doing business in latvia 2011

DOING BUSINESS IN LATVIA 2011

DOING BUSINESS IN

LATVIA 2011

February 2011

Doing Business in Latvia

February 2011

Introduction

This publication has been prepared for the exclusive use of BDO Member Firms as well as their

existing and prospective customers with the aim of providing background information for setting up

and running a business in Latvia in compliance with the legislation in force in February 2011. It is of

use to anyone who is thinking of establishing a business in Latvia as a separate local entity or as a

branch or subsidiary of a foreign company, and to anyone who is considering coming to work or live

in Latvia permanently.

The publication describes the business environment in Latvia and outlines the financial and legal

implications of running or working for a business in Latvia. While the most important issues are

covered, it is not feasible to discuss every subject in detail within this format. Accordingly, Doing

Business in Latvia 2011 is written in general terms and is not intended to be comprehensive.

If you would like to know more or need assistance, please contact BDO Zelmenis & Liberte and we

will be happy to help you.


February 2011

Table of contents

INTRODUCTION ................................................................................................................................................. 2

1. WHY INVEST IN LATVIA? ..................................................................................................................... 6

Business facility ............................................................................................................................................. 6 Access to knowledge and skills ...................................................................................................................... 6 Gateway to the EU and Russia/CIS ............................................................................................................... 7 Business incentives ........................................................................................................................................ 7 Cost effectiveness .......................................................................................................................................... 7 International recognition ............................................................................................................................... 8 Temporary residence permits ........................................................................................................................ 8 National airline ............................................................................................................................................. 8

2. BUSINESS ENVIRONMENT .................................................................................................................. 10

GENERAL INFORMATION ................................................................................................................................... 10 Geography ................................................................................................................................................... 10 History ......................................................................................................................................................... 10 Government and political powers ................................................................................................................ 10 Population and language ............................................................................................................................ 11 Currency ...................................................................................................................................................... 11 Time, weights and measures ........................................................................................................................ 11

BUSINESS ENTITIES ........................................................................................................................................... 11 Forms of business ........................................................................................................................................ 11 Limited liability companies ......................................................................................................................... 12 Joint stock companies .................................................................................................................................. 12 Representative offices .................................................................................................................................. 13 Branches of foreign companies ................................................................................................................... 13 Business reorganisation and liquidation ..................................................................................................... 13

LABOUR RELATIONS AND WORKING CONDITIONS .............................................................................................. 13 Information on the employment market ....................................................................................................... 13 Employment regulations and laws ............................................................................................................... 14 State Labour Inspectorate ........................................................................................................................... 14 Working conditions ...................................................................................................................................... 14

SOCIAL SECURITY ............................................................................................................................................. 15 FOREIGN EMPLOYEES ........................................................................................................................................ 16

Visa requirements ........................................................................................................................................ 16 Schengen visa .............................................................................................................................................. 16 National or long-term visa .......................................................................................................................... 16 Short-term entry and stay in connection with employment .......................................................................... 16 Visa with work permit .................................................................................................................................. 16 Temporary residence permits ...................................................................................................................... 16

3. FINANCE AND INVESTMENT ............................................................................................................. 18

BANKING AND LOCAL FINANCE ......................................................................................................................... 18 EQUITY MARKET ............................................................................................................................................... 18 ACCOUNTING AND AUDIT REQUIREMENTS ........................................................................................................ 19

Accounting and annual financial reporting ................................................................................................. 19 Foreign exchange policy ............................................................................................................................. 20

INVESTMENT OPPORTUNITIES AND INCENTIVES ................................................................................................. 20 Foreign investors’ guarantees and rights .................................................................................................... 20 Performance requirements and incentives .................................................................................................. 20 Repatriation of initial investment and profits .............................................................................................. 21

4. TAX SYSTEM ........................................................................................................................................... 22

INTRODUCTION ................................................................................................................................................. 22


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Direct taxes.................................................................................................................................................. 22 Indirect taxes ............................................................................................................................................... 22 Other taxes .................................................................................................................................................. 22

PAYMENT .......................................................................................................................................................... 22 ASSESSMENT ..................................................................................................................................................... 23 APPEAL PROCEDURES ........................................................................................................................................ 23 ANTI-AVOIDANCE PRINCIPLE ............................................................................................................................ 23

5. TAXES ON BUSINESS ............................................................................................................................ 24

CORPORATE TAX SYSTEM .................................................................................................................................. 24 Scope and extent .......................................................................................................................................... 24 Company residence ..................................................................................................................................... 24 Taxable entities ............................................................................................................................................ 24 Taxable income ............................................................................................................................................ 24 Deductions ................................................................................................................................................... 25 Capital gains ............................................................................................................................................... 26 Dividends, interest and royalties ................................................................................................................. 26 Losses .......................................................................................................................................................... 28 Group treatment .......................................................................................................................................... 28 Tax incentives .............................................................................................................................................. 28 Micro-company tax ...................................................................................................................................... 29 Thin capitalisation ....................................................................................................................................... 29 Transfer pricing ........................................................................................................................................... 30 Controlled foreign companies ..................................................................................................................... 30 Tax rate ....................................................................................................................................................... 30 Assessment procedure ................................................................................................................................. 30 Returns and payments.................................................................................................................................. 30

VALUE ADDED TAX ........................................................................................................................................... 32 Taxable persons ........................................................................................................................................... 32 Taxable activities ......................................................................................................................................... 32 Place of supply, acquisition and import within the EU ............................................................................... 32 Standard, reduced and zero rate ................................................................................................................. 34 VAT registration .......................................................................................................................................... 34 Non-deductible input VAT ........................................................................................................................... 34 VAT returns and payment ............................................................................................................................ 35

PERSONAL INCOME TAX .................................................................................................................................... 37 Territoriality and residence ......................................................................................................................... 37 Structure of personal income tax ................................................................................................................. 37 Exempt income ............................................................................................................................................ 38 Family unit .................................................................................................................................................. 38 Taxation of employment income .................................................................................................................. 38 Taxation of personal business income ......................................................................................................... 39 Taxation of investment income .................................................................................................................... 40 Capital gains ............................................................................................................................................... 41 Taxation of other income ............................................................................................................................. 41 Deductions and allowances ......................................................................................................................... 41 Tax rates ...................................................................................................................................................... 42 Taxation of non-residents ............................................................................................................................ 42 Returns and payment ................................................................................................................................... 44 Appeals ........................................................................................................................................................ 44

INHERITANCE AND GIFT TAX ............................................................................................................................. 44

6. OTHER TAXES ........................................................................................................................................ 45

NATURAL RESOURCE TAX ................................................................................................................................. 45 LOTTERY AND GAMBLING TAX .......................................................................................................................... 45 REAL ESTATE TAX ............................................................................................................................................. 45

Property transfer duty ................................................................................................................................. 46


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EXCISE DUTY .................................................................................................................................................... 46 General provisions ...................................................................................................................................... 46

CUSTOMS DUTY................................................................................................................................................. 46 VEHICLE TAXES ................................................................................................................................................ 47 ELECTRICAL POWER TAX ................................................................................................................................... 47

7. SOCIAL INSURANCE CONTRIBUTIONS .......................................................................................... 48

INTRODUCTION ................................................................................................................................................. 48 Employee contributions ............................................................................................................................... 48 Employer contributions ............................................................................................................................... 48 Self-employed contributions ........................................................................................................................ 48

8. BDO ZELMENIS & LIBERTE ............................................................................................................... 50


February 2011

1. Why invest in Latvia?

Latvia has experienced an extensive economic growth across all sectors over the past ten years. The

global economic crisis, however, has led to many economic challenges. The Latvian government has

expressed its determination to meet these challenges and prepared a development programme that

features foreign direct investment (FDI) as a top priority and key to a fast and successful economic

recovery.

Business facility

As a small country in today’s globalised world, Latvia knows the importance of attracting foreign

investment. It has consistently pursued liberal economic policies and welcomed FDI. Latvia has

worked diligently to make doing business in Latvia easy and fast, for example it takes only one day to

incorporate a company in Latvia. Other elements are:

Business without borders – an EU member state

Access to EU Structural Funds for business development

Minor bureaucratic obstacles

Transparent legal and judicial system

Latvia understands that an active dialogue between the government and foreign investors is vital for

success. Key investment issues are regularly raised with the government through the Foreign Investors’

Council in Latvia and, less formally, through easy access to officials and decision-makers.

Access to knowledge and skills

Highly educated and multilingual workforce

Northern European culture and work ethic

Business knowledge and experience of Russia/CIS

Latvia’s multilingual and well-educated labour force are ready to take on new challenges, and even

more so given the present circumstances. Employees are highly motivated. Latvia’s workforce is rated

among the top five globally in terms of university students per capita and possesses a northern

European culture and work ethic – excellent skills and discipline. Historically, Latvia has experience

and business knowledge of working with Russia and other CIS countries:

Over 85% of Latvians speak Russian;

70% of people under the age of 40 speak English; and

German and Scandinavian languages are also widely spoken.

The present economic conditions mean there are a number of attractive merger and acquisition

opportunities in a variety of sectors including:

Renewable energy;

ICT;

Woodworking; and

Construction materials and industrial real estate.


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Gateway to the EU and Russia/CIS

In terms of logistics, Latvia is one of the best locations to establish a business in northern Europe. Riga

is the largest city in the Baltic States and is ideally located in the heart of the region. Latvia’s salient

features include:

The EU border with Russia;

Ice-free ports;

The fastest growing airport in Europe; and

An integrated, well-developed transport infrastructure.

The Trans-Baltic highway (Via Baltica) runs the length of Latvia, providing a north/south transport

corridor, and is connected to the highway leading to Moscow. Riga International Airport is the fastest

growing capital city airport in Europe. Riga offers direct flights to more than 80 destinations. Latvia’s

main asset, though, is its maritime links: Latvia has three major ice-free international ports linked to its

infrastructure by rail, road and pipeline.

Business incentives

State support programmes

Special economic zones

As Latvia is a relatively new EU member, companies investing here have an ideal opportunity to

qualify for EU Structural Funds under the support scheme for 2007 to 2013. Substantial financial

grants are available in a variety of key business activities including vocational and other training,

innovation, R&D, value-added manufacturing and technology/knowledge transfer.

Latvia has four separate special economic zones (three ports and one inland). All the zones are well

connected to transport and have a well-developed infrastructure. The zones offer corporate tax rebates

(up to 80%) as well as 0% rates for VAT, customs and excise duties to companies established there.

Special government funding programmes are available to assist export-oriented business activities.

From 1 January 2011 qualifying investments are eligible for a tax credit in the year an investment

project is completed as follows:1

25% of the initial total for investments of up to LVL 35 million (€50 million)

15% of the initial total for investments exceeding LVL 35 million

Unused credits can be carried forward 16 tax years.

