Tax regimes in Latvia: which one to choose?

Are you going into business?

Congratulations! Here you will find basic information on the tax regimes available in Latvia.

The first important question to answer is: do you want to operate as a legal entity or as a natural person?

If you choose to be a legal person, you can either operate as a corporate taxpayer (general regime) or opt for micro-enterprise tax.

If you want to operate as an individual, you must choose one of the tax types listed below:

  • Economic operator (tax on business income);
  • Reduced patent fee;
  • Micro-enterprise tax;
  • Enterprise agreement;
  • Non-registered commercial activity.

Once you have chosen your tax regime, you usually have to register it electronically in the SRS EDS system or in person at a customer service centre.

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By the general tax payment regime we understand corporate income tax payers – capital companies and partnerships. In the general tax payment regime, the corporate income tax payer also pays labour taxes: personal income tax and mandatory state social insurance contributions.

The forms of commercial activity are:

  • Capital company
    • Limited liability company
    • Joint stock company
  • Partnership
    • General partnership
    • Limited partnership

A limited liability company is a legal person, which in itself is a significant advantage compared to a sole proprietorship, as a limited liability company is liable only for the assets it owns.

When setting up a limited liability company (usually an LLC), the founder must invest the share capital, i.e. the funds invested in the development of the business. The minimum share capital is EUR 2 800, but it is also possible to set up a small-capital LLC with a smaller share capital of EUR 1.

This means that an entrepreneur can start a business even with limited resources.

A corporation or partnership must keep double-entry accounts in accordance with the requirements of the laws and regulations and submit annual accounts:

  • The financial statements of a small company shall comprise at least the balance sheet, the income statement and the notes to the financial statements.
  • The financial statements of a medium-sized or large company consist of the balance sheet, income statement, cash flow statement, statement of changes in equity and notes to the financial statements.

The accounting requirements for a corporation and a partnership are much more complex than for a sole trader or other simpler tax regimes.

Corporation tax is payable on distributions of profits, deemed dividends and other distributions of profits. The corporate income tax rate is 20%. Corporation tax is payable by LLCs (excluding micro-entities), PLCs and partnerships.

Personal income tax is a progressive tax with the following rates:

  • 20% of annual income up to €20 004,
  • Part of annual income between EUR 20 004 and EUR 78 100 – 23%,
  • For the part of the annual income exceeding EUR 78 100 – 31%,
  • Capital gains tax – 20%,
  • income from property – 10% if the individual does not apply business expenses.

Although in theory a limited liability company may not employ employees, and a member of the management board may perform his duties without remuneration, in such cases corporate income tax and national social security contributions are payable at the minimum wage, in cases in which:

  • the company’s turnover in a given month exceeds five minimum wages,
  • the company does not employ any staff.

This means that a corporation cannot avoid paying labour taxes if there is an actual activity. So there has to be a minimum wage contribution of one minimum wage.

These rules are in place so that the owner/manager of the company does not act without remuneration but receives income in the form of dividends.

State social insurance mandatory contributions (VSAOI) is a mandatory payment into a special budget account that ensures a socially insured person to receive social insurance services.

The rates of state social insurance mandatory contributions are:

  • 23.59% for the employer,
  • 10.5% for the employee.

1% of the total 34.09% mandatory contribution rate goes to financing health services.

The maximum contribution facility in 2023 is EUR 78 100. The excess of the maximum object is the object of solidarity tax.

Micro-enterprise tax

The right to become a micro-enterprise is:

  • individual merchant;
  • individual enterprise, farms and fish farms;
  • natural person, which is registered in the State Revenue Service (SRS) as a performer of economic activities
  • person is not a member of partnership.

Important: the mentioned persons are not registered value added tax payers!

There is the right to choose to pay the micro-enterprise tax (MUN) if the expected turnover will not exceed 50,000 euros and the micro-enterprise does not plan to become a registered value-added tax payer until the value-added tax registration threshold is reached.

Note that the micro-enterprise tax applies only to the owner. Accordingly, if the micro-enterprise employs staff, its income is subject to social security contributions and payroll tax.

The owner of a micro-enterprise cannot at the same time be a payer of personal income tax from economic activity, including paying personal income tax on the income of his individual company. Therefore, the micro-enterprise tax (MUN) can be applied only to one person – the micro-enterprise owner – and one registered form of economic activity. A micro-enterprise has the right to hire employees for the performance of its economic activity. Taxes are paid from employees’ salaries in the same way as with other employers.
A taxable person who has ceased to do business cannot choose to pay MUN again in the same year and in the following year.

Comparing the micro-enterprise tax regime with the general tax regime, the micro-enterprise tax regime (MUN) is a simplified tax payment regime, which provides for reduced administrative requirements and simplified tax payment procedures. MUN is not a separate type of tax, but forms a composition of the following taxes:

  • 80% of the micro-business owner’s State social insurance mandatory contributions,
  • Personal income tax on the share of income from micro-business activities – 20%.

