Operating environment

FORMS OF BUSINESS

The main forms of business stipulated in Latvia’s Commercial Law are individual merchants, limited liability companies, joint-stock companies and partnerships.

Individual merchant

Natural persons are obliged to register as an individual merchant (komersants) with the Commercial Register if the annual turnover from their economic activities exceeds LVL 200 000 or the economic activities performed conform to those of a commercial agent or a broker, or the yearly turnover from performed activities exceeds LVL 20 000 and the natural person provides employment for more than five employees. The whole of individual merchants’ property is liable in terms of meeting their obligations.

Limited liability company

Limited liability companies (LLC) are closed business entities whose equity capital consists of the total amount of the par value of the shares, which cannot be traded publicly. Limited liability companies may be established by one or more natural or legal entities. Shareholders may simultaneously be the only member of the Board and the only employee. Permanent presence of shareholders in Latvia is not required, although the board must be reachable at the address of the registered office. The capital of a LLC is divided into shares and the liability of shareholders is limited to their investment in share capital. The minimum share capital of a LLC is LVL 2 000, but a LLC may have less share capital if it has no more than five members (all individuals) and certain conditions stipulated by the Commercial Law are met. Share capital can also be paid in the form of tangible or intangible property. Where the total value of property (tangible or intangible) contributions does not exceed LVL 4 000, and total property contributions are less than 50 % of the equity capital of a company, the valuation of the property may be made by the founders. The administrative institutions of a LLC are the shareholders’ meeting and the board of directors, also the supervisory council (if such has been formed). According to the Commercial Law, only shareholders’ meetings may:

• amend the articles of association;
• increase or reduce share capital;
• elect or recall members of the council;
• elect or recall members of the board of directors;
• approve annual accounts and the distribution of profits;
• elect and recall auditors, LLC controllers and liquidators;
• perform other activities stipulated by the Commercial Law.

The executive body of a LLC is the board of directors whose main duty is to submit quarterly reports to the council on the activities and financial status of the LLC.

Joint-stock company

Joint-stock Companies (JSC) are business entities whose equity capital consists of the total amount of the par value of shares in the company’s stock. Joint-stock companies can be closed or open with shares in public circulation. Minimum statutory capital for JSCs is LVL 25 000. JSCs performing the activities of banks, insurance companies or currency exchange require a higher amount of statutory capital. JSCs can issue ordinary and preference shares which can grant shareholders rights to receive dividends, rights to receive a liquidation quota and voting rights at shareholders’ meetings.

JSCs are managed by shareholders’ meetings, supervisory councils and boards of directors. Only shareholders’ meetings may make decisions concerning:

• annual accounts;
• use of the profit from previous year’s activities;
• election and recall of council members , auditors, JSC controllers and liquidators;
• the bringing of actions against members of the board of directors, the council and the auditor or withdrawing actions against them, also the appointment of representatives to maintain actions against council members;
• amending articles of association;
• increasing or reducing equity capital;
• the issuance and conversion of a JSC’s securities;
• the remuneration for council members and auditors;
• termination of activities or their continuation or reorganisation; and
• the general principles and criteria for determining the remuneration for board and council members.

The supervisory council represents the interests of shareholders between shareholders’ meetings; it appoints the board of directors and supervises its activities. The board of directors is the executive institution of JSCs which supervises and manages their activities. Boards of directors consist of one or more members, but if a JSC is publicly traded, the board of directors must have at least three members.

Partnership

A partnership is a business entity in which two or more persons (members) have united, on the basis of a partnership agreement to perform commercial activities utilising a joint company name. The Commercial Law provides for two forms of partnership: general and limited partnerships. Both can be established by two or more persons. The main difference between the two forms is that all persons establishing a general partnership have unlimited liability for the partnership’s debts. On the other hand, limited partnerships are established by limited and unlimited partners, where the liability of limited partners is limited to the amount of capital contributed. Partnerships are established by partnership agreements and there are no requirements for minimum capital. Partnerships’ profit or losses are distributed at the end of the year in proportion to the amount of capital contributed by partners.

