The Law on Taxes and Duties, adopted on 2 February 1995, determines Latvia’s general taxation principles. This law is applicable generally, unless specific tax laws, such as the Law on Value Added Tax, Law on Corporate Income Tax or any other provide for different rules. If there is a conflict between general principles and specific rules, the specific rules prevail.
According to the Law on Taxes and Duties, duties are imposed either by the State or the municipality. The State is entitled to impose duties on a number of different items. These include vehicles, court applications, notary applications, gambling, changes of identification data, reservation of land in rural areas, transactions with vouchers and bills of exchange, immigration services, business licences/permits, registration of security interests, applications for patents, trademarks or plant protection certificates.
The State taxes are:
1. Personal income tax
2. Social security contributions
3. Real estate tax, including stamp duty
4. Corporate income tax, including withholding taxes
5. Value added tax
6. Excise tax
7. Natural resource tax
8. Motorcycle and motor car tax
9. Gambling and lottery tax
10. Customs duties
11. Energy tax
12. Micro-enterprise tax
13. Vehicle operation tax
14. Company car tax
More information about tax rates at State Revenue Service (SRS) website here.
PERSONAL INCOME TAX
Latvian personal income tax payers are Latvian tax residents and non-residents for tax purposes.
Pursuant to Latvian legislation, persons are considered to be residents of Latvia for tax purposes, if:
The general principle followed within taxation of private individuals is that Latvian tax residents are taxed on their worldwide income, but Latvian non-residents for tax purposes are taxed on their Latvian sourced income, i.e. income attributable to Latvia:
The taxable object of Latvian tax resident shall be all types of income, unless they are specifically defined as non-taxable.
Income from capital other than capital gains (taxable items are dividends, interest income and similar income, income from investment in private pension funds, income from life insurance contracts, investment gold and other precious metals, transaction units in the currency exchange market or commodity exchange market) and capital gains (taxable income is determined as asset-disposal price minus asset-acquisition price or liquidation quota minus investment value) are also subject to PIT in Latvia.
General tax rates are as follows:
Application of international agreements
If a Convention for the avoidance of double taxation and the prevention of fiscal evasion exists, the amount of income tax payable in Latvia may be reduced by the amount of income tax paid in the foreign state, provided that the respective tax payment has been certified by a foreign tax-collection institution.
Non- taxable income
Income tax is not applied to:
Income received as salary
Private individuals employed by Latvian-registered enterprises and by enterprises non-resident in Latvia are subject to the standard income tax rate of 23 %. Salary includes all income related to labour relations, including fringe benefits, bonuses and other benefits provided by the employer.
Employers shall withhold income tax from employees’ salaries.
Expenses deductible from personal income
The following expenses are deductible for PIT purposes:
Non-residents who are residents of other EU Member States or residents of EEA countries who have derived at least 75 % of their total income in the taxation year in Latvia, are entitled to apply the same eligible expenditure as residents of Latvia.
Income from property sales
Income from the sale of real estate is not taxable if ownership of the real estate has continued for more than 60 months and the real estate was the person’s primary declared place of residence for at least 12 months before the date the sales agreement was concluded.
The income of individuals engaged in self-employed activities is subject to income tax at a rate of 25 %. For the purpose of determining income tax on self-employment income, taxable income consists of gross income less eligible expenses.
Tax payers who have registered as performers of economic activities, who do not have employees and who are not engaged in provision of professional services (e.g. scientific and literary activity, the activity of a lecturer, actor, producer, doctor, sworn advocate, sworn auditor, sworn land surveyor, sworn assessor, artist, composer, musician, consultant, engineer, sworn bailiff, accountant or architect), may choose to pay fixed income tax at a rate of 5 % of the total income if their total income does not exceed EUR 14 229.
Self-employed persons performing certain economic activities (e.g. preparation of craft products, beauty services, home care services) have the option to pay a monthly patent fee (combined PIT and SSC payment) in the range EUR 43 to EUR 100.
Income of hired personnel
The definition of “income of hired personnel” as well as taxation of such income is introduced in the Law on Personal Income Tax. According to the rules the lessee of personnel shall be responsible for application of PIT and SSC from the income of hired personnel.
The sending of the personnel of a lessor of the personnel who is not a resident of Latvia or a permanent representation of a non-resident in Latvia, in exchange for remuneration to the resident of Latvia or the permanent representation of the non-resident in Latvia so that this personnel might perform activities in connection with the economic or professional activities of the lessor of personnel in Latvia or in foreign states is considered as the hiring of personnel if at least one of the following criterions is met:
Tax returns and terms
Annual income tax declarations for the preceding year shall be submitted in the time period from 1 March until 1 June of the current year for PIT payers who, during the taxable period (calendar year), have received:
Declarations are prepared on a self-assessment basis and may be audited up to three years after the tax became payable.