Cost effectiveness

Low taxes

Competitive labour costs

High productivity

1 For more details see Chapter 4 of the present material.


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In the present economic climate all businesses are focussed on reducing costs. Latvia offers an

environment where this can be achieved. In addition to low business tax rates and uncomplicated

bureaucracy, other costs have decreased significantly, particularly for construction, office space, and

industrial real estate.

The current economic slowdown is an opportunity to attract qualified labour at better rates. Latvia’s

labour costs are very competitive, especially compared to those in the older EU member states.

Latvia’s flat corporate income tax rate of 15% ranks among the lowest in Europe, with dividends to EU

citizens free of tax. Personal income tax is also charged at a low flat rate of 25%.

International recognition

EU and NATO membership since 2004

Latvia’s national currency, the lat (LVL), is pegged to the euro

Business environment fosters entrepreneurship

Latvia’s international membership of NATO and EU guarantees a political stability and easy access to

Europe’s most dynamic regional market, the Baltic Sea Region, with seamless access to 100 million

affluent consumers.

Latvia’s national currency is pegged to the euro at LVL 1 = EUR 1.42, as part of the medium-term plan

to introduce the euro in 2014.

The current crisis is a window of opportunity for investors: as the economy develops in cycles, it is the

best time to be first to invest in Latvia.

Temporary residence permits

In July 2010, Latvia adopted new rules providing additional opportunities for foreign nationals to

obtain a temporary residence permit in Latvia without the need to reside in Latvia for a specific period

of time. According to the newly adopted rules, a foreign national may take out a temporary residence

permit if he or she:

invests at least €35,500 in a Latvian company;

sits on the board of a Latvian company that has existed for at least one year by the time of

applying for a permit;

deposits at least €284,600 into the subordinated capital of a Latvian credit institution (bank);

or

acquires real estate in Riga or one of the major cities of Latvia worth €142,300 or real estate

worth €71,200 in other areas.

For more details see Chapter 3 of the publication.

National airline

Air Baltic Corporation (airBaltic) is the Latvian flag carrier airline, with its head office on the grounds

of Riga International Airport in Riga.

airBaltic currently operates direct flights out of the three Baltic capitals: Riga, Vilnius, and Tallinn.

airBaltic offers flights to and from more than 80 cities in Europe, Asia and Middle East, including


February 2011

such cities as Barcelona, Paris, Frankfurt, Moscow, St Petersburg, Tel Aviv, Rome, Tashkent, and

Dubai.


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2. Business environment

General information

Geography

Latvia is located in northern Europe on the eastern shores of the Baltic Sea, between Estonia and

Lithuania. It has also borders to the east with Russia and Belarus as well as a maritime border with

Sweden. The climate resembles that of New England. Latvia has over 12,000 rivers, of which only 17

are longer than 97 km, and over 3,000 small lakes, most of which are located in the eastern province of

Latgale. The major rivers are the Daugava, the Lielupe, the Gauja, the Venta, and the Salaca.

Woodlands, mostly pine, comprise 41% of the Latvian territory. Apart from peat, dolomite and

limestone, natural resources are scarce. Latvia has 531 km of sandy coastline and three main ports:

Riga, Liepaja, and Ventspils.

With an area of 64,589 sq km and a population of about 2.25 million, Latvia is a small European

country. Its capital, Riga, has nearly 900,000 inhabitants (metropolitan area). The second largest city in

Latvia is Daugavpils, with a population of about 150,000.

History

The Latvians (or Letts as they are sometimes known) were still organised under separate tribal

chieftains when they were conquered and converted to Christianity in the 13th century by German

crusading orders. Subsequently, the territory of modern Latvia passed under Polish and Swedish

suzerainty. During the 18th century, following the conclusion of the Great Northern War in 1721 and

the final partition of Poland in 1795, the whole Latvian territory became part of the Russian empire.

A Latvian national revival began in the middle of the 19th century, and following the collapse of Russia

and Germany at the end of World War I, an independent Latvian republic was proclaimed in November

1918. Despite the serious devastation resulting from the World War and the subsequent War of

Independence, Latvia recovered rapidly in both economic and cultural terms, and by 1940 had achieved

a standard of living comparable with that of Scandinavia at the time. The Latvian constitution (1922)

established a democratic parliamentary republic. In 1934, the then prime minister, Karlis Ulmanis,

staged a coup d’état, suspending Parliament indefinitely, and became a virtual dictator. In 1936, he also

assumed the position of President. In June 1940, under the provisions of the Nazi-Soviet

Non-Aggression Pact, Latvia was occupied by the USSR and made a Soviet Socialist Republic. In

1941, Latvia was occupied by the German forces, and re-conquered by the USSR in 1944–45.

In May 1990, the Latvian parliament reasserted Latvia’s independence. In 1993, new parliamentary and

presidential elections were held under the restored 1922 constitution.

Latvia became a member of the United Nations in 1991 and signed a free-trade agreement with Estonia

and Lithuania in 1993. Latvia joined the EU and NATO in 2004.

Government and political powers

According to its Constitution (Satversme), Latvia is an independent democratic parliamentary republic.

It has a unicameral parliament (Saeima), composed of one hundred members elected by the list system

of proportional representation. The President, who is the head of state, is elected by Parliament for a

four-year term. The executive power rests with the prime minister, who is appointed by the President,

http://lv.wikipedia.org/wiki/Kvadr%C4%81tkilometri


February 2011

and the Cabinet of Ministers. At present, Valdis Zatlers is the President of Latvia, and Valdis

Dombrovskis of the party Vienotība is the prime minister. He heads a coalition of two centre-right

parties. For administrative purposes, the country is divided into 26 counties and seven municipalities.

Latvia became a full member of the EU on 1 May 2004.

Population and language

The official language is Latvian, one of the two surviving members (the other being Lithuanian) of the

Baltic branch of the Indo-European language family. Latvian and Russian are commonly spoken

languages. English is also widely spoken. Some 59% of the population are ethnic Latvian, and 28% are

Russian. No other ethnic group reaches 5% of the population.

Currency

Latvia’s currency is the lat (international abbreviation LVL), which is subdivided into 100 santims. On

1 January 2005, the lat switched from the SDR to a euro peg at a rate of LVL 0.702804 = EUR 1, and

joined ERM II later in the year. At the time of going to press (mid-February 2011), the lat was quoted

at USD 1 = LVL 0.5410.

Time, weights and measures

Latvia uses Eastern European Time, which is two hours ahead of Greenwich Mean Time (GMT+2

hours). Every year between March and September, Latvia introduces Daylight Saving Time (GMT+3

hours). Latvia uses the metric system of weights and measures and the Celsius scale of temperature.

Business entities

There are no specific requirements for foreign nationals wishing to establish a business in Latvia.

Investors, whether Latvian or foreign, benefit from equal legal treatment and have the same right to

establish business operations in Latvia by incorporating a separate legal entity. The procedure requires

the fulfilment of certain legal formalities (registration with the Latvian Commercial Registry

(Uzņēmumu reģistrs) and the State Revenue Service (SRS – Valsts Ieņēmumu dienests).

Forms of business

The common form of carrying on a business in Latvia is through a company, mainly a limited-liability

company or a joint-stock company. Companies have their own name, share capital (the minimum

amount of which is established by law), management, a registered office and a bank account.

Companies established in Latvia are subject to Latvian law, but contracts signed by a Latvian company

can be governed by any law agreed between the parties. No permit is required by foreign nationals

wishing to subscribe the shares of a company or to be appointed to the board of a Latvian company.

The registered address of a company must be local to ensure the delivery of official correspondence.

The activities of Latvian businesses are governed mostly by the Latvian Commercial Code

(Komerclikums), enacted in 2000 and further amended. The Commercial Code allows and defines

three forms of a business entity:

Individual trader (Individuālais komersants, abbreviation IK);

Limited-liability company (Sabiedrība ar ierobežoto atbildību, abbreviation SIA); and


February 2011

Joint-stock company (Akciju sabiedrība, abbreviation AS).

Other forms of doing business are representative offices and branches of foreign companies. A

representative office has limited functionality and is not allowed to carry on any business activity; it

does not, therefore, give rise to a permanent establishment in Latvia. Individuals or partnerships

providing professional services (lawyers, tax consultants, insolvency specialists etc) have special forms

of organisation that may or may not be recognised as a distinct legal entity. The Latvian law recognises

two forms of partnership (personālsabiedrība):

General partnership (pilnsabiedrība); and

Limited partnership (komandītsabiedrība).

Other forms of doing business in Latvia are:

European economic interest grouping (Eiropas ekonomisko interešu grupa);

European company (Eiropas sabiedrība);

European cooperative society (Eiropas kooperatīvā sabiedrība); and

Cooperative society (kooperatīvā sabiedrība).

Latvian legislation does not recognise the concept of a trust. However, there is an ongoing discussion

about the necessity of introducing this concept in Latvia.

Limited liability companies

The most common form of doing business in Latvia is the limited-liability company. Its name is

usually abbreviated to SIA.

The share capital of an SIA must be at least LVL 2,000 (€2,850) and is normally divided into 100

shares with a nominal value of LVL 20 each. Accordingly, it is the most appropriate form of starting

business, which does not require a considerable initial investment.

The organisational structure of an SIA requires an executive board of directors (valde), although one

director is sufficient. A supervisory board (padome) and an auditor (revidents) are optional, where not

expressly required by law (see Chapter 2).

It usually takes about one week to incorporate an SIA in Latvia; it costs about LVL 124 (€175) in

registration and other duties, excluding professional fees. A limited-liability company must be

registered with the local office of the SRS and file tax returns on a regular basis.

Joint stock companies

A joint-stock company must bear the initials AS in its name. It has a minimum share capital of LVL

25,000 (€35,600) and needs at least two shareholders. Its shares can be either registered shares or

bearer shares, and they can be freely traded and pledged. Share capital must be paid up within 12

months after a company is incorporated and entered on the Commercial Register.

A joint-stock company may be set up privately or by public subscription. It must have both an

executive board and a supervisory board. The general meeting of shareholders elects members of the

supervisory board, who then appoint the executive board. Managers or directors need not be

shareholders.


February 2011

It usually takes about one week to incorporate an AS in Latvia; it costs about LVL 274 (€390) in

registration and other duties, excluding professional fees. A joint-stock company must be registered

with the local office of the SRS and file tax returns on a regular basis. If a joint-stock company decides

to go public there are more requirements to be met before listing.

Representative offices

Foreign companies can set up a representative office (pārstāvniecība) in Latvia in order to carry out

non-income generating activities such as promotion and supervision of the parent company’s business.

Representative offices cannot perform commercial activities in Latvia.