Branch and representative office

According to the Commercial Law, local and foreign companies may establish branch offices in Latvia. A branch is an organisationally independent part of a company that can carry out economic activities, but is not treated as a legal entity. A branch is subject to the same reporting obligations as registered companies, and the head office of the branch is fully liable for activities carried out by the branch.

Representative offices, similar to branches, are not independent legal entities. Representative offices cannot perform economic activities and their functions are limited to market research, promotion of the parent company and other limited marketing activities.

SETTING UP A COMPANY

All companies must be registered in the Commercial Register. For companies to achieve legal status, their founders shall prepare and submit to the Register of Enterprises a foundation agreement and articles of association, together with receipts that confirm payment of registration duty and for the publication of an announcement in the official newspaper, Latvijas Vēstnesis. Registration duty depends on the chosen form of business, for JSCs it is LVL 250, for LLCs it varies from LVL 15 to LVL 100, but for branches it is LVL 20. To register partnerships, the parties shall submit an application for registration and pay registration duty (LVL 100) and for the publication of an announcement in the official newspaper (LVL 24). Before applying to the Register of Enterprises, companies must pay at least 50% of subscribed capital for LLCs and at least LVL 25 000 for JSCs, the remaining subscribed capital must be paid within one year of the registration date in the Commercial Register. The Register of Enterprises undertakes to review applications and register companies within three days or within one working day (if a three times larger fee is paid)

ENTRY, WORK AND RESIDENCE PERMITS

According to the Immigration Law, foreign nationals are entitled to enter and reside in Latvia if they have valid travel documents. If foreign nationals wish to reside in Latvia for more than 90 days within a 6-month period, they must obtain a visa or residence permit. Since accession in the EU, citizens of other EU Member States do not require visas or a residence permits, but must obtain a registration card from the Office of Citizenship and Migration Affairs if their stay in Latvia exceeds 90 days.

Visas

Since 21 December 2007, Latvia has been a member of the Schengen Agreement, therefore it is possible to travel to other Schengen countries with a Schengen visa issued in Latvia. Foreign nationals are entitled to request visas if they:

• have a valid travel document;
• have the financial resources necessary to reside in their destination country;
• submit documents substantiating the purpose of entry and stay and the place of stay, or have an invitation or request and;
• have a valid health insurance policy.

An invitation is mandatory if a natural or legal person in Latvia is considered to be an employer in accordance with the Law on State Social Insurance and they intend to employ a foreign national by entering into an employment contract or a work-performance contract. However, foreign nationals who wish to establish employment relationships or become self-employed must have a work permit.

Work permits

Work permits are issued by the Office of Citizenship and Migration Affairs on the basis of visa or residence permits. If employers intend to employ a foreign national, they must register a job vacancy with the State Employment Agency (SEA) at least one month before applying to the SEA for approval of invitations for visas or sponsorship for residence permits. Foreign nationals must receive separate work permits if they will work for more than one employer or in several positions. Where the employment of foreign nationals relates to short-term stays in Latvia that do not exceed 90 days in a six-month period, work permits can be issued in accordance with the validity of visas.

Residence permit

Residence permits allow foreign nationals to stay in Latvia temporarily or permanently for periods exceeding 90 days in a six-month period. Residence permits may be requested by self-employed persons, members of the boards of directors or supervisory councils of companies registered in the Commercial Register, persons authorized to represent foreign companies in branch activities and in other situations prescribed in the Immigration Law. Since April 2010, temporary residence permits may be requested by foreign nationals who have invested at least LVL 25 000 in the equity capital of a capital company and, during a financial year, the capital company pays at least LVL 20 000 in taxes or has acquired real estate worth at least LVL 100 000 (Riga, Riga planning region or cities), LVL 50 000 (in regional areas), or has made subordinated capital investments of at least LVL 200 000 in a Latvian credit institution.

REAL ESTATE ACQUISITION PROCEDURES AND RESTRICTIONS

Latvian legislation provides no restrictions on the acquisition or transfer of ownership rights to real estate in cities for citizens of Latvia, citizens of EU Member States and companies in which more than 50 % of equity is owned by citizens of Latvia or EU Member States or by natural or legal persons from countries with which Latvia has entered into international agreements on the promotion and protection of investments. Foreign nationals from third countries are subject to restrictions on the acquisition of land in State border zones, specially protected areas and agricultural or forest land.