SOCIAL SECURITY CONTRIBUTIONS (SOCIAL TAX)
The employer deducts 10.5 % from the employee’s gross salary as the SSC payable by the employee. The employer must also pay SSC equal to 23.59 % (The total standard rate of the SSC is 34.09 %).
A different social security payment scheme is applied for persons who are entitled to a State old-age pension, receive a service pension or State special pension as a disabled person, are self-employed as well as have other specific statuses.
Foreign employers not registered in Latvia but having employees working in accordance with employment agreements in Latvia, who are subject to social security in Latvia, must register as employers in Latvia for SSC purposes and pay SSC accordingly. With respect to EU citizens, A1 certificates are applicable.
REAL ESTATE TAX
Real estate tax is paid by individuals, legal entities and non-residents that own or hold Latvian real estate, including land and engineering constructions.
The standard real estate tax rate for buildings, land and engineering constructions is 1.5 % of the cadastral value. The real estate tax rate for residential houses and apartments not used to conduct business activities varies from 0.2 % to 0.6 % depending on the cadastral value of the real estate. Additional 1.5 % real estate tax is levied on uncultivated agricultural land. 3 % real estate tax is levied on buildings degrading the environment and on human security-threatening houses or buildings. The taxation period is a calendar year.
Some types of real estate are exempt from real estate tax. For instance, exemptions apply to:
Every registration of title rights with the Land Register resulting from the sale/transfer of property is subject to stamp duty. The amount of stamp duty depends on the type of transfer. For the transfer of property to:
With respect to the investment of real estate into the charter capital of companies, stamp duty in the amount of 1 % of the value of the real estate investment shall be paid.
CORPORATE INCOME TAX
Latvian corporate income tax payers are:
Companies are subject to income tax at a rate of 15 %.
For resident companies and non-resident companies operating through a permanent establishment in Latvia, capital gains are included in their taxable income.
For non-resident companies without a permanent establishment in Latvia, the final withholding tax is imposed on proceeds received from the sale of Latvian real estate or from sale of shares in the company if, in the taxation period of the sale or the taxation period prior to the sale, 50 % or more of the company’s assets consist of real estate located in Latvia. The rate of withholding tax is 2 % of gross proceeds from the sale of Latvian real estate or from sale of company shares.
The taxable income of a Latvian company receiving dividends is decreased by the amount of dividends received from EU and EEA country residents. The taxable income of a Latvian company receiving dividends is decreased by the amount of dividends received from other non-residents if the Latvian company owns at least 25 % of the capital and voting rights in the company paying the dividends, however, this provision is not applicable if the company paying the dividend is located in a state or territory which according to Cabinet regulations, is considered to be a low-tax or no-tax state or territory.
Starting from 2013 dividends paid out of resident profits being taxed under the Law on Corporate Income Tax shall not be included in the taxable income of a resident recipient company. The said exemption shall not be applied if the payer is a company benefiting from a tax holiday.
The tax year is either the calendar year or may differ from the calendar year if so stipulated by a company’s charter. That is, the tax year corresponds with the financial year of the company. Generally, the tax year for corporate income tax purposes may not exceed 12 months. However, in the year of incorporation the tax year may last less or more than 12 months, but not more than 18 months.
The annual income declaration must be filed within 30 days of the annual shareholders’ meeting, but not later than four months after the year‘s end. Companies must pay tax advances by the 15th day of each month.
DETERMINATION OF TAXABLE INCOME
Taxable income is the income reported in a company’s profit and loss statements, prepared in accordance with the Latvian accounting law and subject to certain adjustments specified in the Law on Corporate Income Tax.
Depreciation for tax purposes
Tax depreciation is calculated applying the declining balance method. See section Tax Incentives for information regarding depreciation rates for corporate income tax purposes.
Groups of companies
Relief for losses within a group of companies may be utilised by tax group companies. The parent company can be either a Latvian resident or a resident of an EEA country or country with which Latvia has concluded a double tax treaty, which, on the basis of an effective double tax treaty, is not also recognised as a resident of another state. To qualify for group relief, the parent must own directly or indirectly at least 90% of the subsidiary’s capital rights and the parent-subsidiary relationship must exist for the entire fiscal year.
Foreign tax relief
Corporate income tax may be reduced by the amount of income tax paid in foreign countries. The reduction may not exceed an amount equal to the tax calculated in Latvia on the income gained abroad. Such paid tax in foreign countries should be confirmed by a foreign tax-collection authority.
When determining the taxable income of a taxpayer, profit may be decreased by the amount of notional interest calculated as a multiple of retained earnings of the previous taxation periods which start after 31 December 2008 and the interest rate determined by the Bank of Latvia in the previous taxation period for loans issued to domestic companies.
