Taxation

GENERAL PRINCIPLES

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 payments
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. Electricity tax
12. Micro-company tax  

PERSONAL INCOME TAX

Pursuant to Latvian legislation, persons are considered to be residents of Latvia for tax purposes, if:

• their permanent place of residence is Latvia, or
• they reside in Latvia for 183 days or longer in any given 12-month period commencing or finishing during a taxation year, or
• they are a citizen of the Republic of Latvia employed abroad by the Latvian government

Income earned by a Latvian tax resident in any country is taxed in Latvia.

The object of income tax for non-residents is their Latvian-sourced income (tax treaties shall be taken into account for residence purposes), i.e. income attributable to Latvia:

• employment income;
• income from independent professional services;
• directors’ fees;
• interest income, except interest from Latvian, European Union (hereinafter – EU), European Economic Area (hereinafter – EEA) or municipality debentures;
• dividends;
• income from payments for intellectual property;
• other income forms listed in the Law on Personal Income Tax.

As of 1 January 2010, the following income is taxable for Latvian taxpayers:

• 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);
• capital gains (taxable income is determined as asset-disposal price minus asset-acquisition price or liquidation quota minus investment value);
• income acquired from forests – 10 %.

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 from agricultural production and the provision of rural tourism services, if it does not exceed LVL 2 000 (approx. EUR 2 845) a year;
• insurance indemnities received from insurance companies;
• other income listed in the Law on Personal Income Tax.

Tax rates

Tax rates are as follows:

• for annually taxed income and salary income: 25 %
• for income from capital other than capital gains: 10 %
• for income from capital gains: 15 %

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 25 %. Salary includes all income related to labour relations, including fringe benefits, minus a monthly non-taxable amount (LVL 45 (approx. EUR 64)) for employees and LVL 70 (approx. EUR 128) for each of their dependants).
Employers must withhold income tax from employees’ salaries.

Expenses deductible from personal income

The following expenses are deductible for personal income tax purposes:

• the amount of SSC paid in Latvia and other EU countries;
• expenses for medical treatment, vocational training and obtaining education;
• health insurance premium contributions to insurance companies;
• authors’ expenses;
• contributions to Latvian private pension funds or other private pension funds registered in other EU Member States or EEA countries which do not exceed 10 % of a person’s annual taxable income;
• other expenses listed in the Law on Personal Income Tax.

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.

Individual activity

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, may choose to pay fixed income tax (from LVL 25 to LVL 500 (approx. EUR 36 to EUR 712). per year) if their income did not exceed LVL 10 000 in the pre-taxation year.

Self-employed persons performing certain economic activities have the option to pay a monthly patent fee (combined PIT and SSC payment) in the range LVL 30 to LVL 120 (approx. EUR 42 to EUR 171).

Tax returns and terms

Annual income tax declarations for the preceding year are due on 1 April of the current year for personal income tax payers who, during the taxable period (calendar year), have received:

• income from economic activities;
• income from activities performed abroad;
• non-taxable income that exceeds four times the annual non-taxable minimum specified for the taxation year (LVL 1 680 for 2010).

Other Latvian residents may submit PTI declarations within a 3-year period after the taxable period. 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 11 % from the employee’s gross salary as the social security contribution payable by the employee. The employer must also pay SSC equal to 24.09 % (The total standard rate of the social security contributions is 35.09 %).

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;
• are private individuals managing real estate;
• are foreign employees of a foreign employer.

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 insurers in Latvia and pay SSC. With respect to EU citizens, A1 certificates are applicable.

REAL ESTATE TAX

Tax rate

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. The taxation period is a calendar year.

Tax exemptions

Some types of real estate are exempt from real estate tax. For example, exemptions apply to:

• buildings which are utilised only for agricultural production;
• buildings erected or reconstructed for the performance of economic activities for one year, counting from the next month after their commissioning;
• buildings or the parts thereof, which are utilised for educational, health, social care or cultural purposes (except cinemas and video libraries);
• other buildings specified by the Law on Real Estate Tax.

