Taxation of foreign employees in Latvia

The below test outlines the employee tax implications arising from the international employment of an employee from the European Union company (home company) to Latvia (host company). Two options could be considered in such situations: (1) secondment to Latvia and (2) local employment contract. The test is also applicable for the residents coming from the countries Latvia has entered the double tax treaty (except for social insurance contributions which are then governed by bilateral social insurance treaties.

About the foreign employee tax test

The below test is developed to help foreigners understand their tax position and allows understand:

1. In which country the foreign employee is considered a tax resident
2. In which country the foreign employee should pay payroll taxes
3. What are the other tax risks, e.g. permanent establishment risk?

Commentaries on 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 exceeding in the aggregate 183 days in any 12 months commencing or ending in the fiscal year concerned.  However, in the 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 a foreign employee qualifies as a 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 a stay, which, owing to the reasons of it, is necessary 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 country 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 specific guidance as to what length of time the comparison must be made, 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 three preceding tests do not enable a specific determination to be made.

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

Commentaries on leased personnel

Leased personnel typically refers to temporary workers or employees who are contracted through a staffing agency. These individuals work for a client company but are technically employed by a staffing agency or leasing company. The client company pays a fee to the staffing agency or leasing company for:

• the services of these workers, and
• the agency is responsible for its payroll, taxes, and other employment-related matters.

Companies commonly use leased personnel to meet short-term staffing needs or to fill temporary positions.

The definition of the leased personnel you will find here.

Commentaries on social insurance contributions

The social insurance requirements for foreign employees you will find here.

Benefits of being a tax resident in Latvia

This status will give you the right to order the Tax card and you will be entitled to a non-taxable minimum of EUR 70 and an allowance of EUR 175 per dependent registered in Latvia.  The mentioned employee tax reliefs will decrease the taxable base for tax purposes in Latvia. Upon achieving tax residency status, you are eligible to apply for an electronic tax card.

If you do NOT qualify as a tax resident

If you do not qualify as a tax resident in Latvia:

• Request from the Tax authorities in your home country – tax residence certificate or document confirming that you are considered a tax resident in your home country.  The documents must be in English or translated into English.
• Submit an application to Latvian tax authorities asking them to register you as a tax non-resident in Latvia.

Information about employment

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