blend of news, resources,learning, networking, and practical application within a supportive, female-focused environment:
- Skill Lab: Micro-modules covering essential startup skills
- Virtual Startup Building: Create or join startups and tackle real-world challenges
- AI Co-founder (PlayPal): Guides users through the startup process
- SANDBOX: A testing environment for idea validation before launch
- Wellness Integration: Virtual activities to balance work and self-care
- Marketplace: Buy or sell expert sessions and tutorials
Impact and Growth
Since its inception, Fe/male Switch has shown impressive growth:
- 5,000+ female entrepreneurs in the community
- 100+ startup tools built
- 5,000+ pieces of articles and news written
- 1,000 unique business ideas for women created
Partnerships
Fe/male Switch has formed strategic partnerships to enhance its offerings. In January 2022, it teamed up with global website builder Tilda to provide free access to website building tools and mentorship services for Fe/male Switch participants.
Recognition
Fe/male Switch has received media attention for its innovative approach to closing the gender gap in tech entrepreneurship. The platform has been featured in various publications highlighting its unique “play to learn and earn” model.