STAMP DUTY

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:

• relatives – 0.5 % of the value of real estate, but not more than LVL 1 000;
• other natural and legal persons – 2 % of the value of real estate, but not more than LVL 30 000;
• other natural and legal persons as a gift – 3 % of the value of real estate, but not more than LVL 50 000.

With respect to the investment of real estate into the charter capital of companies, stamp duty to the amount of 1 % of the value of the real estate investment shall be paid, but no more than LVL 1 000.

CORPORATE INCOME TAX

Table 1. Corporate income tax

Corporate income tax rate (%)	15
Withholding tax (%) (A)
Dividends(B)	10 or 0
Interest to related party (C)	10 or 5
Management and consultancy fees(D)	10
Royalties (E)	15 or 5
Payments for the use of fixed or movable property in Latvia	5
Gross proceeds of the sale of real estate in Latvia	2
Net operating losses (years)
Carry back	n/a
Carry forward (F)	8

(A) Taxes apply to payments to non-residents
(B) 0% tax applies if the recipient is resident of another EU or EEA country and has a residence statement* approved by the tax authority in the recipient’s residence country confirming that the recipient is resident for tax purposes.
*Residence statement – a statement that confirms that the recipient is considered a resident of a EU/EEA Member State for tax purposes, and under the terms of a double tax treaty is not considered to be a resident for tax purposes outside the Community as well as is subject to income tax of the respective Member State, without the option of being exempt. The residence statement issued by the tax authority of the residence country of the recipient of dividends must be at the disposal of the Latvian company prior to the payment of dividends.
Additionally please see Table 12 for withholding tax rates applied to residents of treaty countries.
(C) Interest withholding tax applies only to interest paid to related parties. 5 % rate applies to interest paid by Latvian-registered banks to related parties; 5 % rate applies to interest paid by other Latvian companies to EU resident related companies**; 10 % rate applies to other interest payments (additionally please see transitional period in Table 13).
**Two EU resident companies are considered related, if:
- one company owns at least 25 % of the capital or voting rights in another company; or
- 25 % of the capital or voting rights of both companies belong to another EU resident company.
(D) No withholding tax applies to residents of treaty countries provided that a residence certificate is obtained prior to the payment of management fees.
(E) The 15 % rate applies to copyright royalties (5 % between EU-resident related companies starting from 1 July 2009), the 5 % rate applies to royalties on other types of intellectual property; (additionally please see transitional period in Table 13).
(F) 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.

Taxable income

Resident companies are subject to tax on their worldwide income. Non-resident companies without a permanent establishment in Latvia are subject to tax on their Latvian-sourced income. 
 
Non-resident companies operating through a permanent establishment in Latvia are subject to tax on income derived by the permanent establishment in Latvia, as well as income independently derived abroad by the permanent establishment.
 

Capital gains

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.
 
 
Dividends

Dividends paid out of resident profits being taxed under the Law on Corporate Income Tax are not included in the taxable income of a resident recipient company. The said exemption is not applied if the payer is a company benefiting from a tax holiday.

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.

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.
 

Determination of taxable income

Taxable income is the profit or loss before tax reported in a company’s profit and loss statement, prepared in accordance with the Law on Annual Accounts and subject to adjustments to annual corporate income tax declarations as specified below:
 
 I. PROFIT (LOSS) SHOWN IN PROFIT AND LOSS STATEMENT:

• plus: losses from the maintenance of social infrastructure multiplied by coefficient of 1.5;
• plus: expenses not directly related to business activity multiplied by coefficient of 1.5, except certain donations;
• equals: adjustable taxable income (loss).

