Doing business guide Latvia 2018

Facts and figures

Geography

The Republic of Latvia is located on the eastern coast of the Baltic Sea at the crossroads of northern and eastern Europe. Latvia has land border with Estonia (~343 km) in the North, Russia (~276 km) in east, Belarus (141 km) in south-east, Lithuania (453 km) in South and maritime border with Sweden on West. Latvia’s total coast lane is 498 km. Latvia has three large ports – Liepaja, Riga and Ventspils which are ice-free also in winter and seven smaller ports distributed along all coast border – Skulte, Mersrags, Salacgriva, Pavilosta, Roja, Lielupe and Engure. These smaller ports are with regional importance by mainly operating with timber export and sea product import. Riga and Ventspils ports operates as a tax-free zones, Liepaja is part of the special economic zone (SEZ). All these ports are linked with railroad and highway networks leading to any further desired direction. Latvia’s climate is maritime continental. Country territory covers 64,589 km2 and is populated by 1,986.1 thousand (at the beginning of 2015). Capital of Latvia is Riga located in centre of country at coast of Riga gulf.

Currency

As of 1 January 2014 Latvia has joined Eurozone and adapted to euro (EUR) as its national currency.

Language

Latvia has one official language: Latvian. However most of Latvian inhabitants know other languages such as English, Russian and German. Latvia’s approximate structure of inhabitant language knowledge is as follows:

  • Over 85% of Latvians speak Russian
  • 70% of people under 40 speak English
  • German, French and Scandinavian languages are also widely spoken

Business infrastructure

In Latvia there are plenty of options for infrastructure to choose from.

  • With 3 ice free ports (and 7 small ones)
  • Railway from West to East and from North to South reaching every region
  • Airport connection to 80 destinations
  • Available telecommunications in whole Latvia’s territory as well as electricity and water supplies
  • There is also a gas pipeline connected to several reservoirs in Latvia for transit and storage of Russian oil and gas resources

Government and Politics

Latvia is an independent democratic republic. The sovereign power of Latvia belongs to people who are represented by a unicameral parliament (Saeima) with 100 members elected for a four-year period. The Saeima elects the President for a term of four years.

The Cabinet of Ministers is the highest executive body of the country. The Cabinet of Ministers is formed by people who are invited by the President.

Incentives for investors

Taxes

An  investor has the opportunity to enjoy 0% corporate income tax on reinvested profits, establish a company in Special Economic Zones or use the holding company regime.

Latvia has four separate Special Economic Zones (three ports and one inland).

Labour Related Incentives

There are agencies that help with vacancy registration and employee selection. Procedure for pre-hiring training that predicts up to three month probationary period before hiring to assure candidate adequacy for position.

Employee qualification

Available courses for raising employee knowledge in particular sphere and teach new skills in terms of methods, tools and passing experience.

Funding options

For development and starting a new business there are several business incubators available. Substantial financing grants are available in variety of key business activities including: vocational and other training, innovation, R&D. Value-added manufacturing and technology /knowledge transfer.

 

Legal Forms of Business

Broadly, a foreign investor should select between limited liability company, public limited company, branch (permanent establishment) or representative office. However, the limited liability company is the most preferred for the business activity and representative office is used if the foreign entity carries out only auxiliary activities in Latvia.

Limited Liability Company (LLC)

LLC (‘SIA’ in Latvian) is a private limited liability company, which is the most commonly used form of business in Latvia. Share capital can be paid in cash or contributed in kind. The minimum share capital value is EUR 2,800 and at least a half of it has to be paid in cash. Until applying for registration in the Register of Enterprises at least a half of the share capital has to be paid, the remaining part must be paid within one year’s time from the date the company has been registered in the Register of Enterprises.

Limited Liability Company with reduced share capital

Limited Liability Company with reduced share capital is a company whose share capital value is between EUR 1 and EUR 2,799. Before applying for registration share capital has to be signed and paid, in addition, until applying for the company registration it must be paid up in cash.

The company must meet the following requirements of the Commercial Law:

  • The number of founders of the company should not exceed five individuals
  • The number of shareholders of the company should not exceed five individuals
  • The board of directors should consist of one or more members, and they all should be shareholders of the company
  • Each shareholder can be only a member of a single limited liability company with reduced share capital

Every year limited liability company with reduced share capital should create a minimum reserve by making a deduction of at least 25 % of the year’s net profit. The statutory reserve, based on shareholders meeting can be used to:

  • Increase the share capital
  • Cover losses of annual report, if they are not covered by the previous annual report
  • Cover losses of previous financial year if they are not covered by the annual report

Public Limited Company (Joint-stock company)

Public limited company (‘AS’ in Latvian) is a public company and its shares can be publicly-traded. Share capital of a public limited company cannot be less than EUR 35,000. If the share capital is set above EUR 35,000, then by applying for registration the entire share capital has to be signed, but the paid-up share capital has to be not less than the statutory minimum share capital (EUR 35,000) and not less than 25 % of the signed share capital (the rest is paid up no later than in one year’s time from the date of signing the Founding Agreement).

NB! The public limited companies, depending on the type of their activity, have different minimum amounts of share capital (for example, the financial sector (banking, insurance, non-bank lending)).

Typical business activities

The foreign investors usually select Latvia as a place for conducting the following business activities.

