Taxes in Latvia


Tax Consulting in Latvia since 2002

The company AUDITEX offers clients a wide range of advisory service: from consulting on legal and tax matters till assistance in drafting contracts. Having mastered the specifics of accounting for a wide variety of business activities, we also advise on business planning, as well as optimization of corporate and personal taxes.

Basic information about the Latvian tax system

Currency - euro (EUR)

Foreign exchange control - No

Authorized capital duty - No

Accounting principles / financial reporting - National standards (according to IAS) and IFRS. The financial report must be prepared annually.

Corporate income tax - flat rate 20% on the gross amount of the distribution (effective rate 25%)

VAT - 21%, (reduced rate of 12% or 5% for certain goods/services)

Personal income tax - progressive rate 20%, 23%, 31% (For 2022, the rate is 20% on income up to EUR 20,004, 23% on income from EUR 20,005 up to EUR 78,100, and 31% on income over EUR 78,100. Capital gains and other income from capital are taxed at a flat 20% rate.

Social security contribution for employment income - 34.09%

Free Economic Zones (FEZ) - there are 5 "tax havens" in Latvia and they are located in the largest cities of Latvia (moreover, 3 of them are non-freezing ports): Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Latgale Special Economic Zone, Rezekne Special Economic Zone. More information about registering a company in the FEZ of Latvia is here.

Tax Authorities - State Revenue Service www.vid.gov.lv

Key business entities:

- limited liability company (SIA),

- joint-stock company (AS),

- general partnership (PS)

- limited partnership (KS),

- branch of a foreign company.

Reporting:

Taxation period of the company - calendar month and financial year, some returns are to be filed monthly (or in some cases quarterly) by the 20th of the following month.

Tax Return of individuals - Tax returns must be filed on quarterly basis (for example, capital gains tax) or annually. For more information about tax reporting procedure, please see the section "Taxation and the procedure for declaring income and property of individuals."

Penalties - Penalties are charged at a rate of 0.05% per day for late payment of tax. Based on the results of a tax audit, additional penalties ranging from 10% to 300% of the tax amount may be applied.


Overview of corporate taxation in Latvia

Corporate residence - a company is considered a tax resident of Latvia if it is registered in Latvia (i.e. registered in the Commercial Register of the Republic of Latvia).

The general rule is that residents pay taxes on their worldwide income. Non-residents are taxed in Latvia only on Latvian sourced income. Permanent establishments (PEs) of foreign companies are taxed in the same way as resident companies, although certain restrictions apply to payments made to the head office.

Taxable income in Latvia - corporate income tax is levied only when profits are distributed, i.e. reinvested or retained earnings are not taxed. Profit distributions include calculated dividends and interim dividends, dividend-like payments, hidden profit distributions, and deemed profit distributions such as non-business expenses, excessive interest payments, loans to related parties, transfer pricing adjustments, unqualified bad debts and liquidation proceeds.

Income tax rate - 20% of the total distribution amount. Certain expenses are also considered a distribution of profits (see "Taxable Income." above). Corporate income tax is calculated according to the formula: the tax base is divided by 0.8 and multiplied by 20%. For example the total gross profit is 100 euros, the dividend amount to be distributed is 80 eur (80 / 0.8 x 20% = 20), so from 100 eur profit 20 eur is to be paid to the state budget as tax and 80 eur to be paid to the shareholder in the form of dividends. As a result the effiecient tax rate is 25%.

Minimum tax – if at the end of the reporting year the company has no tax payable or the tax is less than 50 euros, then a minimum tax of 50 eur is applied. The minimum tax is not considered an overpayment of tax.

Losses - Corporate income tax applies only to distributed profit, and any financial losses reduce the amount of profits distributed.

Tax losses accumulated before 2017 can be used until December 31, 2022, to reduce up to 50% of taxable distributed profits

Value Added Tax in Latvia

Taxable transactions - VAT applies to the supply of goods and services, the purchase of goods and services within the EU, and the import of goods and services.