 II. INCREASE OF ADJUSTABLE TAXABLE INCOME:

• total cost of depreciation of fixed assets and written-off intangible assets shown in the annual report;
• total amount of maintenance costs, interest and lease payments in respect of representation motor vehicles;
• total amount of losses related to disposal of representation motor vehicles;
• total amount of penalties comprising penalties imposed on the basis of contracts, tax penalties and monetary penalties;
• underpaid amounts of shortage or misappropriation in the companies of which the share capital owned by the State or local governments exceeds 50%, as well as in institutions financed from the budget;
• payments to non-residents if no withholding tax is paid, including:
  • fees for management and consultancy services;
  • interest;
  • royalties for intellectual property;
  • royalties for usage of property located in Latvia;
  • income from sale of real estate situated in Latvia;
  • payments to low tax or tax free countries.
• 60% of amount used for representation expenses;
• increase in special reserves for doubtful debts and bad debts (does not apply to credit institutions);
• loss on sale of securities (except for losses from securities in public circulation in the EU or EEA or securities which are not sold regularly);
• expenditure related to the acquisition in the taxation period of securities in public circulation in the EU or EEA;
• interest payments in excess of the admissible amount if thin capitalisation rules are applied;
• cost reserves and accruals;
• total of payments for illegal production or usage of natural resources;
• decrease in the total of the costs incurred from the revaluation of balance sheet items, except for amounts related to changes in foreign currency exchange rates;
• compensation paid for tax losses transferred within a group;
• compensation received and not reinvested within 12 months for forced loss of land, buildings, their parts and constructions;
• losses arising from the sale of fixed assets to associated companies or persons related to the company;
• difference between the market value of goods (production, services) and actual value if transactions are between related parties;
• difference between transaction value and market value where transactions are between related parties;
• certain improvement and reconstruction costs;
• insurance premiums paid to non-resident insurance companies for services provided by Latvian insurance companies (except payments made to EU insurance companies);
• payments made by the employer for the benefit of employees into private pension funds in conformity with licensed pension plans and paid in amounts of insurance premiums for employee life insurance (with savings funds) if on the last day of the company’s taxation period there is a tax debt;
• certain dividends received from non-residents, as well as from residents subject to special tax reliefs in Latvia.

 III. DECREASE IN ADJUSTABLE TAXABLE INCOME:

• total cost of depreciation of fixed assets and intangible investments calculated according to the Law on Corporate Income Tax;
• real estate tax, if previously not included in calculation of taxable income;
• total cost of duties and taxes on gambling and lottery;
• cost of agricultural subsidies;
• decrease in special reserves for doubtful debts in comparison with prior tax period and the total amount of bad debts, if certain requirements defined in the Law on Corporate Income Tax are met;
• increase in the total costs incurred in the revaluation of balance sheet items, except for the amount related to changes in foreign currency exchange rates;
• compensation received for forced loss of land, buildings, their parts and construction, if such compensation is reinvested in the same or similar assets within 12 months of the receipt of such compensation;
• compensation received for the transfer of losses within a group;
• income from badwill in privatisation;
• income from difference between value of privatisation vouchers and the selling price of privatised property for the said vouchers;
• dividends received, if certain requirements are met;
• late payment fees for taxes which are decreased in accordance with the Law on Taxes and Fees;
• computers and other electronic equipment donated to education establishments;
• income from the sale of securities in public circulation in the EU or EEA;
• expenses related to provision of special new work places for employees with physical or mental limitations (in a disability group) if new work places are maintained for employees with physical or mental limitations for at least two years;
• weighted average interest rate for loans in lats applied to non-financial companies multiplied by non-distributed profit from the periods before the taxation year. Non-distributed profit is calculated by adding non-distributed profit from taxation periods beginning after 31 December 2008;
• income from sale of fixed assets if new, functionally similar fixed assets are bought during the 12-month period before or after the sale of the fixed asset;
• decrease of reserves and accruals, If previously included in the profit or loss statement;
• recovered bad debts;
• production costs of books for the National Library.

IV.TAXABLE INCOME;

V. LOSSES CARRIED FORWARD, ADJUSTED TAXABLE INCOME, GROUP RELIEF, LOSSES FROM SALES OF SECURITIES IN CERTAIN CASES:

• losses from the sale of securities, other than public securities issued in EU or EEA Member States, may be offset over an eight-year period only against income from the sale of other securities;
• losses may be transferred to another group company only up to the amount not exceeding the taxable income of that company in the same taxable period. Losses incurred during previous taxation years may not be offset within the group.

Tax losses may be carried forward for eight years from the 2010 taxation period.