Trading company

Latvian companies are used for the purpose of trading within EU and countries of CIS. Furthermore, the geographical position of Latvia and transport capabilities allows to use he Latvian companies as a hub for trading between the East and West. A Latvian trading company could be used for trading with the EU countries, since it is straightforward to register it as VAT payer required for intra-community supplies. The sale of goods to the European countries will be subject to zero-rated VAT, meanwhile the input VAT paid will be fully recoverable for the Latvian company. It is important to note that that there is a special VAT regime applicable to the import of the goods from the third countries, meaning that the VAT on import is self-accounted (not paid), thus providing cash flow savings.

Contract manufacturer

Very often foreign groups establish in Latvia entities for the purpose of contract or toll manufacturing. The reason for this is motivated workforce, low costs, and favourable tax regime for manufacturing entities: previously low corporate income tax rate – 15%, now – 0% tax on reinvested profits.

Latvian holding company

Latvian holding company regime is attractive since it has partial participation exemption (3 year criteria) and does not impose any restrictions on ownership of shares in the operating companies. As mentioned above, in most cases capital and profit repatriation are free from withholding taxes, except for the payments to the off-shore jurisdictions. According to the recent global developments, a number of offshore jurisdictions have joined the OECD convention on sharing of the information and therefore are not considered as offshore jurisdictions anymore.

Shared service centres

The developed infrastructure, highly skilled workforce, and low costs allow creating effective service centers, such  as logistic, management, IT programming etc.

Investment and trade with securities

The income from the sale of securities traded on the stock exchange is exempt from taxation, provided that the shares are held for three years. However, since the corporate income tax is payabel only upon dividend distribution, the company can be used for trading securities and reinvesting the profit generated from the capital gains.Therefore, a Latvian company could be established to trade with the listed securities – stocks, shares, bonds etc.

Micro-business

If the annual turnover of a business does not exceed EUR 40,000, a Latvian company using micro-tax regime could be opted for. This allows reducing the tax burden to 15% of the revenues (not profit), instead of paying corporate income tax and payroll taxes. Such structure usually is suitable for service companies (marketing, consulting etc.), having low costs and high-profit margin.

Latvian branch of the foreign company

For trading purposes, a foreign company established may create a Latvian branch (or a permanent establishment) and use it for purchase/sale of the goods within the EU and/or between the EU and third countries. The benefit of the of the Latvian branch is that it provides a transparency of the activities that is becoming a mandatory requirement of the banks for opening a bank account and also solves the problem of the information exchange between the tax authorities of the countries involved.

Representative office

A representative office could be established by the foreign company to conduct marketing and other support (non-business) operations in Latvia. The establishment of a representative office in Latvia is straightforward. The representative office is not treated as the corporate income tax payer in Latvia and does not pay other taxes except for payroll taxes. The representative office is often used as a vehicle to obtain a temporary residence permit.

Large-scale manufacturing

A multinational group of companies can reduce its overall total tax burden by establishing a manufacturing company in Latvia, making investments eligible for tax incentives and shifting the most functions and risks from the high-tax jurisdictions to Latvia. A Latvian manufacturing company investing at least EUR 7 million in assets in qualifying industries (manufacturing, IT and telecommunications) within the 3-year period may obtain a corporate income tax credit amounting to 25% of the investment made up to (EUR 50 million) and 15% of the amount in excess. Relief is available upon completion of the project. Any unclaimed portion can be carried forward to 16 years.

 

Residence permits

The temporary residence permits could be granted to the foreign investors for up to 5 years.

The following advantages and benefits the foreign investors obtain by having Latvian temporary residence permit:

  • Freedom of movement within the Schengen Agreement Member States (no need to obtain a visa of Member State to travel)
  • Latvian temporary residence permit does not require for a person to reside permanently or to reside for a certain period of time during the calendar year in comparison with the other Members of Schengen area
  • Temporary residence permit for investors is valid up to 5 years (restored annually)
  • Investor’s family (spouse, minor children and wards) are also eligible to obtain temporary residence permit
  • Favourable economic environment – secure banking system, labour (able to speak Russian and/or English), infrastructure for business development and management to both West and East from Latvia.

Investor may apply for a temporary residence permit for a period up to 5 years if:

(1) He/she has acquired and owns one or more properties located in the Republic of Latvia with the total value of the transactions not less than EUR 250,000, provided that the following conditions are met:

  • He/she does not owe and never had real estate tax debts
  • The transaction value has been paid up by non-cash payment
  • The property has been acquired from Latvian legal entity, which is registered in Latvia, EU, EEA or the Swiss Confederation, or individual, which is a Latvian citizen, Latvian non-citizen, EU citizen or a foreigner with a valid Latvian residence permit
  • By the time of acquisition the total cadastral value of the purchased properties meets certain values (e.g. 80 000 EUR);
  • He/she, upon requesting the first temporary residence permit, pays 5% of the property’s value into the State budget
  • The property does not contain agricultural or forest land.

(2) He/she has contributed into the share capital of a Latvian entity by increasing it or the contribution has been made upon the establishment of Latvian entity and it is at least:

  • EUR 50,000 given that entity employs no more than 50 employees, annual turnover or value of the assets does not exceed EUR 10 million and in the financial year pays altogether not less than EUR 40,000 in taxes to state and municipal budget
  • EUR 100,000 given that entity employs more than 50 and annual turnover or value of the assets is more than EUR 10 million
  • EUR 100,000 in the holding company which holds shares in one or more subsidiaries together employing more than 50  and annual turnover or value of the assets is more than EUR 10 million.

An investor has to pay 10 000 EUR into the State Budget in addition to the above investments.

(3) He/she has subordinated liabilities with a credit institution of the Republic of Latvia in the amount of not less than EUR 280,000 and the term of the transaction entered into with such credit institution is not less than five years and, upon requesting the first temporary residence permit, he/she pays EUR 25,000 into the State budget.