Acquisition of real estate in rural areas

The Law on Land Privatisation in Rural Areas states that transactions may only be conducted with land which has been recorded in the Land Register. Rural land only can be acquired by citizens of Latvia, public stock companies if the shares thereof are quoted in the stock exchange or companies registered in the Register of Enterprises of Latvia if:

• more than half of share capital belongs to citizens of Latvia, or;
• more than half of share capital belongs to natural or legal persons from countries with which the Republic of Latvia has entered into international agreements on the promotion and protection of investments.

As from 1 May 2011, citizens of EU Member States and legal persons registered in EU Member States will be able to acquire rural land under the same conditions as citizens of Latvia. Until then, citizens of EU member states can acquire agricultural land if they have been actively engaged in agricultural activities in Latvia for three years.

If the said persons wish to acquire ownership of land, they must submit an application to the parish council (municipality, city council) in whose territory the relevant land is located, indicating the purpose of future land use. Parish councils (municipality, city council) shall approve acquisition of land within 20 days.

Transfer of rights to real estate

Each real estate transaction involving changes in ownership rights must be registered in the Land Register which stores information regarding the legal status of real estate. Registration of the transfer of real-estate ownership rights is done by submitting registration applications signed by both seller and purchaser. Before registration with the Land Register, the owner must settle any real-estate tax debt on the property and pay stamp and state duties (see Section Real Estate Tax). Applications for transfer of real-estate rights are reviewed in ten days.

PROTECTION OF INTELLECTUAL PROPERTY

Latvian legislation provides four main instruments for protecting intellectual property – patents, trademarks, designs and copyrights. All laws regarding the protection of intellectual property are harmonized with EU legislation and international conventions.

The institution implementing State policy on the ensuring of industrial property rights and making decisions on the granting of patents or the registration of trademarks, designs or additional protection certificates is the Patent Office. It maintains official State registers of patents, trademarks, registered designs and certifies individuals to act as intermediaries in the registration of intellectual property.

The rights to use intellectual property can be acquired in the form of licences or licence agreements. The owner of intellectual property is entitled to transfer ownership rights to another person together with a company or separately from it.

Patents

The rights of inventors and patent holders are protected by the Patent Law. According to the said law, only new inventions with industrial application can be protected by a patent in any field of technology. Patentable inventions may be devices, methods, substances, combinations of substances, or biological materials. The inventor, his successor or his employer own the exclusive rights to the patent, which prohibits third persons from producing, distributing or using patented products or methods. Exclusive rights are valid for a maximum of 20 years. The rights based on patents or applications have the same legal status as the rights to movable property and patent owners are entitled to grant other persons rights to utilise the patent, partly or fully, by means of licensing agreements.

Persons wishing to patent an invention must file a patent application with the Patent Office. Single patent applications can only request a patent for an invention or a group of inventions with a common purpose. The execution date of a patent is the date the application was submitted if all requirements were met. The Patent Office will grant the patent as soon as possible for 18 months from the date of the application. Within nine months of the publication of the notification regarding the granting of a patent, persons may submit a case against the granting of the patent, to be examined within three months.

Disputes concerning patents are examined by courts according to the same procedures as disputes regarding movable property.

Trademarks

The protection of trademarks and trademark registration is regulated by the Law on Trademarks and Geographic Indications. According to the said law, trademarks can be words, graphics or three-dimensional objects, as well as any combination of the said elements. The rights to trademarks can be acquired by any natural or legal person by registering the trademark with the Patent Office. Within three months of submitting trademark-registration applications, the Patent Office accepts an application for expert-examination after which registration is approved or rejected. After registration and publication of a trademark, the Patent Office shall issue the owner a trademark-registration certificate. Trademark registration is valid for ten years and can be renewed indefinitely for subsequent ten-year periods. Any case opposing trademark registration can be submitted within three months of the publication of a trademark. A trademark registration may be revoked by a court if the trademark has not been actually used for a period of five successive years in connection with the goods and services for which it is registered. Applications for international and Community registration of trademarks can be submitted to the Patent Office.