VI. ADJUSTED TAXABLE INCOME;

 VII. TAX RELIEF:

• corporate income tax paid in foreign countries, but not more than 15 % of the foreign source income calculated in accordance with the requirements specified by the Law on Corporate Income Tax;
• tax relief for agricultural companies;
• tax relief for donations is 85 % not exceeding 20% of the total amount of tax.

Administration

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.
 

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.

Depreciation for tax purposes

Tax depreciation for fixed assets is calculated using the declining balance method. The amount of depreciation for the fixed assets of the taxpayer in the taxation period is calculated from the residual value for each category of fixed asset prior to deduction of depreciation in the taxation period.

See section Tax Incentives for information regarding depreciation rates for corporate income tax purposes.

The acquisition costs of patents, licences and trademarks are amortized according to the straight-line method over five years, but concessions over ten years. Patents, licences and trademarks issued for a term of less than five years or concessions issued for less than ten years can be written off within the term of validity for tax purposes.

See section Tax Incentives for information regarding depreciation of new equipment and intellectual property acquisition costs.

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.

Notional interest

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.

ANTI-AVOIDANCE RULES

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:

• an amount equal to the average amount of liabilities multiplied by 1.2 and the average short-term interest rate determined by the Central Statistics Bureau in credit institutions as of the last month of the tax year;
• the actual amount of interest divided by a coefficient, which in turn consists of ¼ of the average liabilities multiplied by the difference between equity and long-term reserves (including similar reserves, which have not resulted from profit distributions).

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 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.

WITHHOLDING TAXES

The following table shows withholding tax applicable to dividend, interest and royalty payments to the designated countries. If the non-treaty country rate of withholding tax for a particular class of payment is lower than the rate applicable to the designated countries, the non-treaty rate is applicable.

The non-treaty country rate is determined by domestic legislation.

Table 2. Withholding tax rates

country	Dividends %	Interest %	Royalties %
Albania	5/10 (a)	5/10 (j)	5
Armenia	5/15 (a)	10	10
Austria	5/10 (a)	10	5/10 (d)
Azerbaijan	5/10 (a)	10	5/10 (d)
Belarus	10	10	10
Belgium	5/15 (a)	10	5/10
Bulgaria	5/10	5	5/7
Canada	5/15 (b)	10	10
China	5/10 (a)	10	10
Czech Republic	5/15 (a)	10	10
Croatia	5/10 (a)	10	10
Denmark	5/15 (a)	10	5/10 (d)
Estonia	5/15 (a)	10	5/10 (d)
Finland	5/15 (a)	10	5/10 (d)
France	5/15 (h)	10	5/10 (d)
Georgia	5/10 (a)	10	10
Germany	5/10 (a)	10	5/10 (d)
Greece	5/10 (a)	10	5/10 (d)
Hungary	5/10	10	5/10
Iceland	5/15 (a)	10	5/10 (d)
Ireland	5/15 (b)	10	5/10 (d)
Israel	5/10/15 (h, i)	5/10 (j)	5
Italy	5/15 (g)	10	5/10 (d)
Kazakhstan	5/15 (a)	10	10
Kirghizia	5/10 (b)	10	5
Lithuania	0/15 (c)	0	0
Luxembourg	5/10(a)	10	5/10 (d)
Macedonia	5/10 (h,)	5	5/10 (l)
Moldova	10	10	10
Malta	5/10 (a)	10	10
Morocco	6/10 (m)	10	10
Montenegro	5/10 (a)	10	5/10 (k)
Norway	5/15 (a)	10	5/10 (d)
Poland	5/15 (a)	10	10
Portugal	10	10	10
Romania	10	10	10
Serbia	5/10 (a)	10	5/10 (k)
Sweden	5/15 (a)	10	5/10 (d)
Singapore	5/10 (a)	10	7.5
Slovakia	10	10	10
Slovenia	5/15 (a)	10	10
South Korea	5/10 (a)	10	5/10 (d)
Spain	5/10	10	5/10
Switzerland	5/15	10	5/10
Tadzhikistan	0/5/10 (n)	0/7 (o)	5/10 (d)
Turkey	10	10	5/10
The Netherlands	5/15 (a)	10	5/10 (d)
UK	5/15 (b)	10	5/10 (d)
Ukraine	5/15 (a)	10	10
USA	5 /15(g)	10	5 (d) /10
Uzbekistan	10	10	10
Non-treaty country	10	0/5/10 (f)	5/15 (e)