(4) He/she purchases interest-free State securities dedicated to a specific purpose with the nominal value EUR 250,000 and pays EUR 38,000 into the State budget.

 

For more detailed information please visit the website of Citinzenship and Immigration Affairs

http://www.pmlp.gov.lv/en/home/services/residence-permits/how-long-may-the-residence-permit-be-issued-for.html.

Holding companies

Introduction

Latvia has already been selected by several multinationals groups as a location for their shared service centres (finance, IT, back-office functions) due to certain non-tax attributes (location in EU, available English speaking labour), and mainly due to the fact that it is considered as being far-less-expensive location if compared with more developed economies. To create Latvia’s recognition as a location for holding companies, Latvian parliament has passed substantial amendments to corporate tax legislation aiming to compete with other commonly known holding companies jurisdictions in Europe.

Latvian holding company regime applies fully as from 2014. It is simple, with low compliance costs, easy to manage and does not require complex planning. This article will summarize the key tax and non-tax attribute that Latvia can provide and which are important when considering potential locations for a holding company.

A holding company is usually defined as a company that owns shares in other company or companies. Holding companies are often used by multinational groups to centralize the management function, to improve the treasury management (e.g. via cash pooling and allocation of profits) or to hold important assets (e.g. trademarks, licenses, and similar property). Holding company can also be a key component to increase a company’s tax efficiency and, in fact, usually, the tax benefits are considered as a decisive factor for creating a holding company. Thus, the investors’ decision is usually based on the set of tax and other considerations.

A “Wish List” of an attractive location for a holding company 

  • corporate income tax rate
  • Access to strong network of double tax treaties and EU Directives
  • No income tax on dividends, interest and royalties received by a holding company
  • No income tax on capital gains
  • No withholding tax (WHT) on dividends, interest and royalties paid to a holding company
  • No witholding tax on outgoing dividends, interest and royalties paid by a holding company
  • No local stamp duties, capital duties or similar taxes
  • Anti-haven rules
  • Tax efficient exit.

As from 2013/2014 Latvia’s tax laws provide most of these tax attributes as discussed further.

The corporate income tax rate

As of 1 January 2018, Latvian companies will apply a conceptually new Latvian corporate income tax. The new Latvian corporate income tax is payable upon the distribution of profits only. Until the Latvian company keeps the profits, 0% tax is payable. In other words, Latvian company does not pay tax on the annual profits until it distributes dividends, deemed dividends or notional profit

EU directive and double tax treaties

Under the terms of the EU parent/subsidiary directive, if a holding company owns at least 10% of capital of another EU company, no WHT is levied on dividends paid by the subsidiary to its parent company. To qualify for the exemptions provided by the EU directives, tax residence in EU is required. Companies should be subject to taxation in their jurisdiction and should agree with the legal form as prescribed for each country.

Currently, Latvia has concluded 64 double tax treaties (DDT), of which 56 conventions have been signed and 54 conventions are currently effective for application. DTT provide favorable WHT rates on payments made by entities outside EU. Most of the DTT ensures that WHT levied by the subsidiary does not exceed 5% on dividend payments provided that Latvian HC owns at least 25% of capital of another company. The WHT rate on interest payments made to Latvian HC shall not exceed 10% based on provisions of DTT, while WHT on royalties are limited to 10%.

Tax credit in Latvia can be claimed on foreign witholding tax suffered via reduced tax payments in Latvia.

However, for foreign individual shareholders who are holding shares in a Latvian company upon the distribution of profit, the tax payable in Latvia will most likely not be credited against the dividend tax payable in their residence countries.

Income tax on dividends, interest and royalties received by Latvian HC

Since the main purpose of the HC is improvement of capital flow, the most important tax issue is availability of participation exemption (i.e. tax free dividends) rules. As from 1 January 2013 all dividends are exempt from taxation in Latvian HC but with the restrictions that remitter of dividends is a corporate income tax payer in the country of residence and is not registered in black listed jurisdiction. Dividends received from entities in tax haven countries are subject to 20% corporate income tax.

To apply exemption there are no restrictions on minimal shareholding or a holding period or shareholding.

Capital gains

A Latvian company can reduce the tax base by the capital gains the company has earned from the sale of shares, if the Latvian company has held the shares for at least 36 months at the moment of the sale. Of course, if a Latvian holding company sells the shares which it has owned for less than 3 years, the company should not pay tax. However, if the company has held the shares for 3 years, the company can distribute the capital gains as dividends tax-free.

In all other circumstances capital gain on the disposal of a capital asset is treated as ordinary income and is subject to a 20% corporate income tax only if profit is distributed.

Similarly, gains on disposal of securities quoted on the regulated markets of the EU or EEA countries and investment certificates in EU and EEA open-end investment funds are exempt from taxation in Latvia. Thus, Latvian company could be used for trading of such securities as a profit from such activities is exempt from taxation in Latvia.

Gains on the disposal of other investments are taxed at regular corporate income tax rate of 20%. Thus, it is recommended that such assets are disposed via sale of shares.

Repatriation of profit

To create an attractive tax regime in Latvia, WHT on payments made by Latvian entities are gradually removed:

  • There is no withholding tax on dividends paid to foreign entities
  • There is no withholding tax on interest payments made to foreign entities, if it’s within the limits that are set in Latvian legislation
  • And there is also no withholding tax on royalty payments made to foreign entities

The exemption from withholding tax on dividends, interest and royalties is not applied on payments made to entities in tax haven countries. These payments will be subject to 20% WHT. According to new corporate income tax if dividends are paid to individuals (residents or non-residents) the personal income tax is not being deducted anymore. However, the interest income is taxed at 20% rate.

