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Incentives for investors
The Latvian government continues to work on developing a favourable climate for foreign investment by improving the business environment. Legal and administrative requirements are being eased so facilitating cooperation between international and local, non-government partners. The incentives for both foreign and local investors are particularly aimed at encouraging investment in the modernization of manufacturing and the development of innovative technologies.
STATE AID PROGRAMMES
One of the main objectives for the government support programmes developed for 2007-2013 is to attract foreign investment to manufacturing and export as well as to technology sectors. The total amount of State and EU Structural Fund-financing granted for government support programmes up to 2013 is LVL 242.83 million. State support, co-financed from EU Structural Funds is available in the following ways:
Promotion of innovation
The goal of these activities is to promote business activities with high value added by providing support for the development of new products and technologies and fostering cooperation between the research and business sectors:
- competence centres – activities aimed at increasing the competitiveness of enterprises, promoting research and industry cooperation in industrial research, new product and technology development projects;
- development of new products and technologies – finance for industrial research and experimental development;
- support for the introduction of new products and technologies in manufacturing – finance for the introduction of new products and technologies in production;
- support for establishing ownership rights for industrial property – finance for registering property rights to industrial intellectual property;
- investment projects with high added value – activities designed to encourage local business people to invest in knowledge- or technology-intensive projects, as well as to attract foreign investment to sectors with high added value.
Loans and guarantees
Intended to foster the availability of financing for business development while decreasing the negative impact of direct government support on market competition:
- credit guarantees – investment and working capital loans
- short-term export credit guarantees
- loans to improve competitiveness
- venture capital funding
Business start - ups
Activities are aimed at facilitating access to international markets and the use of innovations, such as business incubators:
- business incubators have been established to promote the founding and development of new, viable and competitive businesses in Latvia’s regions, providing them with an environment appropriate to business and consulting services, thus creating a favourable climate for foreign investors.
- start-up capital – in cooperation with investment company Imprimatur Capital, provides capital in high added-value sectors such as IT, life sciences, nanotechnologies, medical devices, etc.
Promotion of business activities
Activities intended to increase business competitiveness on national and international scales and to develop business activities in regions by supporting investment in micro, small and medium-sized enterprises in regions with special support status.
Energy
Activities aimed at increasing the use of renewable resources by facilitating the development of renewable-energy cogeneration power plants.
Additional information at:
www.em.gov.lv
www.liaa.gov.lv
www.esfondi.lv
www.hypo.lv
www.lga.lv
TAX INCENTIVES
Depreciation for tax purposes
Tax depreciation for fixed assets is calculated using the declining balance method. The amount of depreciation for a taxpayer’s fixed assets over a taxation period shall be calculated from the residual value of each category of fixed assets prior to the deduction of depreciation in the taxation period.
Table 1. Depreciation rates for corporate income tax purposes
Category | Rate of depreciation | Type of fixed assets |
1 | 10% | Buildings, structures, permanent plants |
2 | 20% | Railway rolling stock and technological equipment, marine and river vessels, fleet and port technological equipment, power equipment |
3 | 70% | Computing devices and related equipment, including printing devices, information systems, software products and data storage equipment, means of communication, copiers and related equipment |
4 | 40% | Other fixed assets, except the fixed assets referred to in Category 5 and assets related to transport |
4 | 30% | Passenger cars (except vehicles acquired for representation purposes after 2007), motorcycles, marine and river vessels and air transport acquired after 12 June 2007 and not classified as representation automobiles |
5 | 15% | Oil exploration and extraction platforms together with the equipment necessary for their functioning located on such platforms, oil-exploration and -extraction ships |
The acquisition costs of patents, licences and trademarks are depreciated over five years by the straight-line method, but concessions are depreciated over ten years. For tax purposes, patents, licences and trademarks issued for a term of less than five years or concessions issued for less than ten years may be written off within their term of validity.
Increased depreciation
Increased depreciation rates may be applied to new technological manufacturing equipment, used in business activities, acquired or developed after 31 December 2005. For tax-depreciation calculating purposes, the value of manufacturing equipment qualifying for increased depreciation is increased by the coefficients showed in Table 2.
Table 2. Increased depreciation coefficients for new technological manufacturing equipment
taxable period the equipment was acquired or developed | Coefficient |
2006 | 1.5 |
2007 | 1.4 |
2008 | 1.3 |
2009 - 2013 | 1.5 |
New technological manufacturing equipment is unused (new) machine tools for the performance of specified sequential technological operations as a whole, as the result of which the properties of the work item (substance, material, article) are modified, thus creating an increase in the value of the work item, and the essential accessories and auxiliary devices of the said machine tools with which the performance of the machine tool’s technological operations as a whole are supplemented. Machine tools are installations (mechanisms or sets thereof) the essential components of which are full drive executing systems and control systems.
The law provides tax incentives for the depreciation of trademark or patent acquisition costs. The amount of registered trademark or patent acquisition costs incurred in taxation periods commencing during 2010, 2011, 2012 and 2013 is increased, multiplying it by 1.5 for tax depreciation calculating purposes. Depreciation for other intangible assets (trade secrets, goodwill) is not allowed.
Corporate income tax rebate for large-scale investment projects
This incentive allows taxpayers to claim tax rebates in the following amounts for the initial, long-term investment of large-scale investment projects:
- 25% of total initial long-term investment up to LVL 35 million
- 15% of the part of the total initial long-term investment exceeding LVL 35 million
Tax credits can be claimed for investment in the following sectors, priority manufacturing industries:
- manufacturing of food and beverages, agriculture
- manufacturing of wood and woodworking products
- manufacturing of chemicals, pharmaceuticals, rubber and plastics
- manufacturing of computers, electronic, optical and electrical equipment
- manufacturing of metals, equipment, machinery and vehicles
- steel manufacturing and shipbuilding sectors
To receive tax credits, tax payers shall submit applications for supported investment projects, drawn up in accordance with the provisions of relevant Cabinet regulations. The total initial long-term investment shall be at least LVL 3 million (~EUR 4.27 million), invested over at least a five-year period for the purpose of creating new products, modifying manufactured products or significantly changing the manufacturing process.