(a) 5 % of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 % of the capital of the company paying the dividends.
(b) 5 % of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 % of the voting power of the company paying the dividends.
(c) 0% if the recipient of the dividends is a company other than a partnership that holds shares representing at least 25 % of the capital and the voting power of the company paying the dividends.
(d) 5 % of the gross amount of royalties paid for the use of industrial, commercial or scientific equipment.
(e) 5 % rate applies to royalties for intellectual property, except royalty for copyrights or neighbouring rights on literary or art works, including films and audio recordings to which 15 % applies; 5 % rate applies to European Union-related companies if the residence statement is available prior to payment of the royalties.
(f) 5 % rate applies to interest paid by a Latvian-registered bank to related parties. 10% is applicable to interest paid to a related party; 5 % rate applies to European Union-related companies if the residence statement is available prior to payment of the interests.
(g) 5 % of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10% of the voting capital of the company paying the dividends.
i) 10% of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10% of the capital of the company paying the dividends where the dividends are paid out of profits which by virtue of provisions in the Israeli Law on Encouragement of Investment in Israel are exempt from tax or subject to tax at a rate that is lower than the normal rate of Israeli company tax.
 (j) 5 % of the gross amount of the interest arising in a Contracting State and paid on any loan of whatever kind granted by a bank of the other Contracting State.
(k) 5 % of the gross amount of royalties applies for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes and other means of image or sound reproduction for radio or television broadcasting. 10% of the gross amount of royalties applies for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
(l) 10% of the gross amount of royalties paid for the use of, or the right to use, cinematograph films and films or tapes for radio or television broadcasting. 5 % of the gross amount of the royalties applies in all other cases.
(m) 6% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 % of the capital of the company paying the dividends
(n) 0% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 75 % of the capital of the company paying the dividends; 5 % of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 % of the capital of the company paying the dividends; 10% in other cases
(o) 7% of the gross amount of the interest arising in a Contracting State and paid on any loan of whatever kind by the beneficial owner, resident of second Contracting State; 0% of the gross amount of the interest arising in a Contracting State and paid on any loan of whatever kind granted by a bank or government of the other Contracting State

The Law on Corporate Income Tax provides for the following transitional provisions in respect of the stated rate of withholding tax imposed on interest payments and royalties if the beneficial owner is a company which is a resident of another EU Member State.

Table 3. Withholding tax in transitional period*

Interest		Royalties
Period	Rate	Period	Rate
01.07.2009 -       30.06.2013 From 01.07.2013	5 % 0 %	01.07.2009 - 30.06.2013 From 01.07.2013	5 % 0 %

*0% and 5 % tax applies if the recipient is resident in another EU or EEA country and has a residence statement approved by the tax authorities of the recipient’s residence country confirming that he is resident for tax purposes. The residence statement issued by the tax authorities of the country of the recipient of the royalties/interests must be at the disposal of the Latvian company prior to the royalty/interest payments.

VALUE ADDED TAX

According to the Law on Value Added Tax, adopted on 9 March 1995, VAT shall be charged on:

• supply of goods and services for consideration, including self-consumption;
• import of goods;
• Intra-Community acquisition of goods.
• Intra-Community acquisition of new means of transport performed by non-taxable persons.
  VAT rates applicable in Latvia: 22%, 12% or 0%.

Registration

Persons registered in Latvia whose supplied goods and services during a 12-month period do not exceed LVL 35 000 (approx. EUR 49 800) are not 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 LVL 7 000 (approx. EUR 9 960) during the year.