Local stamp duties, capital duties or similar taxes

Unlike other countries, Latvia charges no stamp duty on share capital payments, apart from small stamp duties to the Enterprise Registry. Sale of real estate however is subject to 2% stamp duty, which (in case of non-residential building) is capped at EUR 42,686. Planning options are available to minimize the amount of stamp duty.

Controlled foreign corporation, thin capitalization

Latvian corporate income tax law does not provide CFC rules as only actual income is taxed and not consolidated profit.

Certain holding company jurisdictions have thin capitalization rules pursuant to which too high debt to equity ratio may prevent the HC from being deemed a structure to which the participation exemption rules apply. Latvian laws also impose the debt-equity ratio which is fixed at 4 to 1. According to the new rules, the excess interest over allowable is the notional profit distribution subject to tax (should be added to tax base).

However, thin capitalization rules do not apply to the loans received from the credit institutions (in Latvia, EEA or double tax treaty country) and other financing received from specialized finance institutions. Moreover, the new thin capitalization rules do not consider the average bank credit interest rates anymore. In practice this means that for the loan financing the shareholder should structure the adequate share capital and should comply with the arm’s length value of the loan interest.

Anti-haven rules (applicable to offshore companies)

Historically Latvia has established list of tax-haven countries and territories, which now comprises 25 locations and include most of tax haven countries and locations with certain exceptions. The payments to residents located in these countries and locations are subject to 20% WHT. WHT however does not apply, if specific permission is granted by the tax authorities or if goods of origin of tax haven country have been purchased.

Full list of tax havens is prescribed by the Cabinet of Ministers Regulations of 7 November 2017 No. 655 and is available here.

Tax efficient exit

If a foreign investor decides to close the Latvian operations, there is no specific exit taxes payable. Sale of Latvian HC is neither subject to Latvian WHT nor capital gains tax. However, if Latvian real-estate company is sold (more than 50% of its assets value is real estate in Latvia), 3% WHT may apply. This WHT may be effectively avoided by prior planning.

If the operations of Latvian entity are transferred toanother countryy, transfer-pricing aspects of the transaction should be considered to eliminate potential disputes with the tax authorities.

Advance rulings and clarifications from the tax authorities could be obtained within a month for free of charge.

Advanced transfer pricing agreements are also available from the tax authorities for a fixed fee of EUR 7,114.

Non-tax attributes

The desired non-tax attributes for a HC location would usually include:

  • Sound standing in the international and business community
  • Politically and economically stable environment
  • Ease of incorporation and closure of operations
  • Minimal reporting requirements (accounting, consolidated accounts, audit)
  • Minimal substance requirements and administration costs
  • Approachable location
  • Availability of well qualified and trained workforce at competitive salaries

Further are discussed some of these attributes applicable in Latvia.

Political and economic environment

Although Latvia suffered a lot from the global crisis, it showed remarkable ability to balance its economy and achieve stable growth. This is accompanied with introduction of euro as from 2014, invitation to join OECD and positive ratings issued by international credit rating agencies (e.g. Standard & Poor’s, Moody’s).

Incorporation / closure

Latvian laws do not have specific holding company rules, for establishment and operation of the HC the same rules apply as for the regular companies.

The activities of the holding company are carried out through either limited company, which usually is established for business operations or public limited company, which are usually established to satisfy specific business requirements (e.g. banks, insurance companies and certain other businesses required to be registered as public companies) or because the entity intends to trade shares publicly.

Setting up a holding company in Latvia requires a minimum share capital of EUR 2,800 and no great expense is involved in its ongoing maintenance. Incorporation is easy and can be carried out within a week.

Reporting requirements

Latvian companies need to apply local accounting standards, which are generally in line with IFRS. Accounting registers should be maintained in euros as from 2014.

Statutory audit is required only for companies if at least the following two criteria are exceeded:

  • Balance sheet of EUR 400,000
  • Turnover of EUR 800,000
  • Average number of employees – 25

Summary

As from the above, Latvia can be considered as a reasonable location for a HC due to the attributes discussed above together with minimal substance requirements, availability of advance rulings and advanced pricing agreements, low maintenance costs. The fact that Latvia is not well-known location for holding companies in some cases may considered as advantage as may lead to less scrutiny by the tax authorities in other jurisdictions.

Latvian HC regime can be particularly useful for the following activities:

  • For holding shares in a company, which intends to be sold without taxation
  • As platform for new investments, especially if several investors are involved with minority shareholdings and each having its HC
  • For centralizing management and back-office functions to benefit from new corporate income tax regime of 0% tax rate on undistributed profit.
  • For cash pooling and centralizing financing
  • As a tax-free platform for trading with or investing in listed securities traded in stock exchange located in EU or European Economic Area

Corporate Income Tax

Tax rate and base

The new Latvian corporate income tax follows the cash flow principle. Therefore, corporate income tax is payable upon the distribution of profits only. Until the Latvian company keeps the profits, 0% tax is payable. The corporate income tax (CIT) rate applied on distributed gross dividends, deemed dividends or notional profit is 20%.

However, the 20% rate applies to the gross dividend amount. In order to calculate the gross amount the net dividends (so the number of dividends the shareholder wishes to receive) should be divided by 0,8 to calculate the gross amount and then the 20% should be applied. The effective tax rate, i.e. the payable to net dividend amount is 25%.