Designs

According to the Law on Design, legal protection is granted to a design if it is new and has individual character. To establish exclusive rights to a design and prohibit other persons from using the design, its owner must register the design with the Patent Office by submitting an application for registration. If the submitted design meets the definition of a design, the execution date of the design is determined to be the application submission date. The registration of a design is valid for five years and can be renewed for a maximum period of 25 years. Within three months of the granting of legal rights to a design, any person can submit a case opposing the registration of the design. International design registration has the same legal status as domestic registration.

Copyright

Copyright on works of literature, science, art, design, photographic works and other works of authors is protected by the Copyright Law. Copyright belongs to the author as soon as a work is created without any registration or other formalities. The copyright to works of authors created while authors are in an employment relationship belong to the author, with the exception of computer software. Authors have exclusive rights to publish, distribute, reproduce and take any other actions related to their work. In certain cases prescribed in the Copyright Law, for example, for educational, research or judicial purposes, the works of an author can be used without infringing the copyright. Copyright is in effect for the entire lifetime of authors and for 70 years after their death. Neighbouring rights for performers, recording producers, film producers and broadcasting organisations are valid for 50 years. Copyright protection can be conducted by a collective management organisation formed by authors. Where copyright is infringed, authors may enforce their rights in court and seek compensation for any losses and moral damage incurred.

REGULATION OF COMPETITION, MERGERS AND ACQUISITIONS
Foreign and local companies commencing business or involved in reorganisation (merger or acquisition) must comply with the corresponding provisions of the Competition Law, the Commercial Law and the Law on Corporate Income Tax. Since Latvia acceded to the EU in 2004, the Competition Law and the national competition authority – the Competition Council – have operated in accordance with EU regulations on mergers and acquisitions.

Competition

According to the Competition Law, unfair competition is actions infringing legislative acts and creating restrictions on or distortion of competition through the imitation of goods produced or sold by another market participant, the spreading of false, incomplete or distorted information regarding other market participants, or other activities hindering competition.

The protection and development of competition in Latvia is performed by the Competition Council, whose main tasks are to:

• monitor observance of the prohibition against the abuse of dominant positions and prohibited agreements by market participants;
• monitor observance of the Advertising Law;
• examine submitted notifications regarding agreements between market participants and take decisions in respect of them, and;
• restrict market concentration.

The Competition Council has the right to:

• carry out market supervision;
• conduct investigations of competition violations;
• provide opinions regarding the conformity of market participants’ activities;
• submit pleadings, applications and complaints to courts.

According to the Competition Law, agreements between market participants which restrict or distort competition in Latvia, such as agreements regarding price- and tariff-fixing or non-participation in tenders or auctions, etc., are prohibited. In cases of prohibited agreements, the Competition Council has the right to impose fines on each participant of up to 10 % of their net turnover for the previous financial year. The decisions of the Competition Council are binding on market participants and market participant groupings.

Any market participant who is in a dominant position is prohibited to refuse to enter into transactions with other market participants or restrict the amounts of production, technical development of the market, or abuse its dominant position in any other way. The amount of fines imposed in cases of abuse of dominant market position is 10 % of net turnover for the previous financial year (0.005 - 0.2 % in retail).

Mergers and acquisitions

The merger and acquisition of companies is regulated by the Commercial Law which prescribes procedures for reorganising companies. Companies involved in a reorganisation process must enter into a reorganisation agreement, approved by a certified auditor, stating all the parties involved and all the consequences of the reorganisation, and prepare a reorganisation prospectus (optional for LLCs and partnerships). Every company involved in a reorganisation must publish an announcement to creditors in the official newspaper Latvijas Vēstnesis. Three months after publishing the announcement, companies must submit applications to the Commercial Register providing the reorganisation agreement and other documents stipulated in the Commercial Law. After the reorganisation is recorded in the Commercial Register, the property of the acquired company is considered to be transferred to the acquiring company and the acquired company is deleted from the Commercial Register and regarded as liquidated. Shareholders of the reorganised company who did not agree to the reorganisation can request that the acquiring company redeem their shares as compensation.