Branches of foreign companies

A branch (filiāle) of a foreign company can be registered with the Latvian Commercial Registry to

carry out business in Latvia. The foreign company will be liable to the branch’s employees and

creditors for the actions of, and debts contracted by, its managers and agents on behalf of the branch.

Branches may carry out only activities for which the parent company is authorised.

After its registration with the Commercial Registry, the branch must register for tax purposes with the

SRS and will be subject to corporate tax as a permanent establishment. There is no branch remittance

tax in Latvia.

It usually takes about one week to establish a branch in Latvia; it costs about LVL 36 (€50) in

registration and other duties, excluding professional fees.

Business reorganisation and liquidation

The liquidation of a company may occur voluntarily by decision of its shareholders or in other statutory

cases. According to the law, the minimum length of the procedure is about six months, but in practice

the procedure is very long and takes about two years to obtain approval from the authorities.

Both the company and any creditor may file a bankruptcy petition.

Mergers and acquisitions are regulated by the provisions of the Latvian Commercial Code and EU

Directives; it takes about six to eight months to complete all formalities. A reorganisation must be

approved by all shareholders of the company.

Labour relations and working conditions

With just over 2 million inhabitants, Latvia is a small market in Eastern Europe. One of the main

advantages of the Latvian labour market consists in its qualified specialists in social sciences,

economics and law (53%) as well as IT, engineering, manufacturing and construction (10%).

Information on the employment market

According to official statistics at the end of 2010, the occupied workforce was 950,000 and

unemployment stood at about 14.3%. The level of unemployment varies from region to region (it is

considerably higher in Latgale, the eastern part of Latvia).


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There is a minimum statutory monthly wage of LVL 200 (€284). The average monthly gross wage at

the end of 2010 was estimated at LVL 433 (€616).

The majority of employees work in wholesale and retail, in equipment repair (16%), manufacturing

(15.6%) and construction (11.3%). The service and construction sectors have shown a continuous

growth of employment over the last few years.

Employment regulations and laws

Employment relationships are mainly governed by the Employment Code (Darba likums). There are

special laws enforcing rules for labour conflicts, trade unions and employers’ organisations as well as

collective employment.

According to the Employment Code, an employment contract must be in writing. However, a

non-written contract will be considered in force if at least one party has fulfilled its provisions. An

employment contract must specify certain mandatory conditions such as working hours and salary.

State Labour Inspectorate

The State Labour Inspectorate (Valsts Darba inspekcija) is authorised to supervise all employment

relationships as well as the safety of labour and industrial equipment. Violations of provisions of the

law are penalised.

Working conditions

Working hours

The normal working period is eight hours per day with a one-hour lunch break, five days per week.

There are specific working conditions for night work, hard physical work, and employment of

juveniles. Any overtime work must be paid for additionally.

Holidays

Employers are required by law to provide holiday pay. The minimum period of annual holiday is 20

days. In addition, the statutory holidays are as follows:

1 and 2 January New Year’s Holiday

2 days (set yearly) Easter

1 May Labour Day

4 May Day of Proclamation of Independence

23 and 24 June Midsummer Days

18 November National (Independence) Day

25 and 26 December Christmas

There are also paid absence periods for family events (childbirth, funerals, etc).

Termination of an employment contract

An employment contract can be ended in one of the following ways:


February 2011

by agreement between the parties;

by declaration with notice;

by expiry of the contract, if applicable;

by performance of the specific task covered, if applicable;

under statutory circumstances.

Under conditions prescribed by the Employment Code, one month’s written notice of termination must

be given by either the employee or the employer, depending on the circumstances.

Employees are not required by law to state their reason for leaving. However, the employer must state

the grounds for terminating a contract.

The statutory maximum period of probation is three months. The employment contract may be

terminated during this period with three days’ notice. However, the employer is required by law to state

the grounds for termination exactly as under normal procedure.

Under certain conditions, a dismissal of personnel qualifies as a collective lay-off, which must be

notified to and supervised by the unemployment agencies. For example, there is a collective lay-off if

there is a dismissal, within 30 days, of at least:

Five employees in a company with a staff between 20 and 50 people;

Ten employees in a company with a staff between 50 and 100 people;

10% of the staff in a company with a staff between 101 and 299 people; or

30 employees in a company with more than 300 people.

Fringe benefits

The typical fringe benefits granted to employees include extra holiday pay, medical insurance, a

stock-option plan, paid mobile phone subscription, and public transportation.

Social security

At present, Latvian social security legislation comprises five essential areas:

Pensions and other social security benefits for employees;

Provision of healthcare services;

Unemployment benefits and assistance;

Allowances and support for the family (child allowance, supplementary allowance for families

with children, allowance for single-parent families); and

Social assistance for disadvantaged individuals, including special protection for disabled

persons.

The first three areas are part of the social insurance system for employees, with the principal aim of

providing support to insured persons who cannot obtain regular remuneration in certain risk situations

(temporary or permanent incapacity for work, maternity, retirement, unemployment etc). The social

insurance system is based on collecting funds from insured persons and making distributions to those

qualifying for the insured benefits.

Unlike the social insurance system, which is contributory, family and social assistance are

non-contributory systems funded by the State.


February 2011

Latvian and foreign employees alike are governed by the same social security, health, pension and

unemployment insurance provisions, subject to any relief given under EU regulations and international

social security conventions signed by the Latvian government.

Foreign employees

Visa requirements

Non-Latvian resident individuals planning to carry on a business, to be employed, or simply to enter

Latvia, must take out a visa, with the exception of EU residents.

Schengen visa

Latvia is a member of the Schengen area, and so a uniform or Schengen visa is available that entitles

foreign nationals to stay in Latvia and the other Schengen countries: Austria, Belgium, Czech

Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Lithuania,

Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and

Switzerland.

National or long-term visa

Foreign nationals staying in Latvia for a period of more than 90 days in any six-month period have to

apply for a long-term visa or residence permit depending on the circumstances of the particular case.

This visa is valid for stay in Latvia only. The maximal term of a long-term visa under general

conditions is one year.

Short-term entry and stay in connection with employment

If a foreign national’s employment involves a short-term or irregular stay in Latvia not exceeding 90

days in any six-month period, they must take out a visa or residence permit for a certain term and a

work permit. This condition also applies to foreign nationals who need not obtain an entry visa.

If a foreign national’s employment involves a regular stay in Latvia for more than 90 days in any

six-month period, they must take out a residence permit for a certain term and a work permit.

Visa with work permit

If a foreign national meets certain statutory conditions, then a competent authority will issue a work

permit according to the expiry date of their visa.

Temporary residence permits

In July 2010, Latvia adopted new rules providing additional opportunities for foreign nationals to

obtain a temporary residence permit for a 5-year period without the need to reside in Latvia for a

specific period of time. According to the newly adopted rules, a foreign national may obtain a

temporary residence permit if he or she:

invests at least €35,500 in a Latvian company;


February 2011

sits on the board of a Latvian company that has existed for at least one year by the time of

applying for a permit;

deposits at least €284,600 into the subordinated capital of a Latvian credit institution (bank);

or

acquires real estate in Riga or one of the major cities of Latvia worth €142,300 or real estate

worth €71,200 in other areas.

Procedure

1. Invitation

A foreign national needs to receive an invitation to Latvia in the case of:

- investing in a Latvian company; or

- sitting on the board of a Latvian company.

Where a foreign national applies for a temporary residence permit on the basis of investing in or sitting

on the board of a Latvian company, that company needs to draw up an invitation.

2. Submission of documents

Once the invitation has been reviewed and accepted or where one is not required, the foreign national

must submit documents to the Latvian diplomatic mission in his or her country of residence. The

review period is 30 days (a shorter period is possible depending on the amount of stamp duty paid by

the applicant).

3. Obtaining a temporary residence permit

After a positive decision is taken by the Latvian immigration authorities, the applicant will receive a

single-entry visa to Latvia, issued by the Latvian diplomatic mission in his or her country. Afterwards

but no later than seven days after entering Latvia, the applicant will personally receive a temporary

residence permit from the Citizenship and Migration Office. A sufficient period of stay in Latvia is 1–2

days.


February 2011

3. Finance and investment

Banking and local finance

Banking in Latvia is regulated by the Credit Institutions Act (Kredītiestāžu likums) in force from 24

October 1995.

Latvia’s central bank is the Bank of Latvia (Latvijas Banka), which is one of the key public institutions

and carries out the economic functions prescribed by law. To ensure the implementation of the

monetary policy, the Supreme Council (which predated the Fifth Parliament elected in 1993) adopted

the law founding the Bank of Latvia on 7 September 1992. Its principal objective is to regulate the

currency in circulation by implementing a monetary policy so as to maintain price stability in Latvia.

The activities of the Bank of Latvia is regulated by the Bank of Latvia Act (likums “Par Latvijas

Banku”) in force from 19 May 1992.

The banking system comprises several types of credit institutions:

Commercial banks;

Credit institutions;

Mortgage banks;

Subsidiaries, branches and agencies of foreign banks.

The minimum capital required for establishing a bank is the equivalent of €5 million (LVL 3.5 million)

and must be subscribed and paid up fully in cash.

The supervision of the Latvian banks, insurance companies, participants in the financial instruments

market and private pension funds is carried out by the Financial and Capital Markets Commission

(Finanšu un kapitāla tirgus komisija) as regulated by the Financial and Capital Markets Commission

Act (likums “Par Finanšu un kapitāla tirgus komisiju”) in force from 1 July 2001.

Since 1 February 2008, Latvia has fully implemented the Markets in Financial Instruments Directive

2004/39/EC, which regulates the financial markets. The central aim of this directive is to ensure the

protection of investors’ interests and the perfect functioning of the financial instruments market. The

Latvian banks have therefore introduced a number of improvements in order to ensure better protection

of investors and to improve the provision of investment services.

The Latvian Commercial Banks Association (Latvijas Komercbanku asociācija) is a public

organisation that unites banks registered in Latvia and branches of foreign banks on a voluntary basis,

currently 21 and 2 respectively. It was founded on 23 July 1992 and its purpose is to contribute to the

strengthening and development of the banking system in Latvia.

Equity market

The official Stock Exchange is located in Riga (Rīgas Fondu birža). It is the sole stock exchange

operating in Latvia and is owned by OMX.

The Central Depository of Latvia (Latvijas Centrālais depozitārijs) administers all publicly issued

securities in Latvia. Its operation is supervised by the Financial and Capital Markets Commission and

its main functions are as follows:


February 2011

Keep safe custody of securities, clearing and settlement for securities trading and management

of corporate actions;

Provide other services related to securities;

Keep a register of numerous debt securities of non-public joint-stock and private limited

companies and other corporate debt securities;

Keep initial lists of shareholders for privatised enterprises; and

Administer the state-funded pension scheme, i.e. the second pillar of the pension system.