Companies registered in Latvia (i.e. registered with Register of Enterprises) and permanent establishments of foreign entities are subject to CIT on their worldwide income. Companies registered outside Latvia are subject to CIT on their Latvian-source income.

In general, the taxation period is a calendar month. The taxpayer should submit the return and pay tax on a monthly basis until the 20th date of the following month.

How to determine the tax base

According to the CIT Act Latvian corporate income tax is payable upon the distribution of profits and distribution of notional profits.

Profit distribution includes:

  • regular and extraordinary dividends
  • expenses equalized to dividends
  • notional (or “deemed”) dividends

Notional profit distribution includes:

  • expenses not related to economic activity
  • bad debts
  • excess interest payments (thin capitalization rules)
  • loans to the related persons (exemptions apply)
  • transfer pricing adjustments
  • goods that the non-resident allocates to their employees or members of the board (council)
  • liquidation quota

Expenses not related to economic activities

Expenses that are not related to operating activities of the company are equalized to notional profit distribution and are subject to CIT.

For example (the list provided is not definitive):

  • expenses that could not be personalized and are incurred for the benefit of taxpayer’s owners and employees (e.g. trips, entertainment events, trips using a company car for non–business purposes)
  • donations, gifts, loans (except income-equivalent loans subject to personal income tax) to other persons
  • representation and staff sustainability expenses exceeding 5% of the previous year’s gross salary
  • fines, penalties and penalties for non-compliance, if not adequate to the transaction value or made to low tax jurisdictions
  • expenses related to a representative car
  • depreciation and maintenance costs of the assets acquired before 31 December 2017 and used for non-business purposes

Interest payments

According to the new rules, the excess interest over allowable is the notional profit distribution subject to tax. The excess interest is:

  • the excess interest calculated for the debt financing exceeding debt-to-equity ratio of 4-to-1;
  • if the interest payments exceed 3 million euros, the excess interest is the amount over 30% of the EBITDA ratio.

The thin capitalization rules do not apply to the loans received from the credit institutions (in Latvia, EEA or double tax treaty country) and other financing received from specialized finance institutions.

The new thin capitalization rules do not consider the average bank credit interest rates anymore. In practice this means that for the loan financing the shareholder should structure the adequate share capital and should comply with the arm’s length value of the loan interest.

Capital gains

A Latvian company can reduce the tax base by the capital gains the company has earned from the sale of shares, if the Latvian company has held the shares for at least 36 months at the moment of the sale. Of course, if a Latvian holding company sells the shares which it has owned for less than 3 years, the company should not pay tax. However, if the company has held the shares for 3 years, the company can distribute the capital gains as dividends tax-free.

In all other circumstances capital gain on the disposal of a capital asset is treated as ordinary income and is subject to a 20% corporate income tax only if profit is distributed.

Similarly, gains on disposal of securities quoted on the regulated markets of the EU or EEA countries and investment certificates in EU and EEA open-end investment funds are exempt from taxation in Latvia. Thus, Latvian company could be used for trading of such securities as a profit from such activities is exempt from taxation in Latvia.

Gains on the disposal of other investments are taxed at regular corporate income tax rate of 20%. Thus, it is recommended that such assets are disposed via sale of shares.

Bad and doubtful debts

According to new CIT Act bad and doubtful debts are the notional profit distribution subject to tax.

Bad debts are included in tax base if:

  • written off directly to expenses;
  • accruals for debts are not recovered within 3 years.

Representation costs

As mentioned above the representation and staff sustainability expenses exceeding 5% of the previous year’s gross salary is equalized to notional profit distribution subject to CIT.

Under CIT Act the representation costs are costs for establishing and maintaining the prestige of the company at the level of publicly accepted standards. The Act provides examples of representation expenses and these include public conferences, receptions and meals with clients, and expenses for acquiring small value items representing the company (i.e. which generally means items with the company or product logo).

Loss carry forward

The tax losses accrued by 31 December 2017 are partially carried forward to the following years. The taxpayer can reduce the tax calculated on dividends by 15% of the accrued losses. If a company does not use the full amount of tax losses in 2018, it has a right to carry forward them during the next 4 financial years. However, the taxpayer cannot reduce the tax for more than 50% of the tax liability of the particular year.

Representative car

As described previously under CIT Act expenses related to a representative car is notional profit distribution and are included in the tax base. CIT Act describes representative car as:

  • a passenger car with up to eight seats excluding the driver’s seat, the value of which exceeds EUR 50,000 (excl. VAT) and which is not an operational means of transport or a special passenger car (ambulance, caravan or hearse), or a passenger car, which is specially equipped in order to transport disabled persons in wheelchairs, or a new passenger car, which is utilized as a demonstration car for an authorized car dealer.
  • a truck with a maximum mass of up to 3000 kilograms having more than three seats (including driver’s seat) which is classified as a truck (category N1) but essentially is a passenger car (category M1).

Please note that there are different taxation rules stipulated to taxpayers whose operations are related to car rental.

Related party transactions (transfer pricing)

Transactions with related non-resident parties and associated Latvian entities with direct 20%-50% ownership must comply with arm’s length principle. Transactions with companies established in tax havens are regarded as transactions with a related company. In case related party conducts the transaction at the price different from market price, the transfer pricing adjustment (the actual difference) will be equalized to notional profit distribution subject to CIT.

Submission of tax return

The taxation period is a calendar month. The taxpayer should submit the return and pay tax on a monthly basis until the 20th date of the following month. If a taxpayer has a reporting obligation on a quarterly basis, it will submit quarterly tax returns.

