Latvia

Latvia Personal Taxation

The law “On Individual Income Tax”, adopted in 1993, sets out the basis of taxation of individuals’ personal income. The basic rate of taxable personal income is 25% which is withheld at source and remitted to the tax authorities.

The tax is payable by permanent residents of Latvia who have generated income in Latvia or abroad and by non-residents who have generated income in the Republic of Latvia. The tax is imposed on the taxable income of the taxpayer.

Expatriates are liable for Latvian taxes depending on their tax residency. Latvian residents are taxable on their worldwide income. Non-Latvian residents are liable on their income derived in Latvia.

An individual will be regarded as a resident of Latvia, if:

• the permanent place of residence of that person is Latvia; or
• the person resides in Latvia for 183 days or longer in any given 12-month period commencing or finishing during the taxation year; or
• the person is a citizen of the Republic of Latvia employed abroad by the Latvian government.

As a general rule, persons who do not match the above-mentioned categories are considered to be non-residents of Latvia for tax purposes.

An individual, who has not been considered to be a resident during the year prior to that when taxation is due, is considered to be a resident from the date they entered Latvia during the taxation year. An individual, who is not considered to be a resident during a post-taxation year, is not considered to have been a resident for that period of the taxation year after the date that they left Latvia, provided that during that period the person had closer ties with another country than with Latvia.

Closer ties with another country may be demonstrated by ownership of property in that country, contributions to that country’s social security system, or the fact that the expatriate’s family is residing abroad.

A actual presence test is used to ascertain how many days an individual has been in Latvia. When the test is applied, the following days are included in the calculation as full days: days of partial presence (less than 24 hours), days of entry and departure, Saturdays and Sundays, public holidays, days of annual leave, and periods of illness, except when the illness has prevented the departure of the person.

Certain types of individual income are exempt from income tax in Latvia:

• dividends paid by Latvian or EU member state companies;
• income from deposits in banks registered in Latvia;
• income from the sale of personal property, excluding the sale of real estate held for a period less than 12 months;
• insurance monies received – except compensation payments for life, health or accident insurance if premiums were paid by employers – upon expiration or breach of agreements;
• income derived from Latvian state or municipality treasury bills;
• certain business travel expenses;
• a number of government benefits.

There are limited deductions under Latvian law. Deductible items are:

• Mandatory social security contributions;
• Allowances for the support of close relatives or dependants;
• Donations to charitable organizations;
• Expenses related to the production of scientific, literary and artistic works;
• Contributions to private pension schemes.

Non-resident taxpayers and individuals who are resident for less than six months in a tax year are only entitled to the standard deductions like social security contributions. Special rules apply to the calculation of the income of a self-employed individual.

Annual declarations must be filed by 1 April of the following year. Declarations are prepared on a self-assessment basis and may be audited up to three years after the tax became payable. If the tax liability assessed exceeds 100 LVL the tax can be paid over three months in equal instalments.

Individual income tax in respect of employment income is usually withheld from salary payments (payroll tax). All employers in Latvia, including foreign companies operating through a permanent establishment (branch), must deduct payroll tax from remuneration paid to all employees, and remit this tax to the tax authorities on monthly basis on the salary payment date.

Latvia Taxation Of Non-Residents

Non-residents are liable for Latvian tax only in respect of Latvian source income including:

• employment income for duties performed within Latvia in favour of a Latvian or foreign employer, or performed outside Latvia for a Latvian employer;
• income from independent professional services rendered to Latvian residents or registered permanent establishments within and outside Latvia;
• income from professional services such as an artist, sportsman or trainer performed in Latvia;
• income from performing duties as the member of a Board or advisory body of a Latvian company;
• income from a Latvian registered partnership;
• income in the form of liquidation proceeds from the liquidation of a Latvian company that exceed payable dividends;
• income from the sale or use of immovable property located in Latvia;
• income from the lease of movable property in Latvia;
• income from agricultural production from “individual” farms;
• dividends;
• interest income, except interests from Latvian credit institutions;
• income from intellectual property (royalties);
• insurance payments, if the agreement is concluded by an employer and it is terminated before a specified period;
• pensions paid according to Latvian legislation.

Personal tax paid abroad may be credited against tax payable in Latvia, but not more than 25% of the income taxed abroad. To credit foreign paid tax, statements from foreign tax authorities must be submitted to the Latvian tax authorities.

Foreigners working in Latvia for a non Latvian employer must register with the tax authorities and either the employer or the foreigner must, on a monthly basis, pay personal income tax based on their monthly salary.

Expatriates who have received remuneration abroad and stayed in Latvia for more than 183 days within any 12 month period starting or ending within a year, or who have received Latvian residence permit, must file a Latvian individual income tax declaration, except where tax treaty exemptions are applicable.