Accounting and audit requirements

Bookkeeping and financial reporting in Latvia is mainly regulated by the Accounting Act (likums “Par

grāmatvedību”) and the Corporate Annual Reports Act (likums “Par uzņēmumu gada pārskatiem”) as

well as the Certified Auditors Act (likums “Par zvērinātiem revidentiem”) and the Latvian Accounting

Standards (Latvijas Grāmatvedības standarti).

Accounting and annual financial reporting

Accounting records

A company’s accounting records must be kept in a manner that enables any person qualified in

accounting to clearly identify the financial situation of the company and transactions made during the

accounting period, and to ascertain the beginning and progress of each transaction.

Accounting records require the use of the lat as a measure of value and the Latvian language. A second

language, however, may be used if agreed between the parties and acceptable to the auditors.

Accounting records and all relevant mandatory documentation must be stored in Latvia.

Confidentiality

The information included in a company’s annual report, consisting of the financial statements and the

management report, is not considered a trade secret of the company and is available publicly on

request. All other information in the accounting records is confidential. The only exception is made

with respect to the auditors, the tax authorities examining taxes reported, and other authorities in

statutory circumstances. The reporting period is normally 12 months.

Consolidated reporting

The parent company must prepare a consolidated annual report if the figures for the parent company

together with its subsidiaries for two successive years have exceeded any two of the following three

criteria:

Total assets of LVL 1,000,000 (€1,420,000)

Net turnover of LVL 2,400,000 (€3,414,000)

250 employees on average in the reporting year.

Statutory audit of financial statements

The financial statements must be audited by a certified auditor or by a firm of certified auditors if the

company exceeds two of the following criteria:


February 2011

Total assets of LVL 250,000 (€350,000)

Net turnover of LVL 500,000 (€700,000)


Development of the accounting and auditing profession

All the largest international audit firms are represented on the Latvian market, and they have also the

dominant position in servicing large companies. About 30 local audit firms operate in the largest cities

of Latvia, mostly in Riga. Unlike the large networks, local firms rarely provide business consulting.

However, the service fees charged by local firms are generally significantly lower.

Accounting software

According to the law, computerised accounting is allowed only if the law is not violated. Moreover, the

data output must be understandable to an independent third party.

Foreign and domestic accounting software packages are used: foreign packages are generally designed

for large and medium-sized enterprises, while locally developed packages are intended for small and

medium-sized enterprises.

Foreign exchange policy

The exchange rate of the lat varies according to movements on the global foreign exchange market.

The foreign reserves of the Bank of Latvia comprise gold, convertible foreign currencies, and XDRs.

The Bank of Latvia invests in safe and liquid financial instruments, predominantly in government and

government agencies’ securities of the USA, Germany, France, the UK and Japan, as well as in

securities of international institutions.

Investment opportunities and incentives

As a small country with limited private capital resources, Latvia appreciates the impact of foreign

direct investment on its continuing economic development. The government and local authorities in

cooperation with various business organisations are committed to improving the legal and

administrative environment for foreign and local business ventures wishing to establish themselves in

Latvia, by a number of methods. For example, Latvia was among the first countries to effect a gradual

reduction in the standard rate of corporate income tax from 25% in 2001 to 15% from 2004.

Foreign investors’ guarantees and rights

The Latvian constitution guarantees the right to private ownership. Domestic and foreign private

entities alike are allowed to establish and own business enterprises and engage in all forms of

commercial activity, except those prohibited by law. Private enterprises have competitive equality with

public enterprises with respect to access to markets and business operations.

Performance requirements and incentives

The Latvian government extends national treatment to foreign investors. Therefore, most investment

incentives and requirements apply equally to local and foreign businesses. The government has

prepared a series of incentive schemes for investment, both foreign and domestic, in several free ports,

special economic zones, and special assisted regions. Two other incentive packages are available to


February 2011

companies producing hi-tech products and to projects having state-supported investment status. In

addition, all investors are exempt from VAT and customs duties on fixed assets imported as long-term

investments.

Repatriation of initial investment and profits

Latvia’s foreign investment law provides for unrestricted repatriation of profits associated with an

investment. Investors can freely convert local currency into foreign exchange at market rates, and have

no difficulty obtaining foreign exchange from Latvian commercial banks for investment remittances.


February 2011

4. Tax system

Introduction

The Latvian system of taxes and duties consists of:

State taxes, the base and rate of which is set by Parliament;

State duties applicable under the Taxes and Duties Act (likums “Par nodokļiem un

nodevām”), other laws, and regulations of the Cabinet of Ministers;

Local duties applicable under the Taxes and Duties Act and binding regulations issued by the

local authorities concerned; and

Directly applicable taxes and other mandatory payments set in EU regulatory enactments.

The taxes governed by the Taxes and Duties Act are as follows:

Direct taxes

Corporate income tax (uzņēmumu ienākuma nodoklis)

Personal income tax (iedzīvotāju ienākuma nodoklis)

Mandatory social insurance contributions (valsts sociālās apdrošināšanas obligātās iemaksas)

Real estate tax (nekustamā īpašuma nodoklis)

Micro-company tax (mikrouzņēmumu nodoklis)

Company car tax (uzņēmumu vieglo transportlīdzekļu nodoklis)

Indirect taxes

Value added tax (pievienotās vērtības nodoklis)

Excise duty (akcīzes nodoklis)

Electrical power tax (elektroenerģijas nodoklis)

Car and motorcycle tax (vieglo automobiļu un motociklu nodoklis)

Vehicle operation tax (transportlīdzekļu ekspluatācijas nodoklis)

Customs duty (muitas nodoklis)

Other taxes

natural resource tax (dabas resursu nodoklis)

lottery and gambling tax (izložu un azartspēļu nodoklis)

Payment

All taxes and duties are assessed and paid in Latvian lats.

The tax authorities may not waive their right to claim for unpaid tax in favour of another person or

transfer to another person their right to claim in relation to taxes, duties and related charges, with the

exception of the recovery of tax debts and the sale of confiscated and inventoried property in cases

prescribed by other tax laws.

http://www.fm.gov.lv/nodokli/iin/law.doc

http://www.fm.gov.lv/likumi/nin/Par_NIN_en.pdf

http://www.fm.gov.lv/nodokli/pvn/likums_par_pvn_en.doc

http://www.fm.gov.lv/nodokli/automoto/autoMoto_Tax.pdf

http://www.vid.gov.lv/default.aspx?tabid=9&hl=2

http://www.vid.gov.lv/default.aspx?tabid=8&id=29&hl=2

http://www.vid.gov.lv/default.aspx?tabid=8&id=30&hl=2


February 2011

No set-off of taxes, duties or related charges against other liabilities is permitted. The due date for

payment is prescribed by the law regulating the particular tax or duty.

Assessment

The Latvian tax system is generally one of self-assessment. Taxpayers are responsible for computing

their own tax payable on the basis of their tax return and for deducting the amount of tax payable as

prescribed by specific tax laws. Taxpayers must file tax returns and informational returns in electronic

form, except for individuals who are not economic actors. Taxpayers are also responsible for

preserving all documentary evidence of income and expenditure related to their financial and economic

activities for at least five years (there might be exceptions).

The tax authorities have the power to carry out tax audits, subject to advance notification of the

taxpayer about a tax audit, indicating its timing and specifying which taxes, duties, tax returns and tax

periods will be covered.

The tax authorities have the power to adjust the amount of taxes and to impose fines as a result of a tax

audit.

Appeal procedures

Any person who disagrees with a fiscal administrative document (including an assessment) or a refusal

to issue such a document has the right to file an appeal.

A decision taken by a local officer on tax issues may be appealed to the head of department within 30

days after receipt of that decision.

If a taxpayer is dissatisfied with the result of his appeal, he may appeal against the decision to the

courts.

If a taxpayer disagrees with a decision of the tax authorities on market prices or the market value of a

specific transaction, he has ten days to seek an opinion from the Deal Valuation Commission

(Darījumu novērtēšanas komisija) appointed by the Cabinet of Ministers from experts in the field. The

commission’s opinion can be appealed by the authorities and the taxpayer to the courts.

Anti-avoidance principle

Latvia operates specific anti-avoidance rules. As a matter of principle, where a tax liability has not

been calculated or has been calculated on a tax base that differs from the one existing in reality, thereby

avoiding the scope of tax law, that tax liability will be recalculated on the real tax base (‘substance over

form principle’).


February 2011

5. Taxes on business

Corporate tax system

Scope and extent

Corporate income tax (CIT) is charged on worldwide profits realised by Latvian legal entities and on

profits that non-Latvian resident entities derive through a permanent establishment in Latvia.

Non-resident entities without a permanent establishment in Latvia are liable to tax on their

Latvian-source income and capital gains.

Company residence

For the purposes of tax legislation, a taxpayer who is not an individual is considered resident in Latvia

if it has, or should have, been established and registered in accordance with Latvian law. Thus, a

Latvian company is deemed resident even if its management and control are situated abroad, and it is

not possible for a Latvian company to change its residence without being dissolved and reincorporated

abroad.

Taxable entities

The persons liable to CIT are as follows:

Resident entities carrying on a business (performing economic activities);

Foreign companies and other foreign legal entities deriving income or capital gains in Latvia;

and

Permanent establishments of non-residents carrying on a business in Latvia.

The following are not liable to CIT:

Individual (family) undertakings that are not required to file annual reports in accordance with

the Corporate Annual Reports Act;

Institutions financed from a State or local-government budget whose income from economic

activity is provided for in that budget;

Private pension funds;

Associations (biedrības) and foundations (nodibinājumi) if their disclosed or undisclosed

objective is neither the acquisition of profit nor the growth of capital for the benefit of their

members; and

Religious organisations, trade unions and political parties.

Investment funds, general and limited partnerships, and cooperative societies are transparent for CIT

purposes. Their partners are liable to either personal income tax or CIT on their share of partnership

profits.

Taxable income

The Latvian tax authorities levy CIT on worldwide profits of Latvian entities and on Latvian-source

profits that foreign entities derive through either a permanent establishment or an association that does

not amount a legal entity.


February 2011

All types of business income including dividends, interest income, royalties, capital gains and rental

income attract CIT.

Taxable income is calculated by adjusting accounting profit for non-taxable items and non-deductible

items, and making other statutory adjustments.

Deductions

As a general rule, an expense is deductible only if it is directly related to the company’s business.

There are expenses with limited deductibility and wholly disallowed expenses, for instance

representation expenses are only partly deductible (40%).