The company submits a single declaration to the State Revenue Service for the period from January to June of 2018.  After submitting the first return it pays the corporate income tax by 20 July 2018. For the rest months, the company should submit returns and pay tax by the 20th date of the following month.

If the taxpayer does not have taxable items in the month, it should not submit the return (excluding the return for the last month of the financial year).

The submission period of annual report and CIT return for large companies (as stipulated by Act on Annual Reports, i.e. balance sheet value –

  • EUR 20 000,000, turnover –
  • EUR 40 000,000 and average number of employees – 250 (5.pants)) or parent companies which have to prepare consolidated annual report according to Act on Consolidated Annual Report, is four months after the reporting year end.

A taxpayer will pay tax in advance only during the transitional period from 1 January until 30 June 2018.  The advance payments correspond to 1/12 of the tax assessed in 2016.

Withholding Tax

Currently, Latvia has concluded 64 double tax treaties (DDT), of which 56 conventions have been signed and 54 conventions are currently effective for application. DTT provide favorable WHT rates on payments made by entities outside EU. Most of the DTT ensures that WHT levied by the subsidiary does not exceed 5% on dividend payments provided that Latvian HC owns at least 25% of capital of another company. The WHT rate on interest payments made to Latvian HC shall not exceed 10% based on provisions of DTT, while WHT on royalties are limited to 10%.

Tax credit in Latvia can be claimed on foreign WHT suffered via reduced tax payments in Latvia.

As from 1 January 2013, no WHT is levied on dividends paid by Latvian company to non-resident company. However, this rule does not apply for dividend payments to companies established in tax havens.

However, for foreign individual shareholders who are holding shares in a Latvian company upon the distribution of profit, the tax payable in Latvia will most likely not be credited against the dividend tax payable in their residence countries

Interest and royalties

As of 1 January 2014, WTH is not applied for Latvian company’s interests (if it’s within the limits that are set in Latvian legislation) and royalties paid to abroad companies, excluding those, which are located in tax haven territory.

Management and consulting fees

20% WHT is levied on management and consulting fees. It is possible to obtain exemption from 20% WHT under the provisions of DTTs, provided that certain administrative procedure is complied with before making the payment.

Gains on disposal of real estate

3% WHT is levied on proceeds to a non-resident from disposal of real estate located in Latvia and 20% WHT if the real estate is being disposed of in favour of company located in tax haven. Latvian company is obliged to deduct WHT. Meanwhile no WHT should be applied on disposal of real estate when both contracting parties are non-residents.

Under CIT Act if real estate constitutes more than 50% of company’s assets (at the beginning of the financial year) then it is considered as the disposal of real estate property and therefore attracts 3% WHT.

Payments to tax havens

Currently Latvia has updated list of tax-haven countries and territories, which now comprises 25 locations.

The payments to residents located in these countries and locations are subject to 20% WHT. WHT however does not apply, if specific permission is granted by the tax authorities or if goods of origin of tax haven country have been purchased.

Full list of tax havens is prescribed by the Cabinet of Ministers Regulations of 7 November 2017 No. 655 and is available here.

Administrative requirements

In order to apply the provisions of the tax treaty and avoid/reduce WHT, there should be evidence that the tax treaty provisions may be applied. In particular, non-resident has to obtain a valid residence certificate prior Latvian company makes the payment. If that is not done (i.e. there is no residence certificate at the Latvian company’s disposal), Latvian company has to apply WHT from the total amount of payment to non-resident. Nevertheless, this tax may later be recovered by non-resident by submitting a special request.

As noted above, it is possible to avoid the WHT based on the DTT rules subject to availability of residence certificate. The payments may be done by Latvian company without deducting WHT only when the residence certificate is approved by non-resident’s tax authority and Latvian State Revenue Service.

The residence certificate is valid for five years from the date when the Latvian State Revenue Service approves it. In practice, there are cases when foreign tax authorities refuse to approve Latvian residence certificate form and issue the certificate in their own format. Such residence certificate would be valid only for one year and also certain minimum information is required.

It is possible for a non-resident to apply for tax refund in case Latvian company has withheld tax at a rate provided under CIT Act. In order to reclaim tax, non-resident within 3 years after the payment shall file residency certificate and application for refund with Latvian State Revenue Service.

Value Added Tax 

Introduction

A couple of changes of the Latvian VAT Act came into effect as from 1 January 2018. The standard VAT rate is 21%, reduced rate –12%, 5%, 0%. A domestic taxpayer may not register in the State Revenue Service as a VAT taxpayer if the total value of taxable goods and services rendered during the previous 12 months does not exceed EUR 40,000.

A non-registered taxpayer’s threshold for the purchase of goods within the EU is EUR 10,000 per year. If, however, taxpayer renders services to customers outside Latvia or receives services from parties outside Latvia and the place of supply of services is deemed to be country where the customer has established its business then Latvian taxpayer should register for VAT purposes before rendering/receiving such services.

There are no registration thresholds for non-resident company performing taxable transactions in Latvia (effectively non-resident company should register before carrying out taxable activities in Latvia), except if the EU taxpayer is engaged in the distance sales for which registration threshold in previous or current calendar year must not exceed EUR 35,000 (does not apply to excisable goods).

