Legal Forms of Business

Foreign investors establishing a presence in Latvia typically choose between a limited liability company, a public limited company, a branch (permanent establishment), or a representative office.

In practice, the limited liability company is the most commonly used and flexible structure for conducting business activities. A representative office is generally used only where the foreign entity performs auxiliary or preparatory activities and does not engage in commercial operations.

Limited Liability Company (LLC)

A limited liability company (Sabiedrība ar ierobežotu atbildību – SIA) is the most widely used business form in Latvia. It is suitable for both local and foreign investors and offers limited liability to its shareholders.

The minimum share capital of an SIA is EUR 2,800. Share capital may be contributed in cash or in kind. Prior to registration with the Register of Enterprises, at least 50% of the share capital must be paid, with the remaining amount payable within one year from the date of registration.

An SIA may be established by one or more shareholders, including foreign individuals or legal entities. The governance structure is flexible, and the company is managed by a board of directors.

Limited Liability Company with Reduced Share Capital

Latvian law also allows the establishment of a limited liability company with reduced share capital, where the share capital ranges from EUR 1 to EUR 2,799. In this case, the full amount of share capital must be paid in cash prior to registration.

This form is subject to specific restrictions under the Commercial Law:

• The company may have no more than five founders, all of whom must be individuals
• The number of shareholders may not exceed five individuals
• All members of the board must be shareholders
• Each shareholder may participate in only one limited liability company with reduced share capital

Such companies are required to create a mandatory statutory reserve each year by allocating at least 25% of annual net profit until the reserve reaches the minimum share capital threshold. The reserve may be used to increase share capital or to cover losses in accordance with shareholder resolutions.

This structure is typically chosen for small-scale entrepreneurial activity rather than growth-oriented businesses.

Public Limited Company (Joint-stock company)

A public limited company (Akciju sabiedrība – AS) is designed for larger businesses and companies intending to raise capital or operate in regulated sectors. Shares of an AS may be publicly traded, subject to applicable legal requirements.

The minimum share capital of a public limited company is EUR 25,000. Upon registration, the entire share capital must be subscribed, and at least 25% of the subscribed capital must be paid up, provided that the paid-in amount is not less than EUR 25,000. The remaining portion must be paid within one year from the signing of the founding documents.

Certain regulated industries, such as banking, insurance, and financial services, are subject to higher minimum share capital requirements in accordance with sector-specific legislation.

Practical note

In modern practice, most foreign investors and founders opt for an SIA, as it combines legal certainty, operational flexibility, and straightforward governance. Public limited companies are typically used for large-scale operations, capital markets activity, or regulated financial services.

Residence permits

The temporary residence permits could be granted to the foreign investors doing business in Latvia 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 withholding 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 withholding 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 to another country, 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

Several amendments to the Latvian Value Added Tax Act have entered into force in recent years. The standard VAT rate is 21%, with reduced rates of 12% and 5%, as well as a 0% rate applicable to certain transactions in accordance with Latvian and EU VAT legislation.

A domestic taxpayer is not required to register with the State Revenue Service as a VAT taxpayer if the total value of taxable supplies of goods and services made during the preceding 12-month period does not exceed EUR 40,000. Voluntary VAT registration is possible below this threshold.

A non-registered taxpayer is required to register for VAT purposes if the total value of intra-Community acquisitions of goods exceeds EUR 10,000 per calendar year.

If a Latvian taxpayer provides services to customers outside Latvia or receives services from suppliers established outside Latvia, and the place of supply of such services is determined to be Latvia in accordance with EU VAT rules, the taxpayer must register for VAT prior to providing or receiving such services.

There is no VAT registration threshold for non-resident companies carrying out taxable transactions in Latvia. As a general rule, a non-resident company is required to register for VAT before commencing taxable activities in Latvia. An exception applies to EU taxpayers engaged in distance sales, provided that the EU-wide distance sales threshold of EUR 10,000 has not been exceeded in the previous or current calendar year (excluding excisable goods).

VAT rates

Taxable transactions

The standard VAT rate of 21% applies to taxable transactions, including (by way of example):

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

Supplies of goods within the EU are generally taxable in accordance with EU VAT rules and may be subject to the zero rate, provided that statutory conditions are met.

Reduced VAT rate (12%)

The reduced VAT rate of 12% applies to certain goods and services, including (by way of example and subject to statutory conditions):

• Supply of pharmaceuticals and medical devices, including their parts and accessories
• Supply of specialised food products intended for infants
• Passenger and luggage transport services within Latvia
• Supply of printed study books and original literature
• Supply of newspapers, journals, and other periodicals
• Accommodation services
• Supply of thermal energy and certain heating resources to households
• Import and intra-EU acquisition of specific goods as stipulated by the VAT Act

Reduced VAT treatment for food products applies only to specific categories and periods, in accordance with applicable legislation.

Reduced VAT rate (5%)

The reduced VAT rate of 5% is applicable to books, newspapers, magazines, brochures, and similar publications, including electronic formats, subject to the conditions set out in the VAT Act.

Zero-rated transactions

Supplies of goods and services for which the place of supply is deemed to be outside Latvia, and which would be taxable if supplied in Latvia, are treated as taxable supplies with the right to deduct input VAT, provided statutory requirements are met.

Zero-rated transactions include, inter alia:

• Export of goods and supplies of goods not released for free circulation in customs warehouses or free zones
• Supply of goods to a taxable person in another EU Member State, provided the goods are transported outside Latvia
• Supply of a new vehicle to any person in another EU Member State
• Import of goods, subject to applicable authorisations
• Services directly related to the export or transit of goods
• Services performed in free zones and customs warehouses relating to goods not released for free circulation
• International passenger transport, including cross-border passenger and luggage transport
• Supply, repair, and maintenance of ships and aircraft, including spare parts and fuel

VAT-exempt transactions (without the right to deduct input VAT)

The following transactions are exempt from VAT without entitlement to recover input VAT, subject to statutory conditions:

• Postal services
• Medical and healthcare services, including mandatory health checks
• Dental care services and services provided by dental technicians and hygienists
• Social welfare, rehabilitation, and social assistance services
• Services provided by state-accredited educational institutions
• Cultural events, including theatre, concerts, exhibitions, museums, libraries, and similar activities
• Insurance and reinsurance services
• Financial services, including lending, payment services, and deposit-related services
• Gambling and lotteries
• Sale of used immovable property (specific rules apply)

Reporting period

Monthly:

A monthly VAT reporting period applies, inter alia, in the following cases:

• Where taxable turnover exceeds EUR 40,000
• Where the taxpayer supplies goods within the EU subject to the zero VAT rate
• Where services are provided to customers in other EU Member States
• For VAT groups and fiscal representatives

Quarterly:

A quarterly VAT reporting period applies to registered VAT taxpayers where the criteria for monthly reporting 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 tax return 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 34,09% (10,50% tax rate for employee and 23,59% tax rate for employer). The rate varies depending on the taxpayer type (e.g. self-employed, retired persons etc.).

From 1 January 2024 the taxable object of the social tax is capped at EUR 78 100 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:

• 1,5 % 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 doing business in Latvia 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:
  • 0,2% of cadastral value, which does not exceed EUR 56,915
  • 0,4% of the part of cadastral value, which exceeds EUR 56,915, but does not exceed EUR 106,715
  • 0,6% 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 50 000 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.