Special rules for permanent establishments
Permanent establishments of non-resident companies may not deduct interest, royalties, rent and payments for any services that are paid to the head office.
The taxable income of permanent establishments may be reduced by a part of the acquisition cost of intellectual property, interest and administration costs borne by the parent company, if the said expenses are effectively connected with the permanent establishment.
Expenses for the acquisition of intellectual property, interest and administration costs that are deductible are subject to the appropriate withholding taxes.
Thin capitalisation rules on interest
No limits exist with respect to the amount of loans received by a company. However, thin capitalisation rules are applicable with respect to the deductibility of interest payments.
For corporate income tax purposes, companies may not deduct interest expenses incurred from payments to Latvian residents and non-residents that exceed the lower of the following two amounts:
Thin capitalisation rules do not apply to interest payments for loans from credit institutions and insurance companies of EU/EEA/double tax treaty states and to EU/EEA publicly traded debt securities and from the Treasury of the Republic of Latvia, the Nordic Investment Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Council of Europe Development Bank and from the World Bank group.
Transfer pricing rules
Latvian legislation provides for an arm’s length principle to be followed in all transactions between related parties. The SRS may redefine the value of transactions between related parties and recalculate the tax base if it has grounds to suspect tax evasion.
Methods such as comparable uncontrolled prices, resale prices, cost plus, profit split or the transactional net margin method may be used to assess market prices in transactions between related parties.
The generally accepted practice on transfer pricing issues is based on OECD transfer-pricing guidelines.
Provisionally detailed transfer pricing rules will come effective in the middle of 2012.
VALUE ADDED TAX
VAT shall be charged on:
VAT rates applicable in Latvia are 21 %, 12 % or 0 %.
A reduced rate of 12% applies to certain services and goods such as certain medicines and medical equipment, infant food, domestic public transport, supplies of domestic heating and natural gas, books, magazines and newspapers.
VAT at zero rate is applied to the export of goods and to intra-Community supplies, international passenger traffic, supplies of goods and services under diplomatic and consular arrangements etc.
In addition, the Law on Value Added Tax provides a list for groups of supplies and services, which are exempted from the VAT (e.g. fees for children attending pre-school institutions, medical services and services connected with medicine etc.)
Businesses are entitled to deduct input VAT on goods and services received to ensure the taxable transactions of the respective person provided they are registered as VAT taxable persons in Latvia. Retrospective registration is not allowed in Latvia.
Deducted input VAT for acquired real estate or fixed assets with value over EUR 71 144 must be annually adjusted over a ten-year period (for real estate) or five-year period (for fixed assets whose value exceeds EUR 71 144) considering the intended usage proportion of the real estate or fixed asset.
VAT refund to residents
If the amount of input VAT exceeds output VAT, the SRS, after receiving the taxpayer’s VAT return, automatically examines, accepts and carries forward overpaid VAT to the next taxation period, first covering VAT and other tax debts. After the end of taxation year, the SRS repays the overpaid VAT into a bank account nominated by the taxpayer.
Taxable persons are entitled to claim back overpaid VAT before the end of the respective taxation year if certain conditions specified in the Law on Value Added Tax are met.
VAT refunds to foreign taxpayers
Generally, taxpayers from other countries making no taxable supplies in Latvia may claim the refund of VAT paid in Latvia under requirements equivalent to EU Council Directives 2008/9/EC and 86/560/EEC. VAT refunds on VAT paid for goods acquired and services received in Latvia and import of goods to ensure their taxable transactions in the EU can be claimed by tax payers that do not carry out any business activities in Latvia and are registered in another EU country or in a country outside Latvia, if in the respective state a tax similar to VAT is applied in accordance with the reciprocity principle.
Persons registered in Latvia whose supplied goods and services during a 12-month period exceeds EUR 50 000 are liable to register as VAT payers. The said total value of supplied goods and services does not include the value of supplied capital and intangible assets if such supply has been carried out once in 12 months. However, companies are allowed to register as VAT taxable persons and further to apply VAT on supplies performed before the respective threshold is met. Moreover, non-taxable legal and natural persons registered in Latvia who carry out economic activities shall be liable to register as VAT taxable persons in Latvia if they perform intra-Community acquisition of goods or provide services and the total value of the transactions exceeds EUR 10 000 during the year.
The Law on Value Added Tax provides special registration requirements for persons registered in other EU Member States where such persons carry out certain activities in Latvia:
VAT group is considered to be a taxable person. A VAT group is a group of two or more legal entities which is established on the basis of a VAT-group foundation agreement in order to carry out inter-group transactions, which meets the criteria defined in the Law on Value Added Tax, and which is registered in the Register of VAT Taxable Persons.