VAT rates

Taxable transactions Standard rate (21%) applies for the following transactions (as an example):

  • Supply of goods and related transactions
  • Provision of services and related transactions
  • Supply of goods within EU
  • Import of goods
  • Purchase of new vehicle made by any person within EU territory

Reduced rate (12%) applies for the following types of goods and transactions (as an example):

  • Supply of pharmaceuticals and medical devices (their parts and accessories)
  • Supply of specialized food products intended for infants
  • Transportation services of passenger and luggage in Latvia
  • Supply of study books and original literature books
  • Supply of newspapers, journals and other periodicals
  • Accommodation services
  • Supply of thermal energy, wood and firewood to inhabitants for household consumption
  • Import of specific goods and acquisition of such goods in the EU territory as stipulated by VAT Act

Reduced rate (5%) is applicable to the food products such as fresh fruits, berries, vegetables that are typical for Latvia.

Supply of goods and services for which the place of supply is deemed to be outside Latvia and if such supplies have been subject to VAT, if taken place in Latvia, are exempt with credit (entitling to recover input tax).

Zero-rated transactions (as an example):

  • Export of goods and supplies of goods that are not released for free circulation within the customs warehouses and free zones
  • Distribution of goods to fiscal representative for further export
  • Supplies of goods to taxable recipient of other member state provided that goods are delivered to another EU member state
  • Supply of new vehicle to any person of other member state
  • Import of goods provided that certain permission is obtained
  • Provided services, which are (as an example):
    • Directly relates to exports of goods, including such whose customs procedure started in another member state
    • Directly relates to transit traffic
    • Services in free zones and customs warehouses related to goods, that imported into the European Union from third countries or third territories and are not released for free circulation
    • International passenger traffic, as well as passengers traffic to other member states and brokerage services by selling these tickets, if passenger crosses the border of the Republic of Latvia, as well as luggage transportation, which the passenger carries with him, and transportation of the vehicle with which he travels
  • Distribution and transport by ships and aircrafts, supply of spare parts and fuel to ships and aircraft
  • Export of goods from Latvia to non-EU country

Following transactions are exempt from VAT, without entitlement to recover input tax (as an example):

  • Postal services
  • Medical services
  • Mandatory health checks
  • Dental care services, services provided by dental technicians and dental hygienists
  • Social welfare, occupational and social rehabilitation, social assistance and social work services
  • Services of state-accredited educational institutions
  • Cultural events (theatre and circus, concerts, exhibitions for children, art events and charity events, visits to state-recognized museums, libraries, zoo and exhibitions)
  • Insurance and reinsurance services
  • Financial transactions (lending and loans; deals with loan guarantees; services related to deposits and current accounts, and the involvement of other repayable funds, cash and non-cash payments; and other)
  • Gambling and lotteries
  • Sale of used immovable property (specific rules applies)

Reporting period

Monthly:

  • When taxable transactions exceed the value of EUR 40,000 during the pre-taxation year or the taxation year
  • When goods are supplied within the EU territory, for which apply 0 percent interest rate, according to VAT act
  • If the person provides services in the other country of the EU
  • For VAT group and fiscal representative

Quarterly:

  • For a registered taxpayer in the taxable year, if previous criteria (for monthly reporting period) are not met.

Tax residence

According to Latvian domestic law, an individual is treated as a Latvian tax resident, if he/she has a permanent home in Latvia or if he is present in Latvia for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned.  However, in case of an expatriate working in Latvia, the status of his tax residency should be examined in the light of the specific EU country’s–Latvian double tax treaty (DTT), specifically article 4. Under Article 4 of the Latvian-EU country’s DTT, where an individual qualifies as tax resident under the domestic tax rules of both countries, the individual’s tax residence for DTT application purposes is determined by sequentially performing the four tests set out in Article 4 (2) of the treaty, which are:

  • In which State does the individual have a permanent home?
  • In which State is the individual’s centre of vital interests (personal and economic relations)?
  • In which State does the individual have a habitual residence?
  • Of which treaty State does the individual claim nationality?

Once the examination of a particular criterion gives a definitive answer, the remaining criteria need not be examined. If no definitive answer can be given to any of the above four criteria examined sequentially, the tax residence for treaty application purposes is determined mutually by the tax authorities of both DTT states.

According to the commentaries issued by Organization for Economic Cooperation and Development (OECD) on the model tax convention on income and capital (the ‘Commentaries’) “a permanent home” is to be understood as a house or apartment belonging to or rented by an individual, rented furnished room which is available to the individual at all times continuously, and not just occasionally for the purpose of a stay, which, owing to the reasons of it, is necessarily of short duration (travel for pleasure, business travel, etc.). The location of the centre of vital interests includes an evaluation of all available facts in order to ascertain with which treaty state the individual has closer personal and economic ties (family relations, political, professional and cultural activities, place of business, etc). Having a habitual abode in one country means that in that country the individual stays more frequently. In case of doubt as to in which country the individual has the centre of vital interest, if the individual stays more frequently in one country, that country is viewed as his residence country. Neither the treaty nor the commentaries give a specific guidance as to what length of time the comparison must be made over, however, it is clear that the comparison must cover a sufficient length of time for a sensible determination to be made.

The nationality test may provide a definitive answer regarding the individual’s residence in cases where all the three preceding other tests do not enable a specific determination to be made.

As explained above, if the first test gives a decisive answer (permanent home in expatriate’s home country only), carrying out of the remaining treaty tests will not be necessary.

Personal Income Tax

An individual (resident for tax purposes in Latvia) is taxed on his/her worldwide income and is entitled to certain deductions and allowances. A non-resident is taxed on his Latvian source income and is not entitled to any deductions or allowances, except when he/she (resident of EU/EEA member state) has derived more than 75% of his total income in Latvia in the tax year. Deduction may be applied if similar relief has not been applied in his/her residence country.