Latvia Scope of Income Tax

Taxable entities are resident companies (but not partnerships) and non-resident entities as well as permanent establishments of non-residents that derive income from a Latvian source.

The criterion for establishing a company’s residence for tax purposes is its incorporation in Latvia, or that it legally should have been incorporated in Latvia. Latvia does not have an effective place of management test of residence. Corporate income tax is applied to all Latvian-registered enterprises and permanent representative offices of foreign companies registered in Latvia.

For companies not registered in Latvia (non-residents), corporate income tax is based on income earned in Latvia. The corporate income tax is levied on payments that Latvian-registered companies and permanent representative offices render to non-residents if personal income tax has not already been withheld from such payments. See below for the rates of withholding tax.

From 1 January 2002 international shipping companies registered in Latvia have the option of paying corporate income tax based on the tonnage of the individual vessels used in their operations. Once this option is taken it must be continued for 10 years.

Latvia Rates of Income Tax

From 1 January 2002, the Latvian corporate income tax was reduced from a flat rate of 25% to a flat rate of 22%. The rate was 19% in 2003 and dropped to 15% from 2004.

Companies eligible for specific tax rate reductions will continue to calculate their reduction entitlements based on a flat tax rate of 25%.

Latvia Calculation of Taxable Base

The taxable base of resident companies is their worldwide income and capital gains. A permanent establishment (branch) of a non-resident company is treated by the law as a separate Latvian taxpayer. The profits of a Latvian branch of a non-resident company are taxed on a normal assessment basis at the same rate as the profits of a resident company. However, internal charges between the Branch and its Head Office such as interest, management fees etc. are not deductible.

Latvia uses a double declining-balance method of depreciation for tax purposes. Effective annual rates of depreciation are as follows:

• Buildings, constructions, long-term plantations (10%);
• Oil research and extraction platforms together with the equipment necessary for their functioning, located on these platforms; oil research and extraction ships (15%);
• Rolling stock and railroad technological equipment, sea-going and river transportation vessels, technological equipment of merchant marine, transportation fleet and ports, energy equipment (20%);
• Computers and their appliances, including printing devices, information systems, software products and data storage equipment, communication means, copying machines and their appliances (40%);
• Other fixed assets (40%).

Goodwill may not be amortized for tax purposes. Concessions, patents, licenses and trademarks are amortized on a straight-line basis.

It is possible to carry tax losses forward for five years. Where a change in the control of a Company occurs, the right to existing losses is lost unless the Company continues to undertake for the next 5 years the same fundamental business activity that it undertook during the previous 2 years. Companies are not allowed to carry losses back.

Interest paid to anyone (except Latvian registered credit institutions) that exceeds an allowed amount for the tax period is not deductible. The allowed amount is calculated by multiplying the average short-term credit rate charged by Latvian banks in the last month of the tax period, by the company’s equity at the beginning of the tax period. Undeducted interest can be carried forward indefinitely subject to the annual calculation of allowable interest. The right to carry forward undeducted interest is lost if there is more than a 50% change in the ownership of the Company.

A parent and subsidiary(s) that have 90% common ownership are treated as a group. The companies must be Latvian residents or residents of a country with which Latvia has an operative Double Taxation Treaty. Although there is no fiscal unity for taxation purposes, consolidated financial statements are required for the group. Losses can be transferred between group members who are Latvian residents.

Regardless of ownership level, dividends from Latvian companies are received tax exempt excluding dividends paid by a Latvian company that utilizes some form of corporate income tax relief. In this case the dividends are subject to tax in accordance with the percentage of the tax relief obtained by the paying Company.

Dividends from non-resident companies are normally taxable. They are, however, not taxable if at the moment of payment the Latvian recipient owns at least 25% of the capital and voting rights in the paying Company and the payer is not a Company resident in a listed low or nil tax jurisdiction.

Foreign taxes paid are not tax deductible in Latvia. A tax credit may be granted for these taxes but not exceeding the amount of Latvian tax payable on that income (i.e. ordinary credit) on a source-by-source basis.

Payments to low tax countries ordinary are the subject to 25% withholding tax.

The list of ‘low tax’ countries is as follows: Antilles (Netherlands), Andorra, Anguilla, Antigua & Barbuda, Aruba (The Netherlands), Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Brunei Darussalam, Cayman Islands, Cook Islands (New Zeeland), Costa Rica, Cyprus, Dominican Republic, Ecuador, Gibraltar, Grenada, Guama, Guatemala, Guernsey, Hong Kong (Sjangana), Island of Men, Jamaica, Jersey, Jordan, Jisbuty, Kampione, Katara, Kenya, Kuwait, Labuana (Malaysia), Lebanon, Liechtenstein, Liberia, Maldives, Macao, Madeira (Portugal), Mauricia, Marshall Islands, Monaco, Montserrat, Nauru, New Caledonia, Niue (New Zeeland), Olderne, Panama, San Marino, Seychelles, St. Helens, St. Kitts and Nevis, St. Maria Island (Portugal), St. Pjer and Michael (France), Samoa, Santome and Prinsipi Republic, St. Lusia, St. Vincent and Grenada, Tahiti (French Polynesia), Tonga, Turks and Caicos Islands, United Arab Emirates, Uruguay East Republic, Vanuatu, Venezuela, Virgin Islands (USA) and Zanzibar Islands (Tanzania).