Expenses not directly related to the company’s business are generally not deductible. These expenses

include entertainment, relaxation, pleasure trips and recreational events for owners or employees, and

the taxpayer’s private (non-business related) travel in company vehicles, grants, gifts and gratuitous

loan waivers as well as other rewards in cash or in kind to owners or employees that are not by way of

remuneration for work performed or not related to the company’s economic activity.

A coefficient of 1.5 applies to expenses not directly related to the company’s business and losses

incurred as a result of maintaining social infrastructure items. Taxable income is increased by this

coefficient.

Tax depreciation (capital allowances)

There are two methods mostly used to compute depreciation:

Straight line. This method consists of depreciating fixed assets at a uniform rate over their

useful life. Intangibles (concessions, patents, licences and trademarks) are depreciable on a

straight-line basis over their estimated life. Depreciation of other intangible investments is not

deductible for tax purposes;

Reducing balance. This method is applied to compute tax depreciation for all fixed tangibles.

The CIT Act specifies depreciation rates for five different classes of fixed assets. Depreciation is

calculated under the reducing-balance method by applying twice the rates prescribed by the CIT Act.

The effective rates are as follows:

Table 1

Type of asset Effective rate (%)

Class 1: Buildings, structures and perennial plantations 5

Class 2: Railway rolling stock and technological

equipment, technical equipment of merchant marine

and harbours; energy equipment

10

Class 2: Sea-going and river vessels 10

Class 3: Computers and peripherals, information

systems, software, data storage systems, means of

communication, copiers and ancillary equipment

35

Class 4: Aircraft, light motor vehicles in general 20

Class 4: Other fixed tangibles excluding those in Class

5 20

Class 5: Platforms and vessels for oil exploration and

extraction 7.5


February 2011

Capital gains

Latvia has no separate capital gains tax. Capital gains arising in Latvia to persons subject to CIT are

taxed at the same rate as ordinary income.

No tax is imposed on gains arising on the sale of listed shares traded on Latvian securities markets or

on securities markets of any EU member state or country of the European Economic Area (EEA).

Capital gains are calculated as the difference between acquisition cost and selling price.

Dividends, interest and royalties

Dividends

Dividends received by a Latvian legal entity from another Latvian company are not taxed in the

recipient’s hands, nor are they subject to any withholding tax when paid. However, where dividends

are received from a company enjoying tax exemption or relief under Latvian legislation, they are

taxable in the recipient’s hands to the extent of the relief enjoyed by the distributing company.

Where a dividend originates from a company resident in another EU or EEA country, that dividend is

exempt from tax, provided that:

The foreign distributing company is of a type listed in Schedule 1 to the EEC Mergers

Directive (90/434/EEC), it is not treated as resident outside the EU under the terms of a treaty

with a third country, and it is subject to corporate income tax; or

If the foreign company is resident in the EEA but not in the EU, it must be subject to a

corporate income tax similar to that of Latvia and must not be treated as resident outside the

EEA under the terms of a treaty with a third country.

Dividends received from a third country are generally taxable at 15%. However, if the Latvian

company receiving the dividend owns at least 25% of the share capital and voting power in the foreign

distributing company and that company is not resident in a country or territory recognised by Latvia as

a low-tax or tax-free territory, the dividend will not be taxable.

Interest

Interest income that Latvian-resident companies receive from debt obligations and deposits in Latvia

and elsewhere in the EU, the EEA or third countries is fully taxable. For the treatment of interest

receivable by non-residents, see ‘Withholding taxes’ below.

Withholding taxes

Table 2 shows withholding tax rates for non-resident legal entities which are applicable if a double tax

treaty does not provide otherwise:

Table 2

Type of payment EU or EEA recipient Third-country recipient

Dividends 0% 10%

Interest 0%/5%1, 2

0%/5%/10%1

Literary or artistic royalties3

5%4

15%


February 2011

Other royalties 5% 5%

Rent for movable or immovable property 5% 5%

Management and consulting fees 10% 10%

Proceeds from disposal of Latvian

immovable property5

2% 2%

Remittances of partnership profits 15% 15%

Notes 1 The rate is zero if the recipient is not an affiliate; the rate is 10% (for a third-country recipient) if the

recipient is affiliated, but 5% if the paying company is a bank registered in Latvia. 2 Under Latvia’s derogation from the EC Interest and Royalties Directive (2003/49/EC), the rate is reduced to

zero from 1 July 2013. 3

Royalties payable for copyright on works of literature or art, including films, videos and sound recordings. 4 The rate is reduced to zero from 1 July 2013.

5 Including proceeds from the disposal of shares in a company in which Latvian immovable property

represents more than 50% of its assets in the current or preceding tax period.

In all cases, if payments are made to persons resident in a tax haven, the rate of withholding tax is 15%,

unless the SRS is satisfied that the transaction has not been made with the purpose of avoiding Latvian

tax.

The jurisdictions considered to be tax havens are prescribed by regulation and listed in Table 3:

Table 3

Alderney Guatemala New Caledonia

Andorra Guernsey Niue

Anguilla Hong Kong Panama

Antigua and Barbuda Isle of Man Qatar

Aruba Jamaica St Helena

Bahamas Jersey St Kitts and Nevis

Bahrain Jordan St Lucia

Barbados Kenya St Pierre et Miquelon

Belize Kuwait St Vincent and the Grenadines

Bermuda Labuan Samoa

British Virgin Islands Lebanon San Marino

Brunei Liberia São Tomé and Principe

Cayman Islands Liechtenstein1 Seychelles

Cook Islands Macao Tahiti

Costa Rica Maldives Tonga

Djibouti Marshall Islands Turks and Caicos Islands

Dominica Mauritius United Arab Emirates

Ecuador Monaco Uruguay

Gibraltar Montserrat US Virgin Islands

Grenada Nauru Vanuatu

Guam Netherlands Antilles Venezuela

Note 1

But see above as regards dividends, interest and royalties to EEA countries.

Latvia has concluded about 49 double tax treaties (see the Appendix). If a treaty is in force, the most

favourable rates are applied.


February 2011

Losses

Tax losses may be carried forward up to eight years starting from 2010. No carrybacks are allowed.

Taxpayers registered in one of the special economic zones have a 10-year limit.

Group treatment

Tax losses are transferrable between group companies within Latvia. A group consists of the principal

and its subsidiaries. The principal may be an entity or individual resident in Latvia, in another EU

member state or in a jurisdiction that has an effective double tax treaty with Latvia (a ‘treaty-partner

jurisdiction’). A subsidiary for this purpose is a Latvian-resident company or a company resident in

another EU member state in which the principal, or one or more of the subsidiaries, or the principal and

one or more subsidiaries together, hold an interest of at least 90%.

Subject to certain conditions, a loss incurred by a group member resident in another EU member state

or in a treaty-partner jurisdiction may transfer that loss to one or more group members or their Latvian

permanent establishments, if all means of relieving the loss in the home country have been exhausted.

Tax incentives

There are certain general incentives available in Latvia, including free ports, special economic zones,

special depreciation rules for new technology equipment and investment in agriculture.

1. In 2008, the Latvian government introduced a notional interest deduction. A company is allowed, in

respect of tax periods beginning after 2008, to claim a deduction in each tax period equal to the

aggregate of all its retained profits for any tax period beginning after 2008 multiplied by the annual

weighted average interest rate on loans denominated in lats and extended to non-financial enterprises in

that year. The appropriate interest rate is to be published by the Bank of Latvia. In 2010 the rate was

5.05%.

2. A company may deduct the profit realised on the disposal of a fixed asset if it acquires a functionally

similar asset at any time within a period beginning 12 months before the disposal and ending 12

months after the disposal. The amount deducted is also deducted from the acquisition cost of the new

asset.

3. Concessions, patents, licences and trademarks are amortised for tax purposes by the straight-line

method. Concessions are amortised over ten years, while patents, licences and trademarks are

amortised over five years. For tax periods from 2009 to 2013, the amortisable basis of own developed

patents or trademarks is multiplied by 1.5. Goodwill is not amortisable.

4. The acquisition or manufacturing cost of new production equipment may be multiplied by 1.5 for tax

depreciation purposes. This rule applies to fixed assets acquired between 2009 and 2013.

5. From 1 January 2011 qualifying investments are eligible for a tax credit in the year an investment

project is completed, as follows:

25% of the total initial amount for investments not exceeding LVL 35 million (€50 million)

15% of the total initial amount for investments exceeding LVL 35 million

Unused credits can be carried forward 16 tax years.


February 2011

An investment qualifies when:

The initial investment totals at least LVL 5 million (€7.1 million);

It is invested within three years after the Cabinet of Ministers approved the investment aid;

The investment is made in a ‘priority sector’ defined by Council Regulation (EC) 1893/2006

amending Council Regulation (EEC) 3017/90;

The investment results in a fundamental change of business processes, the opening or

upgrading of existing operations, or their expansion;

The property belongs to the investor; when leased, it should be a long-term lease for at least

13 years and the rights should be entered on the Land Register;

The project must be approved by the Minister of Economy and must not distort competition;

and

Buildings and structures must be used in Latvia for at least ten years; machinery and

equipment for at least five years beginning in the tax year the investment project was

completed.

Micro-company tax

A micro-company may be a sole proprietor, sole proprietorship, farmer or fisherman, or an individual

registered with the SRS as an entrepreneur, or a limited liability company that meets the following

criteria:

a) the shareholders are individuals; and

b) turnover in a calendar year does not exceed LVL 70,000 (€99,601); and

c) the number of employees at any time does not exceed five.

The maximum remuneration per employee (including the owner) is LVL 500 (€712) a month.

Micro-company tax is charged at a rate of 9%, which covers the following:

a) Social insurance contributions, personal income tax and business risk duty for employees;

b) CIT if the micro-company pays CIT; and

c) Personal income tax for the micro-company’s shareholders on their personal activity income (i.e.

no dividends).

Thin capitalisation

1) Interest payments are not deductible to the extent they exceed 1.2 times the average annual

short-term interest rate.

2) If a company’s interest-bearing debt exceeds four times its shareholders’ equity, the excess interest is

treated as non-deductible, reclassified as dividend income, and taxed accordingly.

Where both rules would otherwise apply, the one giving rise to a greater restriction is applicable.

Neither rule applies to interest paid by credit institutions or insurance companies, or to interest on loans

obtained from credit institutions registered in Latvia or in another EU member state or in a country that

has an effective double tax treaty with Latvia, from the Latvian Treasury, the Nordic Investment Bank,

the European Bank for Reconstruction and Development, European Investment Bank, World Bank

group, or Council of Europe Development Bank.


February 2011

The second rule does not apply to interest on loans obtained from financial institutions meeting both of

the following requirements:

a) it is registered in Latvia or in another EU member state or in a country that has an effective

double tax treaty with Latvia; and

b) it provides credit or financial lease services and it is supervised by the financial supervisory

authority.