The micro-business tax payer calculates and pays MUN, but the mentioned taxes are allocated to the relevant headings of the national budget.

The object of the micro-enterprise tax is the turnover of the micro-enterprise, the tax rate in 2024 is 25%, regardless of the amount of the annual turnover.

Accounting for MUN purposes can be carried out under the simple accounting system (receipts and payments are accounted for on a cash basis). This can be done by:

  • sole traders and companies, farms and fish farms (if the turnover in the previous accounting year did not exceed EUR 300 000),
  • natural persons carrying out a registered economic activity,
  • associations and other entities (including foundations, religious organisations) whose turnover in the current and previous accounting year does not exceed €100,000

Micro-enterprise taxpayer status can be obtained by:

  • by registering your company with the Register of Entrepreneurs,
  • a natural person, by registering as an economic activity performer in the SRS EDS electronic system or in person at the SRS,
  • the entities concerned can apply for the status (in the SRS EDS) until 15 December of the following year.

Upon receipt of information on the micro-enterprise income tax status, the SRS will take a decision within 5 days on granting or refusing the status (via the SRS EDS).

Self employed person

Business activity carried out by a natural person without establishing a company is called economic activity. Economic activity can include a very wide range of activities related to the performance of the company’s contract: production of goods, trade and provision of services (for example, outsourced accountant, real estate management, etc.), which are not related to employment legal relations. The amount of income is limited and cannot exceed 284,600 euros.If at least 1 of the 3 criteria is met, the person is obliged to register economic activity (or establish a company):• transactions are regular and systematic – 3 or more transactions per year or 5 or more transactions in 3 years;

• Income from the transaction exceeds EUR 14,229 per year;

• The economic nature of the activity refers to a certain activity with the aim of obtaining remuneration.

There are exceptions when the economic activity may not be registered for income that does not exceed 3,000 euros per year and is obtained from specially reserved types of activity, as well as there are specially allocated activities that are not considered economic activity. On the other hand, there are also areas in which economic activity cannot be registered, as it is necessary to register in the Enterprise Register.

The operator of an economic activity has the possibility to apply one of 4 tax regimes by registering with the SRS before starting the activity:

1) General tax payment procedure;

2)Micro-enterprise tax;

3) Reduced patent fee;

4) Notified economic activity for rental or leasing of immovable property.

Economic activity performers in the general and micro-enterprise tax regime are often called self-employed in Latvian legislation.

The operator of the economic activity performs accounting in a simple record, listing the revenues and expenses. The taxable income of the economic activity is the difference between the received income and the expenses related to its obtaining. Deductible expenses are limited to 80% of total income. However, these restrictions are not applied and the economic activity performer is allowed to deduct the following expenses in full:

  • wages and compulsory employer’s social security contributions,
  • real estate tax,
  • depreciation of fixed assets,
  • compensation to tenants for vacating and terminating their tenancy due to major repairs or conversion of the premises for business purposes.

The self-employed person is limited to deducting 80% of expenses. These limits are applied when preparing the annual income tax return.

If no income from economic activity has been earned during the year or personal income tax from income is not more than 50 euros, the minimum PIT of 50 euros must be paid in the general tax payment procedure. The minimum tax of 50 euros is not payable if:

• The company has made mandatory state social insurance contributions for employees (PIT, VSAOI),

• the taxation year is the first one in which the economic activity was registered, and the following taxation year, as well as the year in which the economic activity was terminated or the liquidation process was completed,

• proportionally for the days when a child is taken care of up to the age of two, as well as the days when the “B” form of incapacity for work is issued.

Personal income tax rates: (progressive PIT)

  • 20% for annual income under 20,004 euros
  • Part of annual income between EUR 20 004 and EUR 78 100 – 23%,
  • Part of the annual income exceeding EUR 78,100 – 31%

Personal income tax is calculated for the year. In order to calculate PIT, economic activity performers must submit an annual income declaration for the following year from March 1st to June 1st, but if the tax annual income that is taxed exceeds 62,800, then the declaration must be submitted from April 1st to July 1st.

The income of the economic activity has the right to apply the non-taxable minimum, tax reliefs and justified expenses.

Economic activity performers are often called self-employed, which is not quite accurate. The term “self-employed” is given in the law “On State Social Insurance”, according to which they are economic operators who have to pay Social Insurance Contribution – 31.07%.

If the economic activity performer has a monthly income of at least 700 euros, he/she makes mandatory state social insurance contributions in the amount of 31.07%. It should be noted that 31.07% rate does not include insurance for unemployment, accidents at work and occupational diseases.

If the monthly income is below 700 euros, the self-employed person makes mandatory contributions to pension insurance of 10% of the actual income.

It is possible to register economic activity in two ways:

1) the SRS electronic declaration system can be used;

2) you can go to any customer center by presenting an identity document (passport or eID) and filling out the taxpayer registration form.