VAT rates in Latvia - the standard rate is 21%, a reduced rate of 12% or 5% applies to certain goods/services. Financial and insurance services are exempt from VAT.

VAT registration in Latvia - a person whose turnover from the VAT taxable supply of goods and services (excluding imports) exceeds 40,000 eur in 12 months must register as a VAT payer with the tax authorities of Latvia. A foreign person doing business in Latvia must register for VAT before the date of the first taxable supply.

Submission and payment of VAT in Latvia - the tax period is usually a calendar month, although it may be quarterly for a taxpayer with a smaller turnover. The VAT report must be submitted to the tax authorities and the tax must be paid before the 20th day of the month following the reporting period.

Deffered VAT payment for import - it is possible to apply for a Special VAT payment regime when importing goods. In this case, there is a deferral of VAT payment calculated upon the import of goods. However, there are a number of requirements for the application of such regime, one of which is the possibility use it only if the company operates more than 1 year and has no tax debts.

Contact us and we will analyze your VAT situation.

Holding regime of companies in Latvia

There is no special holding regime in Latvia, however, certain types of dividends and capital gains may be exempt from taxation.

A) Taxation of distibuted dividends - Dividends and other distributions of profits are subject to corporation tax at the company level (see "Taxable Income" above). Corporate income tax is applied at the time of declaring the payment of dividends. During the payment of profits, no other taxes are applied.

B) Capital Gains - Capital gains from the sale of property are only taxable on distributions of profits. Capital gains from the sale of shares are exempt from tax, provided that the shares have been owned by the company for at least 36 months (this exemption does not apply to capital gains from the sale of shares of companies located in low-tax jurisdictions (see “ Black List”), as well in cases where there is a sale of shares of a company which assets consist of more than 50% of real estate located in Latvia).

C) Received dividends – the subsequent distribution of dividends received from residents and non-residents will not be subject to corporate income tax in Latvia if the following conditions are met:

(1) the company (resident or non-resident) paying the dividend is subject to corporate income tax in its country of residence; or the dividends have already been subject to withholding tax in the jurisdiction when the dividends are paid out;

(2) the dividend payer is not a company from a low-tax jurisdiction (see "Black List"); and

(3) dividends are not considered as deductible costs in the country of the payer of the dividends.

Contact us and we will provide more information about holding regime in Latvia.

Tax at source in Latvia (Withholding Tax, WHT)

"Low tax" jurisdiction - 20% tax is levied on any payments to legal entities located in the low tax jurisdictions, with the exception of payment for the purchased goods and the purchase of public bonds of the European Union or the European Economic Area.

Dividends – no withholding tax is levied in Latvia on dividends paid out, except for dividends payable to residents in low-tax jurisdictions.

Interest – no withholding tax is levied in Latvia on interest paid, except for interest paid to residents in low-tax jurisdictions.

Royalties – no withholding tax is levied on royalties paid in Latvia, except for royalties paid to residents in low-tax jurisdictions.

Consulting services – services of a consulting and management nature are subject to withholding tax in Latvia at the rate of 20% unless otherwise provided by a double taxation treaty. For more details, see the respective double tax convention.

Sale of immovable property - Income of a non-resident from the alienation of immovable property located in Latvia, or the sale of shares in a company, which assets more than 50% consist of immovable property located in Latvia, is taxed at a rate of 3%.

Technical services - no withholding tax is charged in Latvia on payments for technical services.

Transfer of funds from a branch to the head office - no withholding tax is levied in Latvia on the transfer of funds from a branch to the head office.

Contact us and we will help you to assess the risks of withholding tax in Latvia.

Blacklisted countries of Latvia – list of low-tax and/or tax-free jurisdictions

The "black" list of Latvia - low-tax and/or tax-free jurisdictions are:

Guam;

Samoa (USA);

Virgin Islands (US);

Republic of the Fiji Islands;

The Republic of Palau;

The Republic of Panama;

Independent State of Samoa;

The Republic of Trinidad and Tobago;

The Republic of Vanuatu.