Latvia Filing Requirements and Payment of Tax

Latvia has a self-assessment taxation system. The taxpayer calculates the amount of tax payable and reports this amount in a declaration. The taxation authorities may audit the declaration within a period, which is currently up to three years after the payment of the tax for the year in question.The Latvian corporate tax declaration is based on the income disclosed in the Company’s audited profit and loss statement for the year, subject to adjustment as above.

The tax year either is the calendar year or may differ from the calendar year if so stipulated by the charter of the company. The fiscal year should be 12 months, however, a company being incorporated part way through the year may have an tax period which is shorter or longer than 12 months, although, on no account should any tax period exceed 18 months. The annual tax returns must be filed within four month of the end of the tax period to which it relates. Large companies are allowed to extend this deadline up to seven months. Monthly advance payments of tax are required.

The annual income declaration must be filed within 30 days after the annual shareholders’ meeting, but not later than four months after the year-end.
Companies must make tax advance payments by the 15th day of each month. In general, for the period from the first month of taxation period until and including the month of filing the annual report, but not later than four months after the taxation year ends, monthly advance payments are equal to one-twelfth of the tax calculated for the year that is two years before the current tax year, adjusted for inflation. For the rest of the months, the monthly advance payments are each equal to one-eighth of the following: the tax calculated for the preceding year, adjusted for inflation and reduced by the advance tax payments made in accordance with the above procedure.

Any balance of the tax due must be paid within 15 days after the date due for the annual income declaration.

Latvia Social Taxes

An employer must withhold social tax on a monthly basis at the rate of 26.09%. The total tax payable is 35.09%, so 9% must be paid from the employee’s payroll.

From January 1, 2003, the social insurance rate was reduced to 33%, split between the employee – 9% and the employer – 24%.

Expatriates employed by non-resident employers are subject to a social tax of 8.52%. The self-employed rate of social insurance payments is 32.27%.

Latvia Withholding Tax

For non-resident companies without a permanent establishment in Latvia, ta final withholding tax is imposed on proceeds received from sale of Latvian real estate. The rate of withholding tax is 2 per cent for income from the sale of Latvian real estate.
Loss on sale of securities may be offset only against income on sale on securities within next 5 years.

Withholding taxes imposed on payments to non-residents are as follows:

• dividends – 10%;
• remuneration for management and consultation services – 10%;
• interest payments among related enterprises and persons – 10%, but if performed by Latvian commercial banks – 5%;
• remuneration for intellectual property: payments for the right to use literary works or pieces of art, including cinema films, video or sound recordings – 15%; payments for the use of other forms of intellectual property – 5%;
• remuneration for the rent or use of property located in Latvia – 5%;
• income from the sale of real estate in Latvia – 25%;
• remuneration from the sale of securities in Latvia – 10%;
• payment for the sale of real estate located in Latvia is 2% of the total proceeds;
• payments made to entities or individuals in any of the low-tax territories listed above – 25%, other than for dividend payments, normal deposit interest paid by Latvian Credit Institutions and payments for goods that have their origin in the low or nil tax country or territory.

Latvia Value added tax

Taxable entities are individual or legal entities that in the course of a trade or profession perform taxable transactions within Latvia. Taxable transactions are the supply of goods or services within Latvia, self-consumption, the import of goods and export of goods and services.

Individual and legal entities whose taxable transactions exceed 10,000 LVL in a 12 month period must register for VAT.

The standard VAT rate is 18%. A lower rate of 9% applies to some goods. Zero-rated transactions include:

• supplies of goods where the place of supply is not within Latvia,;
• services connected with the export of goods and transit carriage;
• services where the place of supply is deemed not within Latvia;
• supplies of goods and services connected with supply and servicing of international transport;
• travel agent’s services for foreign customers and associated carriage of passengers and goods performed by international transport;
• supplies of goods and services under diplomatic and consular arrangements;
• supplies of goods and services provided under non-repayable foreign technical assistance.

VAT declarations are filed on a monthly basis. Input VAT cannot be claimed in respect of exempt transactions and input VAT can only be claimed in respect of transactions that are directly related to the income production of the individual or entity.