Taxpayers using the tax rebate for large-scale investment projects will not be eligible to apply for tax incentives available in Free Ports and Special Economic Zones. In addition, increased depreciation rates cannot be applied to investments that have received the tax rebate within the large-scale investment project.
Tax incentives for companies established in special regions
Companies, established in accordance with the Law on Regional Development, carrying on business in areas recognized as special development areas under the law are entitled to increase their depreciable base of fixed assets used for business activities in these areas by the coefficients 1.5 (Category 1 fixed assets), 1.3 (Category 2), 1.8 (Category 3) and 2 (Category 4).
Table 3. Increased depreciation coefficients for fixed assets in special regions.
Category | Rate of depreciation | Type of fixed asset |
1 | 1.5 | Buildings, structures, permanent plants |
2 | 1.3 | Railway rolling stock and technological equipment, marine and river vessels, fleet and port technological equipment, power equipment |
3 | 1.8 | Computing devices and related equipment, including printing devices, information systems, software products and data storage equipment, means of communication, copiers and related equipment |
4 | 2 | Other fixed assets |
Transfer of losses
As of 1 Jan. 2012, losses that have occurred before 2008 may be carried forward for up to 8 years for tax purposes. Losses that have occurred after 2008 may be carried forward indefinitely. For taxpayers registered in Special Economic Zones or Specially Supported Territories, losses that have occurred before 2005 may be carried forward for up to 10 years, and losses that have occurred since 2005 may be carried forward indefinitely.
Losses can be carried forward only if ownership does not change by more than 50% during the carry forward period or, if it does, the primary economic activity of the entity for the next eight taxation years after the change of ownership remains the same as in the two years before the change of ownership.
SPECIAL TAXATION REGIMES
Pursuant to the Law on the Application of Taxes in Free Ports and Special Economic Zones, a special tax regime shall apply to companies operating in the Liepaja Special Economic Zone, Rezekne Special Economic Zone, Ventspils Free Port and Riga Free Port.
The applicable tax holidays or favourable conditions are as follows:
- 80% rebate on real estate tax (1.5% in Latvia)*
- 80% rebate on corporate income tax (15% in Latvia)*
- 80% rebate on withholding tax for dividends, management fees and payments for usage of intellectual property (rates for each type of withholding tax vary) for non-residents*
- 0% VAT for most goods and services provided to enterprises in free zones or exported out of them
- 0% VAT for most goods and services supplied in the free zones, including construction services
- Reduced rates for social security tax for expatriates who pay social security in their respective home country.
* The maximum accumulated amount compensated to the company by these conditions collectively is 50% (60% for medium and 70% for small enterprises) of the company’s total ongoing investment of up to 50 million Euros (other restrictions apply; please see On the Application of Taxes in Free Ports and Special Economic Zones, for further details).
However, for the stated tax holidays or favourable conditions to apply, certain criteria specified in the Law on the Application of Taxes in Free Ports and Special Economic Zones shall be met.
PROTECTION OF INVESTMENTS
Latvia has signed bilateral agreements for the promotion and mutual protection of investments with 43 countries. The agreements grant safety and protection to investments made in real estate, intellectual property, shares or any other form of investment, prohibiting the application of unreasonable, discriminatory or arbitrary measures to investments by the other contracting State and direct or indirect expropriation or nationalisation. Through these investment agreements, Latvia grants national or most favoured nation treatment to foreign investment and the expansion, management, maintenance, use, enjoyment and sale or other disposal of investments made by contracting parties.
FOREIGN INVESTORS' COUNCIL IN LATVIA
The Foreign Investors' Council in Latvia (FICIL) is a non-government organisation that unites the largest companies, from different countries and sectors, who have invested significantly in Latvia. Additionally, ten national chambers of commerce operating in Latvia have joined FICIL. The companies represented in FICIL account for about 40% (approx. LVL 800 million) of total foreign direct investment stock.
FICIL's activities are based on dialogue with the Latvian government to improve the business environment and investment climate in Latvia. FICIL members identify issues which affect business operations and cooperate with various government agencies to solve problems through changes in legislation or administrative procedures. The main activities of FICIL address four key issues for improving Latvia’s investment climate:
- transparency
- elimination of protectionism for a well-functioning market and reduced inflation
- stability and predictability in the investment climate
- more forceful attraction of foreign direct investment
To foster the discussion between executives of the foreign investor companies and representatives of the Latvian government, FICIL regularly meets with the government in annual High Council meetings jointly chaired by the sitting Prime Minister and the CEO of a FICIL member’s parent company to review progress and provide further direction.
POLARIS PROCESS
To better serve potential investors, LIAA has developed the POLARIS Process. The key to this new, unique methodology – the POLARIS Process – is collaboration between all stakeholders. In this process, national and local governments, universities and research institutions, and local industry players are brought together to help potential investors understand and take full advantage of Latvia’s strengths and advantages.
LIAA’s support does not end once investors decide to proceed with their investment. The POLARIS Process starts even before investors meet with to LIAA and only ends well after the project is implemented. We provide in-depth knowledge of sectors, project management support, project execution support and then follow up and measure results in order to keep improving the process. For each step of the process, POLARIS defines the tasks to be undertaken by each stakeholder.
Additional information at:
www.polarisprocess.com
www.liaa.gov.lv
www.vid.gov.lv
www.ficil.lv