As prescribed in the Competition Law, where the combined turnover within Latvia for the previous financial year of the participants in a merger or acquisition exceeded LVL 25 million or the total market share of the participants in the merger in the particular market exceeds 40 %, participants must submit a full-form merger notification to the Competition Council. Within one month of receiving the notification, the Competition Council will decide whether to permit or prohibit the reorganisation.

In cross-border merger cases, the reorganisation agreement must state:

• the types of capital companies involved in the cross-border merger;
• data regarding the valuation of assets and liabilities to be transferred to the acquiring company;
• a report on the commercial activities of the capital company upon which the provisions for the cross-border merger are based.

If the reorganised company is registered in Latvia, it must submit a document issued by the Commercial Register Office of another Member State attesting that the acquired company has performed all the necessary actions for the completion of the cross-border merger, and vice versa.

In reorganisation cases (domestic or cross-border), the determination of taxable income shall not take into account the results of the revaluing of asset and liability items transferred to the acquired company and the results of the revaluing of fixed assets shall not be taken into account in the residual value of fixed assets received by the acquiring company if:

• the companies involved in the reorganisation are resident in Latvia; or
• the acquiring company is resident in a EU Member State, the acquired company is resident in Latvia and the assets and liabilities after the transfer are not applicable to the permanent establishment of the acquiring company outside Latvia; or
• the companies involved in the reorganisation are resident in EU Member States and the assets and liabilities after the transfer are applicable to the permanent establishment of the acquiring company in Latvia.

PROTECTION OF THE RIGHTS AND INTERESTS OF INVESTORS

Rights of shareholders

The rights of investors in Latvia are protected by the Commercial Law, the Civil Law and the Law on Judicial Power. Shareholders exercise their rights in annual shareholders’ meetings. Shareholders who jointly represent not less than one twentieth of the equity capital of a company can request extraordinary shareholders’ meetings. Any shareholders can bring an action in court to revoke decisions taken by shareholders’ meetings if they were unlawfully prevented from participating in the meeting or from familiarising themselves with relevant information, or significant violations have occurred in making such decisions.

Shareholders (the supervisory council in JSCs) elect a board of directors. The board of directors acts as the executive body of the company and the members of the board are jointly liable for losses incurred as a result of their actions. Boards of directors are obliged to inform shareholders about the company’s financial results quarterly and about any circumstances that can affect the company’s activities. Shareholders can request internal audits of activities and the economic condition of companies, as well as elect internal controllers to examine companies at the request of shareholders. Shareholders can instigate court proceedings against members of the board of the directors on the basis of a simple majority vote of shareholders or at the request of a minority of shareholders representing at least one twentieth or LVL 50 000 of the equity capital of a company. Investors can defend their rights and instigate court proceedings against persons who have caused harm to the property or rights of the investor by unlawful actions or wrongful intent, in accordance with the Civil Law.

Latvian court system

The Law on Judicial Power prescribes that all court judgments have the force of law after the expiration of their appeal or protest deadline. The Latvian court system is structured in three levels – 1) district (city) courts operate as  first-level courts for civil, criminal and administrative matters; 2) six regional courts operate as first-instance courts for more complicated cases and appeal courts for cases adjudicated by district courts; 3) the Supreme Court, composed of the Senate, the Civil Matters Panel and the Criminal Matters Panel, is the cassation instance for all matters previously adjudicated by district (city) courts and regional courts, and the appeal court for cases adjudicated by regional courts.

Protection of investors

Rights regarding investment made by foreign investors in Latvia are covered by bilateral agreements on the promotion and protection of investments. The agreements state that all disputes between investors and the contracting state must be resolved through negotiation. Where disputes are not resolved by negotiation, investors can hand over the dispute to a competent court in the country where the investment was made or to any ad hoc arbitration tribunal established under UNCITRAL or ICSID.

Additional information at:
www.pmlp.gov.lv
www.zemesgramata.lv
www.ficil.lv
www.tiesas.lv
www.mfa.gov.lv
www.ur.gov.lv