Persons established in Latvia performing economic activities shall also comply with the following provisions:

• if a person who performs economic activities and provides services whose place of supply should be determined in accordance with Article 44 of Council VAT Directive 2006/112/EC to any person registered in the territory of EU who performs economic activities, or to a Community-registered legal taxable person that does not perform economic activities, the supplier has to register for VAT purposes in Latvia prior to the provision of such services;
• if a person who performs economic activities receives services whose place of supply should be determined in accordance with Article 44 of Council VAT Directive 2006/112/EC from another person registered in another Member State, or a person registered in a third country, who does not perform any taxable activities in the Republic of Latvia, the recipient has to register for VAT purposes in Latvia, prior to receiving such services.

When the above mentioned thresholds have been exceeded then the persons shall be obliged to register as VAT taxable persons in Latvia by the 15th date of the month following the taxation period when the respective amount was exceeded.

The registration threshold of LVL 35 000 (approx. EUR 49 800) does not apply to foreign taxpayers who are obliged to register for VAT purposes irrespective of the value of their transactions subject to VAT in Latvia, except specific supplies performed by EU taxpayers as prescribed by the Law on Value Added Tax.

A VAT group is also 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 SRS Register of VAT Taxable Persons. 

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:

• if a person registered in another EU Member State supplies goods inland (in Latvia) that are subject to excise duty in Latvia to a non-taxable person;
• if a taxable person registered in another EU Member State performs distance sale of goods in the territory of the EU and the goods are received in Latvia, and the total amount of such supply of goods without taxes in the current calendar year reaches or exceeds LVL 24 000 (approx. EUR 34 149);
• if a person registered in another EU Member State supplies goods to a non-taxable person and such goods are assembled or constructed inland (in Latvia);
• a person registered in another EU Member State who domestically carries out intra-Community acquisition of goods or supply of goods;
• if another EU Member State person supplies goods or provides services in Latvia which are taxable and according to the Law on Value Added Tax this person is liable for payment of tax into the State budget.

If a person registered outside the EU performs one or more taxable transactions inland and fails to register with the SRS Register of VAT Taxable Persons, the reverse charge VAT on the intra-Community acquisition of goods and reception of services shall be calculated by the goods or services recipient, if he is a VAT taxable person in Latvia.

Foreign businesses can be registered as taxable persons for VAT purposes either by registering the person in Latvia, or by registering their authorized representative in Latvia.

VAT deductions and refunds

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.

Taxable persons are also authorised to deduct input VAT on goods and services received before their registration with the SRS as VAT taxable person in Latvia according to the proportion of taxable and non-taxable transactions, if the goods and services are or will be used for conducting taxable transactions.
Taxable persons are entitled to postpone payment of import VAT on imported goods if they have obtained a specific permit from the Latvian SRS which can be issued only if certain conditions stated in the Law on Value Added Tax are met.

Taxable persons are entitled to reduce the tax amount payable to the State budget for the tax amount of bad debts if certain conditions are met.

Input VAT also can be deducted from goods and services received to ensure the provision of certain financial services stipulated in the Law on Value Added Tax to persons registered in third countries.

It is possible to deduct input VAT within three years of the taxation period when the respective input VAT deduction rights were obtained. However, if the tax inspection covers the specific period (performs complete tax audit), the taxable person loses its rights to deduct the input VAT incurred in the audited taxation periods and not deducted as input VAT in the audited taxation periods.

Deducted input VAT for acquired real estate or fixed assets with value over LVL 50 000 must be annually adjusted over a ten-year period (for real estate) or five-year period (for fixed assets whose value exceeds LVL 50 000) considering the intended usage proportion of the real estate or fixed asset.

As from 1 July 2010, if the amount of input VAT exceeds output VAT, the SRS, after receiving the taxpayers 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 tax payer.

Taxable persons are entitled to claim back VAT overpaid in the taxation period, if 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.

12% rated supplies and services

The VAT rate of 12% is applied to the following goods and services:

1. supplies of medicines according to a list stipulated by the Cabinet;
2. supplies of medical devices and medical goods (also assembly parts, spare parts and accessories) according to a list stipulated by the Cabinet;
3. supplies of specialised products intended for infants according to a list stipulated by the Cabinet;
4. academic literature, also for supplies of original literature, according to a list stipulated by the Cabinet;
5. supply of thermal energy to private individuals;
6. supply of natural gas to private individuals, except gas used for motor cars;
7. supply of several types of firewood to private individuals;
8. until 31.12.2011, the 12% VAT rate shall also be applied to newspapers, magazines, newsletters and other periodical publications which are issued no less often than quarterly and a single edition exceeds 100 copies, except erotic and pornographic publications or publications whose purpose is to publish advertisements or commercial announcements.