Transfer pricing

Transfer pricing rules apply to residents and non-residents if they are deemed to be related parties. The

tax authorities can adjust prices to market value if goods in a transaction between related parties are

sold below market price or bought above market price.

Controlled foreign companies

Latvia has no CFC legislation. However, as stated above, a 15% withholding tax is imposed on

payments made by Latvian companies to entities or individuals registered or domiciled in tax-haven

jurisdictions. Certain exceptions apply.

Tax rate

The current standard rate of CIT on all taxable income is 15%.

Assessment procedure

It is the duty of each company to calculate its tax due.

Returns and payments

Returns

A company’s CIT return is generally due within four or seven months after the year-end, so it is

generally due no later than 30 April or 31 July for companies with calendar-year periods of account.

Four months is the time period for small and medium-sized companies; seven months is the period for

large companies. A large company for this purpose is one in respect of which any two of the following

three criteria is exceeded for the period of account in question:

Total assets of LVL 1,000,000 (€1,420,000)

Net turnover of LVL 2,400,000 (€3,414,000)


Different due dates may apply to credit institutions, insurance companies and savings-and-loan

associations.

Payment of tax

Payment of any tax outstanding is due within 15 days after the filing date, hence no later than 15 May

or 15 August, in most cases.


February 2011

However, most companies are also required to make monthly advance payments by the 15th day of

each month. For the first months of a tax year up to and including the month in which the tax return

and the annual report are due, the amount of advance payment is one-twelfth of the final tax liability

for the penultimate tax year adjusted for inflation. Thus, if the current tax year is 2011, the first

advance payments are based on the tax liability for 2009. For the remaining months of the year (May

onwards for smaller companies and August onwards for larger companies, in most cases), payments are

computed by the following formula:

Final tax liability for previous tax year (adjusted for inflation) – Advance tax paid

______________________________________________________________________________

Remaining months of year


February 2011

Value added tax

Taxable persons

A taxable person is any person that supplies taxable goods or services in the course of business. Any

value added tax (VAT) paid may be deducted from the VAT invoiced on goods and services supplied.

A person must be entered on the SRS Register of Taxable Persons within 15 working days after filing

an application for Latvian VAT registration.

Taxable activities

As a general rule, VAT is imposed on all supplies of goods and services that take place in Latvia. VAT

is payable on each transaction involving the supply of goods and services for a consideration, including

personal consumption, importation of goods, intra-Community supply of goods, and intra-Community

acquisition of new means of transport by non-taxable persons.

Place of supply, acquisition and import within the EU

Place of supply

Goods being dispatched or transported from one EU member state to another are treated as supplied in

the member state in which the dispatch or transportation starts.

Goods being installed or assembled are treated as supplied in the member state of installation or

assembly.

Place of acquisition

Goods being dispatched or transported from one member state to another are treated as supplied in the

member state in which the dispatch or transportation ends.

A new means of transport is treated as acquired in the member state where it is registered.

Place of importation

Goods arriving in the EU are treated as imported in the member state where the customs procedure for

release into free circulation is completed.

Importation of goods

Under the VAT Act (likums “Par pievienotās vērtības nodokli”) importation means the arrival of

goods in Latvia from a third country or territory.

A third territory is a territory of an EU member state to which the EC Treaty does not apply under its

Article 299, as well as the following territories of EU member states:

Germany – the Island of Heligoland and the territory of Buesingen;

Spain – Ceuta, Melilla and the Canary Islands;


February 2011

Italy – Livigno, Campione d’Italia, Italian waters of Lake Lugano;

France – overseas departments; and

Greece – Mount Athos.

The term ‘third country’ applies to countries that are not EU members.

Intra-Community trade

Intra-Community supplies and acquisitions are those made by Latvian companies transacting with

companies of other EU member states. Subject to certain exceptions, intra-Community supplies are

exempt with the right of deduction (i.e. zero-rated). The same treatment applies to transactions

involving new means of transport.

If a taxable person established in another member state provides services consisting of the

transportation of goods within the EU to a Latvian taxable person, it is the Latvian customer who must

account for the VAT due (‘reverse charge principle’).

Similarly, it is the customer who must account for VAT due on services that a Latvian taxable person

provides to a taxable person of another member state. However, if a Latvian taxable person provides

services to a non-taxable person of another member state, then VAT must be calculated and paid by the

supplier. Exceptions apply to the following services:

Services associated with immovable assets, the reloading and storage of goods, as well as other

services associated with transportation;

Services associated with movable property (including valuation, repair and maintenance),

except for the lease of such property;

Intermediary agent services within the EU;

Transportation services;

Catering services; and

Culture, education and sport.

Exempt supplies

Examples of exempt supplies include:

Provision of healthcare and social security benefits;

Education, science, culture, consular services, professional training or retraining of the

unemployed organised by the State Employment Service (Valsts nodarbinātības aģentūra);

Catering services financed from the State budget and provided in corrective institutions and

places of imprisonment;

Supplies of gold, coins and banknotes to the Bank of Latvia;

Certain financial transactions;

Rental of domestic apartments;

Dealings in shares and other securities;

Betting, raffles (lotteries) and other forms of gambling;

Sale of immovable property including land, except for the first sale of unused immovable

property and sale of construction land;

Supplies by insurance and reinsurance institutions including those who mediate such

activities;

Postal services rendered by the Latvian Postal Service (Latvijas pasts);


February 2011

Services (including catering) provided by old people’s homes, welfare and rehabilitation

centres.

The above exemptions may be applied to individuals or entities and their associations if profit is not

made systematically in the provision of such services. If profits are made, the exemption applies where

profit is directed or invested in improving the provision of such services.

Tax is not levied on the importation of the following goods:

Goods specified above;

Foreign financial aid supplies pursuant to procedures prescribed by the Cabinet of Ministers;

and

Goods that are exempt from customs duty, except for those that attract 0% customs duty.

Standard, reduced and zero rate

From 1 January 2011, the standard rate of VAT is 22%. A reduced rate of 12% applies to certain

services and goods such as certain medicines and medical equipment, infant food, domestic public

transport, supplies of domestic heating and natural gas, books, magazines and newspapers.

The zero rate is applied to the export of goods and to intra-Community supplies, international

passenger traffic, supplies of goods and services under diplomatic and consular arrangements etc.

VAT registration

Latvian persons will be entered on the SRS Register of Taxable Persons on the following conditions:

Individuals according to their declared place of residence; and

Entities according to the address of their registered office.

All businesses whose annual taxable turnover reaches or exceeds LVL 35,000 (€49,800) must by law

be entered on the SRS Register of Taxable Persons. Businesses with a lower turnover may register

voluntarily.

There is no threshold for foreign companies, and so they must register for Latvian VAT as soon as they

make a taxable transaction in Latvia.

Once registered with the SRS, the person must, regardless of his place of registration, file a VAT return

within 20 days after the end of a tax period (electronically via the Electronic Declaration System). The

tax period is normally one calendar month. Taxable persons whose taxable turnover in the previous

year did not exceed LVL 10,000 may apply for a quarterly or six-month tax period.

Non-deductible input VAT

A taxable person is not allowed to deduct input VAT if the goods or services were purchased for a

non-business purpose. Only 80% of input VAT that a taxable person has paid on the purchase of petrol

for a car used for his business purposes is deductible. The partial input VAT deduction rule does not

apply to emergency vehicles, taxis and similar cars.


February 2011

VAT returns and payment

Subject to certain exceptions (see above), the tax period is one calendar month. A taxable person must

pay the excess of output VAT over deductible input VAT for a tax period within 20 days after the end

of that period. If input VAT exceeds output VAT, a taxable person may apply for a refund. A new

refund system is effective from 1 July 2010 for overpayments arising after 1 July 2010.

VAT refunds to foreign taxable persons

If a foreign taxable person is to claim a refund of Latvian VAT under the Eighth or the Thirteenth VAT

Directive, the following criteria must be met:

The person is not engaged in any economic activities that are subject to registration in Latvia;

The person has not made any taxable transactions in Latvia that would require registration for

Latvian VAT;

The amount of VAT has been actually paid; and

From 2010 the foreign taxable person has to apply for a refund electronically.

The minimum amount for which a claim may be made is:

LVL 281 (€400) if a refund is claimed for a period of three months or more but less than one

calendar year; or

LVL 35 (€50) if a refund is claimed for one calendar year or for the remainder (last two

months) of a calendar year.

The time limits for filing a refund claim are as follows:

Nine months after the end of a tax year if a refund covers one calendar year or the last months

of the year; or

Three months after the end of the period covered by a claim for a period between three

months and one calendar year.

VAT is not refundable:

on the acquisition of unused real estate and services received in relation to the construction,

reconstruction, renovation, restoration or repair of real estate;

if tax invoices fail to meet the requirements of the VAT Act;

on goods and services acquired for personal use; or

to travel companies and agencies that perform activities in compliance with section 13 of the

VAT Act (corresponding to Article 306 of the VAT Directive 2006/112/EC – the Tour

Operators Margin Scheme).

Re-application

If an application is rejected, the applicant may re-apply within one month after receiving the SRS

rejection. In that case the applicant must file the following documents:

Amended or updated documents or documents that must be filed additionally;

Original invoices and customs declarations;

Proof of payment of the invoices;

A letter stating the date of receipt of the previous decision and listing the enclosed documents.


February 2011

NB: the material on VAT refunds to foreign taxable persons is closely based on the information

contained on the official SRS website:

http://www.vid.gov.lv/default.aspx?hl=2&tabid=7&id=15&oid=13461&lidz=2000.1.1&no=2009.9.1

http://www.vid.gov.lv/default.aspx?hl=2&tabid=7&id=15&oid=13461&lidz=2000.1.1&no=2009.9.1


February 2011

Taxes on individuals

Personal income tax

Individuals resident for tax purposes in Latvia are subject to personal income tax (PIT – iedzīvotāju

ienākuma nodoklis) on their worldwide income. Non-residents are subject to Latvian PIT on their

Latvian-source income only.

Territoriality and residence

Under the Taxes and Duties Act, individuals are considered resident for tax purposes in Latvia if they

meet at least one of the following conditions:

they have a permanent abode (pastāvīga dzīvesvieta) in Latvia; or

they are present in Latvia for more than 183 days in a 12-month period; or

they are Latvian citizens employed abroad in the service of the Latvian government.

Double tax treaties may stipulate more beneficial conditions, with treaty residence provisions

prevailing over the domestic definition of residence.

Structure of personal income tax

PIT is charged under four specific heads:

Salary tax on the income of employees;

Lump-sum tax on revenue from a business;

Tax on income from a business if not liable to CIT; and

Tax on other sources of income.

