A Latvian contract manufacturer

What is contract manufacturer?

A contract manufacturer is a company which manufactures and sells something to the principal according to orders and instructions of the principal. The contract manufacturer usually retains the function of the raw materials and manufacturing cycle. However, usually the contract manufacturer has to buy raw materials from the suppliers selected by the principal (to ensure the quality).

If the principal company operates in country with high expenses of the workforce and infrastructure, it is always good idea to split-off the manufacturing function and move it to the country where those costs are lower. Sometimes geography and proximity to potential clients are considered, as well.

Why Latvia is a good place for contract manufacturers?

The statement that Latvia is good place for contract manufacturers is based on the long-term experience, we have working with them. Latvian has many companies which are producing for the benefit of its parent companies.

The benefits are as follows:

(1) Tax benefit. The 0% on undistributed profits allows reinvest the profits made and thus develop the manufacturing more rapidly, as well as save tax expenses.

(2) Skilled workforce. Latvian universities has long traditions for educating the engineering and technical sciences thus ensuring the skilled employees for manufacturing sector.

(3) Lower costs. As a post-soviet period country Latvia has comparatively lower costs of doing business, if compared with Scandinavian or Western European countries.

(4) Geography and infrastructure. Latvia has excellent transportation routes by air, sea and land. Many contract manufacturers has selected the location near sea ports or transportation hubs.

What is required?

From tax perspective the dealings between the Latvian contract manufacturer and its foreign principal should be in line with transfer pricing principles. In practice this means that the sales price of the goods produced should be calculated on the cost+ or full cost+ basis. The mark-up applicable on total costs may vary from 1% to 10%, usually around 2-5%.

If you would like to start the business in Latvia, the description of a Latvian company formation is here.