Enterprise agreement

Enterprise agreement can be concluded with both natural and legal persons. The entrepreneur may engage other persons to perform the work (if this is provided for in the contract). The contract specifies a specific work outcome (an object produced, such as a work of art, a service performed, such as the dismantling of a building) but it can also involve regular, systematic work, such as providing accounting services. Overall, entering into a enterprise agreement is similar to hiring, but there are some significant differences that need to be considered.The most important difference is the purpose of the contract: in the case of an employment contract, it is important to employ a specific person for work in general, whereas in the case of a enterprise agreement, the main objective is the specified work outcome. In this case, the employer may not be concerned about who performs the particular task; what matters is that the specified work is completed.Work tools: In the case of a enterprise agreement, the entrepreneur carries out the order with their own tools of work. In the case of an employment contract, the employer provides and ensures the means of work.

Work organization: In an employment contract, the employee is subject to the employer’s regulations (such as specified working hours, rest periods, workplace, etc.). In contrast, the entrepreneur achieves the agreed-upon result in the enterprise agreement according to their own discretion.

Tax payment procedure: In the case of an employment contract, tax payment is the employer’s responsibility, whereas in the case of a enterprise agreement, if the contract is concluded with an economic activity provider, taxes are paid by the contractor himself.

If a natural person, when concluding an enterprise agreement, is not registered as a performer of economic activity, he is considered an employee, and in this case, the employer must withhold personal income tax (PIT), VSAOI and provide information on the person’s employment, as in the case of employment relations.

Salary: In an employment contract, payment is made regularly, while in a enterprise agreement contract, salary terms are agreed upon in the contract, taking into account the work done.

Guarantees: When concluding an enterprise agreement, the entrepreneur does not have the guarantees that exist in the case of an employment contract (for example, additional pay for work during night hours).

The conclusion of the contract is notified in the SRS EDS system by submitting the notification “Information about employees” (codes 11 and 81 must be indicated). On the day of termination of the enterprise agreement, the customer submits information about the employees, indicating the code 82.

Personal income tax rates: (progressive PIT)

  • 20% for annual income under 20,004 euros
  • Part of annual income between EUR 20 004 and EUR 78 100 – 23%,
  • Part of the annual income exceeding EUR 78,100 – 31%

State social insurance mandatory contribution rate (VSAOI), if the employee is insured with all types of social insurance, is 34.09%, of which 23.09% is paid by the employer and 10.50% by the employee. 1% of the total mandatory contribution rate is directed to the financing of healthcare services.

The maximum amount of the contribution object in 2024 is 78,100 euros. The excess of the maximum object is the object of solidarity tax.

Non-registered commercial activity

If a natural person owns real estate that he wants to rent, there are 3 options for choosing the PIT payment regime:1) register as a performer of economic activity;

2) apply the special regime by notifying the non-registration of the economic activity (hereinafter referred to as the special regime);

3) register as a micro-enterprise taxpayer.

The special tax regime is simpler and usually also more beneficial (assuming that there are no significant costs associated with renting real estate). The owner can rent several real estate objects by applying this special regime.

In order to announce the rental/lease of real estate and pay taxes under the special regime, it is necessary to inform the SRS within five working days from the moment of concluding the rental agreement. You must also fill out the taxpayer registration form and attach a submission stating that you are using the right not to register your economic activity, as well as a copy of the rental/lease agreement. In the other options, it is necessary to register as a performer of economic activity or as a micro-enterprise tax payer.

In the special payment regime, personal income tax is 10% of rent or lease income. A natural person cannot take into account and deduct expenses related to the management or financing of this property. The only expense item that is deductible is real estate tax. In this case, VSAOI are not paid, the lessor records only revenues. The lessor must submit an annual income declaration if real estate is leased to a natural person who has not registered as an economic operator. In the special regime, the non-taxable minimum or any other personal income tax benefits are not applied.

There are no other taxes to pay.

Reduced patent fee

The patent fee payment regime has been canceled from 2021, maintaining the reduced patent fee regime. The reduced patent fee is a single fixed payment determined by the state, which includes personal income tax payments for the economic activity of a natural person. The reduced patent fee is 17 euros per year or 9 euros per half year. Payers of the reduced patent fee are not socially insured, as this fee includes only personal income tax. The payer of the reduced patent fee is registered by the State Revenue Service after the person has submitted an application.

A natural person has the right to pay the reduced patent fee if certain conditions are met:

  • The natural person receive a pension (including early retirement) and may apply the pensioner’s non-taxable minimum,
  • have a group 1 or 2 disability classification,
  • did not receive more than EUR 3000 from income the previous year,
  • are not a payroll taxpayer,
  • do not employ other people,
  • according to the natural person’s own forecast, the income from economic activity for the tax year will not exceed 3,000 euros.

A natural person can choose to pay the reduced patent fee if he operates in one of the specified areas of economic activity:

– Leather and textile crafts,
– Manufacture and/or repair of clothing and footwear, watches, and locks,
– Household services,
– Handicrafts,
– Florist,
– Home care services.

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