The PIT Act (likums “Par iedzīvotāju ienākumu nodokli”) provides that taxable income is all income

received in cash, in kind or in services. In addition, the law specifies what forms of income other than

employment income are taxable. These are:

Income from individual work, from a contract for services (uzņēmuma līgums), and from

acting as a commercial agent or broker;

Income from an individual undertaking (individuālais uzņēmums), from a farming or fishing

enterprise (where not subject to CIT), and from operating as a registered sole trader

(individuālā komersanta darbība);

Income from a partnership, and from the distributed surplus of an agricultural service

cooperative, and from the distributed profits of various forms of cooperatives;

Income from the liquidation or reorganisation of a company, cooperative society,

organisation, association or foundation;

Income from the lease of immovable property;

Income from subletting property;

Income from the lease of movable property;

Income from intellectual property and related rights;

Gifts from traders, cooperatives, individual undertakings, farming or fishing enterprises,

institutions, organisations, associations and foundations, including gifts from an individual

carrying on a business and made in the course of that business;


February 2011

Pensions from whatever source;

Income arising on the disposal of immovable property;

Income from capital, including gains, dividends, interest etc;

Licence fees; and

Any other income that is not exempt income.

Exempt income

Major types of exempt income are as follows:

Income of an individual from his or her individual undertaking subject to CIT;

Insurance benefits except for those paid under a life, health and accident insurance contract

made by the employer (or other legal entity) on behalf of the insured, at the maturity of the

policy or upon premature termination;

Income from Latvian, EU or EEA government bonds;

Scholarships paid by the state or by approved institutions;

Income arising from inheritance except for inherited royalties;

Cash and non-cash prizes and awards received in competitions and contests totalling up to

LVL 100 (€142) in the tax year from Latvian sources, or up to LVL 1,000 (€1,423) from

international sources;

Maintenance (alimony);

Income arising on the disposal of personal movable property, except for income on the

disposal of goods produced or obtained for sale, and except for capital gains and other income

from capital;

Disposal of immovable property which the taxpayer has held for more than 60 months and

which has been his or her declared principal address for at least 12 months before the disposal.

Any immovable property inherited from the spouse is considered to be in the surviving

spouse’s possession from the date it is registered as a deceased’s property;

Income arising on the disposal of immovable property gained in connection with the division

of property in divorce proceedings if it has been the declared principal address of both spouses

for at least 12 months before the disposal;

Income from gifts made by individuals:

- in full if the taxpayer and the giver are close relatives (except for gifts made by the relative

in the course of business);

- up to LVL 1,000 (€1,423) in other cases subject to certain exceptions;

Some other types of income.

Subject to certain exceptions, non-residents are not exempt from tax on the types of income listed

above.

Family unit

There is no joint income taxation for married couples under Latvian tax laws; individuals are taxed

separately. However, tax deductions are allowed for children or other persons in the taxpayer’s care.

Taxation of employment income

Employment income includes wages, salaries, bonuses, one-off or systematic compensation and other

income and benefits that an employee receives as a result of their current or previous employment with

a company, cooperative society, European company, European cooperative society, European


February 2011

economic interest grouping, state or local-authority institution, association, foundation, individual

undertaking, farming or fishing enterprise, organisation, or individual (including sole trader), also

remuneration in the civil service, and as a consideration for performing any other type of employment

contract, and benefits. Employee benefits include a cost-of-living allowance, use of a company car,

medical care, luncheon vouchers, benefits received on stock options etc.

Employment income also includes remuneration for serving as a director on an executive or

supervisory board, and an elected or appointed office-holder’s remuneration.

Benefits are normally valued at their market value or at the cost to the provider. Certain employee

benefits/allowances are exempt from taxation, however. These include:

Reimbursements for business-related expenses;

Premiums paid by the employer on behalf of an employee to an approved pension plan or life

policy, provided they do not exceed 10% of the employee’s gross salary;

Premiums paid on behalf of an employee under a term assurance, health or accident policy,

provided they do not exceed the lower of 10% of the employee’s gross salary or LVL 300

(€425); and

Gifts up to LVL 150 (€213) a year.

There is no standard deduction for employment-related expenses.

Foreign nationals working in Latvia for a non-Latvian employer must register with the tax authorities

and either the employer or the foreign national have to make monthly PIT payments on their monthly

salary.

Foreign nationals on an employment contract with a Latvian employer are fully and immediately liable

to Latvian PIT and social insurance contributions, subject to any contrary provisions in a double tax

treaty, social security agreement or the EC Social Security Regulation.

Pensions

Pensions are taxed as employment income. State pensions granted before 1996 and the first LVL 1,980

(€2,825) of more recent state pensions are exempt.

Salary tax

Employers must withhold PIT and social insurance contributions on an employee’s salary and wage

payments.

Employment or self-employment

Income of self-employed persons is taxed at the same rate as normal employment income.

Taxation of personal business income

Income from a business, where not subject to CIT, is taxed in one of the following ways:

by a lump-sum payment that varies according to turnover from the business; or

at the standard rate on income less expenditure.


February 2011

Income from a business

A business (economic activity) for this purpose includes any activity that is aimed at producing goods,

performing work, carrying on a trade or providing services for a consideration. It also includes activity

connected with a contract for services, a profession, management of immovable property, the business

of a commercial agent, a broker and a sole trader, as well as the taxpayer’s individual undertaking

(including farming and fishing enterprises).

Income from a business specifically includes:

Income from the sale of goods, work and services;

Income from the hire or lease of property and premises;

Income received from damages; and

Other types of income from economic activity.

Lump-sum taxation

Individuals registered with the SRS as carrying on a business may opt to pay tax on a lump-sum basis

according to their turnover, provided they have no employees and their revenue (turnover) from that

business does not exceed LVL 10,000 (€14,225). In the first year, taxpayers otherwise fulfilling the

conditions may opt for a lump-sum basis if they estimate their annual turnover will not exceed

LVL 10,000. Taxpayers with double-entry bookkeeping are not eligible for a lump-sum basis.

Taxpayers who have opted for a lump sum will continue on that basis in the year their turnover first

exceeds LVL 10,000. In subsequent years, however, they must revert to an income-less-expenditure

basis.

For the rates of lump-sum taxation, see under ‘Tax rates’ below.

Income-less-expenditure basis

Income and expenditure is calculated on a cash basis, i.e. only income actually received and

expenditure actually incurred in the tax year is taken into account. Deductible expenditure on a cash

basis is prescribed by the PIT Act. Taxpayers who are required under the Accounting Act to keep

double-entry books – broadly, those with a turnover of LVL 200,000 (€284,575) or more – and those

who have chosen to do so, must prepare their accounts on an accrual basis and compute their taxable

profits in a manner similar to that prescribed for companies by the CIT Act.

Losses

Taxpayers on an income-less-expenditure basis may carry their losses forward three years (six years if

the business is located in an assisted region and is of an approved type). No carrybacks are allowed.

Taxation of investment income

Dividends

Dividends are taxed at a rate of 10%.


February 2011

Interest

Interest and similar income is taxed at a rate of 10%.

Interest on Latvian, EU or EEA mortgage bonds and government or local-authority bonds is exempt.

Royalties

Income from the use of, or from the right to use, intellectual property is taxable. This includes income

from patents, literary and artistic copyrights, know-how etc. Flat-rate deductions of between 15% and

40% may be available.

Property income

Income from the use of movable or immovable property is taxable in the hands of residents and

non-residents alike. In the case of non-residents, tax is payable by assessment and there is no

withholding tax (see under ‘Withholding taxes’ below). There is no imputed income from owner-

occupation.

Capital gains

Capital gains are taxed at a rate of 15%.

Taxation of other income

Gambling and prize money

Prizes from lotteries and gambling that exceed the cost of obtaining them are taxable.

If a prize or its value exceeds LVL 500 (€700), the organisers or providers must withhold 25% PIT.

Deductions and allowances

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

Mandatory social insurance contributions;

Donations to charitable organisations (within certain limits);

Educational and medical expenses (limited in either case to LVL 150 a year for the taxpayer

and each dependant); and

Contributions to private pension schemes (within certain limits).

Non-resident taxpayers and individuals who are resident for less than six months in a tax year are

entitled to a deduction for social insurance contributions only.

Personal allowances

Each taxpayer is entitled to a personal allowance (exempt amount) of LVL 540 (€768) a year (or

LVL 45 a month).


February 2011

Disabled taxpayers, victims of political repression and resistance veterans are entitled to greater

allowances.

There is a dependant’s allowance of LVL 840 (€1,196) a year (or LVL 70 a month) for each eligible

dependant. Eligible dependants include:

Unemployed spouses;

Minor children;

Unemployed parents or grandparents; and

Children under the age of 24 in full-time education.

Tax rates

PIT is charged at a flat rate of 25% (effective from 1 January 2011).

Persons on a lump-sum basis for business income are taxed at the following rates:

Table 4

Current-year turnover (LVL) Tax payable (LVL)

0–500.00 25

500.01–1000.00 50

1000.01–1500.00 75

1500.01–2000.00 100

2000.01–2500.00 125

2500.01–3000.00 150

3000.01–3500.00 175

3500.01–4000.00 200

4000.01–4500.00 225

4500.01–5000.00 250

5000.01–5500.00 275

5500.01–6000.00 300

6000.01–6500.00 325

6500.01–7000.00 350

7000.01–7500.00 375

7500.01–8000.00 400

8000.01–8500.00 425

8500.01–9000.00 450

9000.01–9500.00 475

9500.01–10,000.00 500

above 10,000 500 plus 7% of the excess over 10,000

Taxation of non-residents

The PIT Act specifies the types of Latvian-source income that are taxable in the hands of

non-residents:

Income from professional activities performed for Latvian residents or for the Latvian

permanent establishments of non-residents;

Income from the professional activities of artists, athletes or coaches, whether accruing to

them directly or to another individual or entity;


February 2011

Employment income, including employment in Latvia for a non-resident employer or an

employer without a permanent establishment in Latvia, and employment outside Latvia for a

Latvian employer (treaty provisions should always be taken into account where applicable);

Income from serving as a director (whether on an executive or supervisory board) of a Latvian

company or cooperative society;

Rental income from movable or immovable property;

Agricultural and forestry income;

Investment income;

Dividends;

Interest and similar income;

Income arising on the disposal of immovable property and other capital gains, excluding

income arising on the disposal of financial instruments;

Income from a partnership registered in Latvia;

Income in the form of a distribution of surplus assets on the liquidation of a Latvian company

or cooperative society to the extent this exceeds a normal dividend;

Payment for intellectual property;

Benefits under insurance policies taken out by employers or other proposers;

Pensions paid under Latvian law; and

Lump-sum payments from supplementary pensions derived from employer contributions to

licensed private pension schemes.