As of 1 January 2018, the progressive rate of Personal Income Tax has been introduced. The following Personal Income Tax rates are levied on provided sources of income:

  • Salary:
    • 20% for monthly income up to EUR 1667
    • 23% for part of the monthly income exceeding EUR 1667
    • 23% if the payroll tax book is not in the possession of employer, regardless of monthly income amount

The Personal Income Tax is withheld by an employer.

  • Income on commercial activities:
    • 20% for annual income up to € 20,000
    • 23% for par of the annual income exceeding EUR 20 000 but not exceeding EUR 55 000
    • 31,4% for part of the annual income exceeding EUR 55 000
  •  Income on capital – 20% (if CIT is paid on dividends no additional PIT applies)
  • Income on capital gains (e.g. sale of shares, real estate) –20%
  • Income on sale of forest, scrap metal and the lease of own property without registering as an commercial activity – 10%
  • Monthly patent fees depending on economic activity – from EUR 50 to EUR 100
  • Lotteries and gambling wins worth over EUR 3000 is subject to PIT.

Latvian Personal Income Tax Act provides extensive list of non-taxable income (e.g. insurance benefits, inheritance and scholarships).

As from 1 January 2013, CFC rules (direct and indirect 25% ownership) has been introduced and are applicable on any legal establishment (company, trust, partnership) in tax havens provided that shares of it are not publicly listed in EU/EEA member states.

Tax residence

Under domestic rules, individual is considered Latvian tax residents if he has a permanent residence in Latvia or if he stays in Latvia for 183 days or more in any 12 month period.

Tax treaty rules applies to determine tax residence of individual in case Latvia has an effective tax treaty with that country and individual is considered tax resident in both countries.

Tax return submission and tax payment

The taxation period is one calendar month (if there is an employment relationship) or one calendar year (in other cases). Both resident and non-resident individuals should file their PIT return between 1 March and 1 June following the year in which their income has been gained. The tax assessed should be paid no later than 15 days after the taxreturn has been submitted. If the tax due exceeds EUR 640 it is possible to divide payment into three instalments due on or before 16 June, 16 July and 16 August.

A non-resident individual who performs employment in Latvia and receives income from an employer that is not resident in Latvia and does not have a permanent establishment in Latvia, is required to submit the Personal Income Tax return. The Act provides specific criteria for cases when non-resident is required to submit of PIT return.

If capital gains exceed EUR 1000 in a quarter, then a capital gains tax return must be filed on a quarterly basis by the 15th day of the following month. If capital gains do not exceed EUR 1000 in a quarter, a capital gains tax return must be filed on annual basis by the 15th of January of the tax following year.

National Social Insurance Contributions

The insured persons and their employers pay the social tax. The standard tax rate is 35,09% (11% tax rate for employee and 24,09% tax rate for employer). The rate varies depending on the taxpayer type (e.g. self-employed, retired persons etc.).

From 1 January 2018 the taxable object of the social tax is capped at EUR 55 000 per year

Real Estate Tax

Real Estate Tax is payable by owner or person in legal possession of immovable property.

Immovable property includes physical objects located in Latvia and which cannot be transferred without causing damage, i.e., land, buildings and engineering constructions. Certain property is exempt from the real estate tax in Latvia. The taxation period is a calendar year.

Municipalities are entitled to set tax rate by issuing binding rules. If not provided otherwise, following real estate tax rates apply:

  • 5 % of the cadastral value on buildings, land, and engineering constructions
  • For buildings with functional use of living, as well as to groups of premises with similar functionality (garages, parking lots, basements, warehouses and household premises) if they are not used for business operations. And auxiliary premises of residential houses and garages which are owned by cooperative societies, associations and individual owners (except for garages for heavy machinery and agricultural machinery) provided that they are not used for business operations:
    • 2% of cadastral value, which does not exceed EUR 56,915
    • 4% of the part of cadastral value, which exceeds EUR 56,915, but does not exceed EUR 106,715
    • 6% of the part of cadastral value, which exceeds EUR 106,715
  • 1,5% of the cadastral value on unprocessed agricultural land
  • For buildings that are degrading the environment or are the threat to human safety, 3% applies to highest of the following values:
    • The cadastral value of the relevant land
    • The cadastral value of the structure

Microbusiness Tax

Latvian entities can opt to pay Microbusiness tax and therefore being exempt from corporate income tax, personal income and social taxes.

In order to become a microbusiness tax payer, company shall comply with certain criteria:

  • Shareholders (owners) are individual persons
  • Turnover up to EUR 40 000 in calendar year
  • Number of employees up to 5
  • Salary (net) up to EUR 720 per month
  • Shareholders are only individuals and are deemed to be employees of the company
  • an individual is allowed to be employed as a micro-enterprise employee simultaneously in only one micro-enterprise
  • Involved individuals and legal persons cannot be members of a partnership

Microbusiness Tax is calculated at a rate of:

  • 15% for turnover that does not exceed EUR 40 000

In case the microbusiness tax payer fails to comply with requirements it losses is special status as from next year, and is subject to increased MBT rate in current year calculated as follows:

  • 2% are added to standard rate for each additional employee in case MBT payer’s number of employees in a quarter exceeds 5
  • 20% rate is applied on the excess of turnover over EUR 40 000
  • 20% rate is applied on the excess of employees salary over EUR 720

The tax is remitted to the State budget on a quarterly basis. The tax return has to be submitted on or before 15th day of month following quarter.

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