Starting from 2011 the fiscal representative concept is introduced for the persons registered for VAT purposes in other EU Member State or outside the EU. Fiscal representatives are allowed to represent the authorizer for several types of activities prescribed by the Law on Value Added Tax.
The Law on Value Added Tax provides for differentiated procedures for submitting VAT returns depending on the amount and type of taxable transactions during the pre-assessment year.
VAT report-filing deadlines
VAT return together with annexes
For newly established enterprises and or if amount of taxable transactions is less than EUR 14 220 and the person does not perform transactions the place of supply of which is in another EU Member State
15th of the following month or 20th of the following month if the VAT return is submitted electronically
Amount of taxable transactions is EUR 14 220 to EUR 50 000 and the person does not perform transactions the place of supply of which is in another EU Member State
Amount of taxable transactions exceeds EUR 50 000 or the person performs transactions the place of supply of which is in another EU Member State.
10th of the following month
VAT due must be paid into the State budget on a monthly basis by the 20th day of the following month. In certain cases the annual VAT return for the preceding year shall also be submitted.
According to the Law on Excise Duties the following products are subject to excise tax:
Excise taxpayers are:
Several exemptions from excise tax are available.
Generally, the taxable period for excise tax is one month.
NATURAL RESOURCES TAX
According to the Natural Resources Tax Law, taxable persons are:
1. Individuals or legal entities that have obtained or are obliged to obtain a special permit and who are, in the territory of Latvia or its continental shelf:
2. Persons who first, in Latvia:
3. Persons who, in Latvia, sell either in public catering or retail, disposable tableware and accessories manufactured from plastic (polymers), paper, cardboard, composite materials thereof (laminates) with polymer or metal components, metal foil, wood or other natural fibres;
4. Persons, who use radioactive substances in their activities, as a result of which radioactive waste is created, which it is necessary to store or to dispose of in Latvia;
5. Persons, who register certain vehicles permanently for the first time in Latvia.
Legislation provides for natural resource tax incentives for companies engaged in activities intended to reduce environmental pollution and the consumption of natural resources. Certain provisions of the Natural Resources Tax Law define the requirements to be met in order to obtain tax relief.
MOTORCYCLE AND MOTOR CAR TAX
Individuals or legal entities on whose behalf cars or motorcycles are registered in Latvia are liable for the tax on motorcycles and motor cars. For cars and motorcycles which were initially registered abroad after 1 January 2009, the applicable tax rate depends on the amount of carbon dioxide generated by the vehicles. Motorcycle and car tax must be paid for cars or motorcycles which are going to be registered in Latvia for the first time, including cases when the specific rules giving rights to exemptions from car and motorcycle tax are not complied with.
Gambling and lottery tax is levied on business entities that have obtained gambling licences. The annual licence fee per company is from EUR 14 230 to EUR 427 000 depending on the type of gambling activity. Gambling tax is payable annually for each gambling facility or gambling machine. For example, roulette tables are subject to EUR 17 280 gambling tax; totalisator games are subject to 15 % tax on revenue; each slot machine – EUR 3 142, each bingo venue is subject to 10 % tax on revenue.
Lottery tax is imposed on the sale of lottery tickets at the rate of 10 % of revenue. Revenue from the sale of instant lottery tickets is subject to 10 % tax.
A micro-company tax payer may be a self-employed person or a limited liability company that meets the following criteria:
Micro-company tax is charged at a rate of 9% (from 4th year – 12%), which covers social security contributions, personal income tax and business risk duty for employees, corporate income tax if the micro-company tax payer is a limited liability company.
The maximum remuneration per employee (including the owner) is EUR 720 a month. In case the mentioned salary threshold is excessed or other criteria are not met, additional tax burden might be applied or the tax payer’s status will be changed either to payer of regular PIT or CIT (in case of limited liability company).
VEHICLE OPERATION TAX
The vehicle operation tax is payable by a legal entity owning, possessing or managing a vehicle registered or to be registered in Latvia, or to the owned, possessed or managed vehicle of which the transit registration plates have been issued in Latvia.
The vehicle operation tax is determined on the basis of the type and weight of the vehicle, its registration year and engine size.
The vehicle operation tax is payable per each calendar year.
COMPANY CAR TAX
The company car tax is payable for cars owned or held by a legal entity being assigned a registration number with the Commercial Register of Latvia.
The company car tax shall be payable for vehicle, which have been registered for the first time after 1 January 2005 and for which information regarding the engine capacity is contained in the vehicle registration certificate, in the following amounts:
The company car tax is payable per those months when the motor car has been registered as owned or held by the legal entity.
If the company car is used solely for company’s business purposes and this fact is approved by a GPS route list, the company might claim the refund of the particular tax.
The penalties for incorrect calculation and/or payment of taxes are as follows:
Decisions of the tax authorities may be appealed with the Director of the SRS within 30 days of the date the decision was received.