Contact us so that we can understand the company's business profile and assess the risks of your work with low tax companies.

Controlled foreign companies (CFCs) in Latvia

Controlled Foreign Companies (CFCs) in Latvia – The Controlled Foreign Companies (CFC) regime for legal entities has been introduced since January 1, 2019. An entity is treated as a CFC where a Latvian taxpayer either alone or together with its associated enterprises holds a direct or indirect participation of more than 50% of the capital or voting rights or is entitled to receive more than 50% of the profits of the entity e.

A permanent establishment of a Latvian company abroad is always considered a CFC.

The Latvian company must include in the tax base the undistributed income of the CFC arising from artificial arrangements that have been entered into for the essential purpose of obtaining a tax advantage.

An arrangement or series of arrangements is regarded as artificial to the extent that the entity or PE either would not own the assets or would not assume the risks necessary to generate the income if it were not controlled by a company that conducts the significant executive management people functions relevant to those assets and risks.

The CFC rules do not apply if the CFC’s profit does not exceed EUR 750,000 and the income derived other than from the sale of goods and services does not exceed EUR 75,000.

Contact us and we will help you to assess the risks of being recognized as a CFC.

Payroll Taxes

Payroll tax - employers are required to withhold personal income tax and transfer the amount of tax monthly.

The following tax rates apply:

20% on income up to 20,004 EUR per year;

23% on income over 20,005 EUR per year; and

31% on income over 78,100 EUR per year.

National Social Insurance Contributions (NSIC) – are paid on income from employment relations in the amount of 34.09% of the employee's gross salary:

23.59% (the employer’s part) - paid by the employer at his own expense and is calculated on top of gross employment income

10.5% (the employee’s part) - is deducted by the employer from gross employment income.

NSIC is payable on annual income up to EUR 78,100. A solidarity tax applies to annual income over EUR 78,100 at the same rates as NSIC.

Contributions must be paid and declared to the tax authorities on a monthly basis. For more information about filing a tax return, see the section "Taxation and the procedure for declaring income and property of individuals."

Non-resident employers must register with the tax authorities or, in certain cases, authorize employees to register and make payments themselves on behalf of the foreign employer.

Thin capitalization rules in Latvia

Under the thin capitalization rules, interest payments are included in the taxable base where (i) the debt-to-equity ratio exceeds 4:1 or (ii) the interest payment exceeds both EUR 3 million and 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization). The inclusion in the taxable base is the larger amount resulting from these two calculations.

The thin capitalization rules do not apply to interest payments made to EU/European Economic Area (EEA) credit institutions, to credit institutions resident in a country that has concluded a tax treaty with Latvia, or in respect of EU/EEA public debt securities.


Transfer pricing in Latvia

Transfer pricing rules in Latvia are generally in line with OECD transfer pricing recommendations.

Mandatory preparation of a master file (without submission to the tax authorities) is required if the total amount of transactions between related parties exceeds 5 million eur per year.

The master file must be submitted to the tax authorities if:

(1) the annual turnover exceeds 50 million euros and the total amount of transactions with related parties exceeds 5 million euros; or

(2) the total amount of transactions with related parties exceeds EUR 15 million.

A local file must be prepared (without submission to the tax authorities) if the total amount of transactions between related parties exceeds 250,000 eur per year and such a file must be submitted to the tax authorities if the amount of these transactions exceeds 5 million eur.

In case of significant violations in the preparation of transfer pricing documentation or its provision, the taxpayer may be subject to a fine of up to 1% of the amount of transactions with related parties, but the amount of the fine does not exceed EUR 100,000 per transaction.

In addition to consulting services, you can also benefit from our Accounting services in Latvia and Services for registering a company in Latvia, registering a business abroad, as well as services for obtaining a Residence permit in Latvia. Follow the news on our Telegram channel: https://t.me/nalogivlatvii or scan the QR code