Zero - rated supplies and exemptions

The following groups of supplies and services are subject to the 0% VAT rate:

1. export of goods and the supply of such goods that are imported into EU territory from third countries or third territories and are not released for free circulation if the supply is performed in customs warehouses and free zones;
2. services which are related to the export of goods (also such export of goods for which the export procedure has been commenced in another EU Member State), import of goods and transit conveyances and services provided in a free zone and customs warehouse, which are directly associated with goods that are imported into EU territory from third countries and third territories and are not released for free circulation (including transport, forwarding, storage of goods, loading, unloading, expert-examination and sorting services);
3. supply of goods and services provided for and relating to ships and aircraft involved in international transportation;
4. services, which are related to movable property imported into the EU from third countries or third territories for the purpose of supplying services in the EU, and that shall be brought out from the EU to a third country or third territory after the supply of service by a supplier or receiver of the service, if the legal address or declared place of accommodation of the respective person is not in Latvia; or by other persons that work for the same supplier or receiver of the service;
5. supplies of goods performed by tax-free retailers to natural persons, who depart from Latvia to third countries or third territories;
6. carriage of international passengers, also carriage of passengers to EU Member States if the passenger crosses the border of the Republic of Latvia by train, bus, airplane or ship, as well as the carriage of the luggage of such passengers, which passengers are taking with them, and the carriage of a means of transport with which they are travelling; and
7. import of electricity or natural gas if the natural gas is supplied using transfer or distribution systems.

The following groups of supplies and services are exempted from VAT:

1. medical services and services connected with medicine, that are required to ensure medical services, according to a list approved by the Cabinet;
2. supply of human organs, mother's milk and human blood;
3. supplies of gold, coins and bank notes to the Bank of Latvia;
4. betting, raffles (lotteries) and other forms of gambling;
5. insurance and re-insurance services provided by insurers and insurance agents;
6. the following financial transactions:

• granting and control of credits and monetary loans, as well as services related to sureties and guarantees and their supervision which is performed by the issuer of the credit,
• services, which are related to the attraction of deposits and other refundable funds, the conduct of payments in cash and non-cash payments, and trust operations,
• services related to the issuing and servicing of instruments of payment, as well as trading in instruments of payment and other money market instruments, except instruments of payment supplied for collectors or containing precious metals, and
• services (including intermediary), which are associated with investment in capital and the holding, disposal and administration of securities, as well as the issuing of securities;

7. sale of real estate, including land, except for the first sale of unused real estate and the sale of building land;
8. the remuneration received by an author for work and its usage as well as remuneration received by performers and phonogram producers for neighbouring-rights objects and their usage;
9. others specified by the Law on Value Added Tax.

Reporting obligations

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.

Table 4. VAT report-filing deadlines

Form	Filing requirements	Frequency	Filing date
VAT return together with annexes	Amount of taxable transactions is less than LVL 10 000 (approx. EUR 14 500) and the person does not perform transactions the place of supply of which is in another EU Member State	Semi-annually	15th of the following month or 20th of the following month if the VAT return is submitted electronically
	Amount of taxable transactions is LVL 10 000 to 35 000 (approx. EUR 14 500 to 50 000) and the person does not perform transactions the place of supply of which is in another EU Member State	Quarterly
	Amount of taxable transactions exceeds LVL 35 000 (approx. EUR 50 000) or the person performs transactions the place of supply of which is in another EU Member State.	Monthly
Intrastat		Monthly	10th of the following month

Apart from the reporting obligations mentioned above, taxpayers who receive cash when carrying out business activity are obliged to register their sales by means of cash registers. Only some groups of taxpayers, including insurance brokers, taxpayers rendering certain types of passenger transport services, municipal and state authorities, are exempt from this obligation.
 