There are no special schemes for expatriate employees.

Withholding taxes

Table 5 below shows the rate of withholding taxes imposed on the income of non-resident individuals.

In all cases where a withholding tax applies, it is final, and consequently the non-resident is relieved of

the obligation to file a tax return in most cases.

Double tax treaties may reduce or eliminate the withholding tax. Payments made directly or indirectly

to persons located in a tax haven (see Table 3 above) attract a flat rate of 25%, unless the payer can

prove no intention of evading Latvian tax.

Table 5

Type of income or payment Rate of withholding tax (%)

Employment income 25%

Professional income 25%

Income of artists, athletes and coaches 25%

Directors’ remuneration 25%

Dividends

Capital gains

10%

15%

Interest income 10%

Income on disposal of immovable property

Income on the sale of forest and timber obtained from it

2%

10%1

Gambling and lottery prizes above LVL 500 25%

Other taxable income 25%

Notes 1

10% applies to forest owners, while intermediaries will be taxed according to the terms of economic

activity.


February 2011

Returns and payment

Returns

The tax period for PIT is one calendar month in the case of an employment relationship, or the calendar

year in other cases.

In most instances, personal income tax is withheld at source, which explains why most individuals are

normally not required to file tax returns.

Resident individuals are required to file an annual tax return only in the following situations:

They have received some Latvian-source income for the tax period on which tax has not been

withheld at source; or

Their exempt income exceeds four times the personal allowance, i.e. currently, if it exceeds

LVL 2,160 (€3,073).

The normal due date for filing tax returns is 1 April in the following tax year. Late filing attracts a

penalty.

Payment

The balance of any tax due after deducting salary tax and other tax withheld at source is payable 15

days after the tax return is due (normally, therefore, 15 April). However, if the balance due is greater

than LVL 450 (€650), the taxpayer may pay the balance in three equal instalments (by 16 April, 16

May and 16 June).

Taxpayers with income from a business are required to make advance payments. Those who are taxed

on an income-less-expenditure basis and keep double-entry accounts must pay according to the CIT

rules (see Chapter 4). Those who keep single-entry books on a cash basis are required to pay their total

final tax liability for the previous year in four equal instalments (due on 15 March, 15 May, 15 August

and 15 November).

Appeals

The appeal procedure is identical to the one for corporate taxpayers (see Chapter 3).

Inheritance and gift tax

Latvia does not levy a specific tax on inheritances and gifts.


February 2011

6. Other taxes

Natural resource tax

This tax is levied on businesses that operate in extractive industry, sell resources that are harmful to the

environment, or use hazardous goods. The tax is also imposed on packaging. The rates vary according

to resources or goods being taxed.

The normal tax period is the calendar quarter. Tax returns for the previous period, and the tax payable,

are due by the 20th day of the first month following the quarter.

Tax returns on the extraction of natural resources and environmental pollution must be approved by an

institution authorised by the Ministry for Environment Protection and Regional Development before

they are filed with the SRS.

Lottery and gambling tax

This tax is levied on companies holding a licence to organise and run lotteries and games of chance.

The tax is payable monthly as one-twelfth of the annual rate where applicable. The rate depends on the

type of gambling and the number of participants. Thus, for card and dice games, the tax charge is

LVL 9,600 (€13,650) per table a year. For games of chance operated by telecommunications, the tax

charge is 10% of net takings (income less prizes).

There is also an annual duty.

Real estate tax

This tax is levied on companies and individuals owning real estate (immovable property) in Latvia. The

tax is charged at 1.5% of the cadastral value of land and buildings used in commercial activity. Exempt

property includes land in a specially protected area on which economic activity is prohibited by law,

and heritage property.

The tax is charged on apartments and buildings (variable rate), technical buildings (1.5%), and

uncultivated agricultural land (3%).

The rate applicable to apartments and buildings depends on their cadastral value:

0.2% if less than LVL 40,000;

0.4% for LVL 40,001–75,000; and

0.6% from LVL 75,001 upwards.

The local authorities may grant relief of up to 90% to certain categories of taxpayers. The tax is

deductible if the property is used commercially.

Real estate tax is payable quarterly by 15 April, 15 May, 15 August and 15 November as one-fourth of

the annual charge. The tax can also be paid as a lump-sum annual advance payment.


February 2011

Property transfer duty

Property transfer duty in Latvia is payable on the disposal of property, other than by way of gift at a

rate of 2% of the greatest of:

the purchase price;

the cadastral value; or

the valuation for mortgage purposes of the immovable property concerned.

The amount of duty is capped at LVL 30,000 (€42,675).

Where the transferee is an individual who already has two properties registered in his or her name, the

rate of duty is 4%, with no maximum. Transfers by way of gift are dutiable at various rates of up to

6%. If the transferee is a close relative, the duty is no more than 0.5% capped at LVL 1,000 (€1,425)

irrespective of whether a consideration is given or not.

Excise duty

The excise duty legislation regulates harmonised excise duties on alcoholic beverages, tobacco, energy

products and electrical power, as well as non-harmonised excise duties on coffee and soft drinks

(except for natural juices and mineral water).

General provisions

For a warehousekeeper, an approved trader and a tax representative, the tax period is one calendar

month.

The persons liable to pay excise are:

Importers;

Warehousekeepers in the cases prescribed by the Excise Act;

Registered traders, non-registered traders, distance sellers and representatives of a dutiable

person defined by the Excise Act;

Persons that brings into Latvia or receive from another member state excise goods that have

been released for free circulation in another member state; and

Other persons defined by the Excise Act.

Dutiable persons must pay the duty on excise goods imported from third countries into Latvia for

release into free circulation before presenting them to a customs authority for one calendar month, or

within five working days after they are received from EU countries or at the border on importation

from non-EU countries.

Customs duty

Goods imported from non-EU countries attract customs duty at varying rates according to the type of

goods.


February 2011

Vehicle taxes

Latvia levies a tax on the first registration of cars and motorcycles in Latvia (vieglo automobiļu un

motociklu nodoklis). For unregistered cars and those registered abroad after 1 January 2010, the tax is

calculated depending on their carbon dioxide emissions, and for motorcycles, depending on their

engine size.

There is also an annual vehicle operation tax (transportlīdzekļu ekspluatācijas nodoklis). The rates

vary according to engine size and vehicle weight.

Companies owning or possessing cars and allowing their private use are subject to a company car tax

(uzņēmumu vieglo transportlīdzekļu nodoklis). The private use of a company car is taxed at the level

of the company, not the person using it.

The tax is calculated as follows:

For cars registered after 1 January 2005:

o Engine < 2.000 cm3 – LVL 19 a month

o Engine between 2.000 cm3 and 2.500 cm

3 – LVL 30 a month

o Engine > 2.500 cm3 – LVL 40 a month

All other cars – LVL 30 a month.

The tax is due pro rata to the number of months a car is used during the tax year, and it is payable at the

time of a technical inspection for the number of months the vehicle has been used since 1 January, the

balance being due by 15 December.

Emergency vehicles, taxis, demonstration vehicles and car rental companies are not subject to this tax,

nor are vehicles that are exclusively used for business purposes. This must be demonstrated in a log

detailing the vehicle’s registration number, make, model and engine size as well as the route travelled,

start and end times. This route control system is a GPS system.

Electrical power tax

This tax is payable by suppliers of electricity to end-users and autonomous producers.


February 2011

7. Social insurance contributions

Introduction

Mandatory social insurance contributions are payable by employers and employees as well as

self-employed persons. Contributions are payable into sickness, pension, unemployment, maternity,

and parental insurance funds.

Employee contributions

The employer deducts employee contributions from their salary payments. The employee contribution

rate is 11% of their gross salary. For Latvian residents employed by non-resident employers, the rate is

32.22%, except for employees that have their permanent abode in an EU or EEA country or

Switzerland and are liable to Latvian social insurance contributions under the EC Social Security

Regulation, in which case the same rates apply as for employment by Latvian employers.

Employer contributions

The effective rate is 35.09% (employee 11% plus employer 24.09%). This contribution is allocated to

the following funds:

Old-age pension fund – 25.56%

Unemployment fund – 2.56%

National insurance fund for industrial accidents and occupational diseases – 0.31%

Disability fund – 3.02%

Maternity and sickness fund – 2.27%

Parental insurance fund – 1.37%

Self-employed contributions

The standard social insurance contribution rate in 2011 is 31.52%. The self-employed may freely

choose the amount of income on which they contribute, subject to an annual minimum of 12 minimum

monthly wages, which corresponds to LVL 2,400 (€3,414) in 2011. From 1 January 2010, there is no

maximum annual contribution.

These contributions are allocated as follows:

Old-age pension fund – 25.56%

Disability fund – 2.42%

Maternity fund – 2.17%

Parental insurance fund – 1.37%


February 2011

Appendix

Double tax treaties

Latvia has income and capital tax treaties with the following jurisdictions: Albania Greece Poland

Armenia Hungary Portugal

Austria Iceland Romania

Azerbaijan Ireland Serbia1

Belarus Israel Singapore

Belgium Italy Slovakia

Bulgaria Kazakhstan Slovenia

Canada Kyrgyzstan Spain

China Lithuania Sweden

Croatia Luxembourg Switzerland

Czech Republic Macedonia Turkey

Denmark

Malta Ukraine

Estonia Morocco United Kingdom

Finland Moldova United States

France Montenegro1

Uzbekistan

Georgia Netherlands

Germany Norway

Note

1 The treaty with the former Republic of Serbia and Montenegro

Latvia has signed but not yet ratified a treaty with Russia.

Estate tax treaties

Latvia has no estate tax treaties.

Social security treaties

As an EU member, Latvia applies the EC Social Security Regulation 1408/71 (as amended) to the

interaction between the Latvian social security system and that of other EEA countries and

Switzerland. Latvia also has social security treaties outside the EEA with Canada and Ukraine. A social

security agreement has been signed with Belarus, but is not yet in force.


February 2011

8. BDO Zelmenis & Liberte

BDO Zelmenis & Liberte is a law firm in association with BDO, the BDO Member Firm in Latvia.

The postal address of BDO Zelmenis & Liberte is:

Alberta iela 1–2

Riga LV-1010

Telephone: +371 6 722 2237

Fax: +371 6 722 2236

E-mail: [email protected]

Website: www.bdolegal.lv

Contacts:

Janis Zelmenis: [email protected]

Vita Liberte: [email protected]

mailto:[email protected]

http://www.bdolegal.lv/




doing business in latvia 2011

Documents

transportldzeku ekspluatcijas nodoklis

excluding professional fees

industrial real estate

acquires real estate

eu structural funds

real estate tax

foreign nationals wishing

special economic zones