 VAT due must be paid into the State budget on a monthly basis by the 20th day of the following month.

The annual VAT return for the preceding year is due on 1 May of the following year and shall be submitted only in the following cases:

• there have been changes in the proportion of taxable and non-taxable transactions for the taxable year;
• corrections have been made to the VAT payable or input VAT, according to the VAT rules;
• certain financial transactions prescribed by the Law on Value Added Tax (e.g. means of payment (currency, securities, derivatives, etc.)) have been conducted.

EXCISE TAX

According to the Law on Excise Duties the following products are subject to excise tax:

• alcoholic beverages
• tobacco products
• oil products
• soft drinks
• coffee
• natural gas

Excise taxpayers are:

• importers;
• approved warehouse keepers according to the provisions of the Law on Excise Duties;
• registered traders, registered receivers, temporarily registered receivers or contracting traders in cases stated in the Law on Excise Tax;
• persons, who import goods into Latvia or receive excise goods from other EU Member States, where the goods have already been released into free circulation;
• persons who import non-alcoholic beverages, coffee or natural gas into Latvia;
• other persons according to the provisions of the Law on Excise Tax.

Several exemptions from excise tax are available. Generally, the taxable period for excise tax is one month.

NATURAL RESOURCES TAX

Taxpayers

According to the Natural Resources Tax Law, adopted on 15 December 2005, 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:

• extracting certain natural resources;
• selling taxable natural resources extracted in an economic activity not related to the extraction of mineral resources from subterranean depths;
• utilising the useful properties of subterranean depths by pumping of natural gas or greenhouse gases into geological structures;
• emitting taxable polluting substances into the environment or burying waste;
• emitting greenhouse gases into the environment from stationary technological installations in which certain polluting activities are performed.

2. Persons who first, in Latvia:

• sell goods harmful to the environment or goods in packaging or coal, coke and lignite (brown coal) as well as enclose goods in packaging for the convenience of buyers or promotional purposes;
• use goods harmful to the environment to ensure their economic activities, except goods harmful to the environment that are taxable upon sale;
• upon provision of a service, attach packaging to the product, and this packaging reaches the recipient of the service in the provision of the service;
• use coal, coke and lignite (brown coal) to ensure their economic activities, except coal, coke and lignite (brown coal) that is taxable upon sale.

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.

Tax relief

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 TAX

Gambling and lottery tax is levied on business entities that have obtained gambling licences. The annual licence fee per company is from LVL 10 000 (approx. EUR 14 229) to LVL 300 000 (approx. EUR 426 862) 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 LVL 9 600 (approx. EUR 13 660) gambling tax; totalisator games are subject to 15 % tax on revenue; each slot machine – LVL 1 680 (approx. EUR 2 390), 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.

ENERGY TAX

According to the Electrical Energy Tax Law, adopted on 19 December 2006, electrical energy tax shall be charged on electricity supplied to the end users, as well as on electricity supplied for self consumption. Generally, the electrical energy tax rate is LVL 0.71 (approx. EUR 1) per megawatt-hour.

Electrical energy tax shall be paid by:

electricity generators who have been issued a licence to generate electricity;
licensed electricity traders; and
autonomous electricity generators.

TAX PENALTIES

The penalties for incorrect calculation and/or payment of taxes are as follows:

• unpaid taxes are subject to a late-payment fee of 0.05 % per day not paid. The calculation of late payment penalties shall cease when the total reaches the amount of the initial debt;
• where tax has not been declared, the amount of tax penalties depends on the proportion of the value to the State Budget. For example, where the non-declared amount of tax does not exceed 15 % of the total amount of tax due, then the penalty shall be in the amount of 30% of the tax not paid;
• should the taxable person accept the additional tax calculated and pay the tax due into the State Budget within 30 days of the of tax audit decision being received, the penalty shall be reduced to 15 % of the initial tax debt.

Decisions of the tax authorities may be appealed with the Director of the SRS within 30 days of the date the decision was received.

Additional information at:
www.vid.gov.lv
www.fm.gov.lv