Income Tax in Latvia
Personal Income Tax:
The tax year is
calendar year and annual income return has to be filed between 1 March and 1
June of the following taxation year.
Tax rates:
Tax rate for both
resident and nonresident is same.
Latvia has adopted a progressive
Personal Income Tax (PIT) system from 1 January 2018. Unless the law provides
for a different rate, the progressive rate applies based on the level of annual
income:
· a rate of 20% applies to an income of up
to €20,004;
· any portion of income between €20,004
and €55,000 attracts a rate of 23%; and
· any excess over €55,000 attracts a rate
of 31.4%.
Income from capital,
other than capital gains, including dividends, prior 2018 has attracted a 10%
PIT. Dividends were paid out of profits that have already been charged to a 15%
Corporate Income Tax (CIT). Thus dividends were first charged to CIT and then
to PIT.
Recent amendment to the PIT Act raise the rate
of PIT on dividends to 20%. However, where a company has already charged its
profits to CIT, there will be no PIT to pay. This would apply to Latvian,
EU/EEA paying companies and other, except for companies from tax havens and
micro-business tax payers. In order to apply 0% PIT on dividends, rather than
20% proves on PIT or CIT paid in foreign country will be required to be
presented.
At the same time the amendments envisage a
two-year period of transition, during which dividends paid out of profits
stated in the balance sheet as at 31 December 2017, could be distributed
applying a 10% PIT.
Other income from
capital, including interest, will also attract a fixed PIT rate of 20% (up from
10%).
From 1 January 2018 the
rates for income from capital gains are increased to a fixed PIT rate of 20%
(up from 15%). The methods for calculating income from capital gains remain
unchanged, but among the rate, also the deadlines for filing capital gains tax
returns, will change.
Latvian tax resident
recipients of royalties are subject to progressive PIT rates, while Latvian tax
payers need to withhold a fixed rate of 20% on resident's royalties.
Non-residents attract a fixed rate of 23%.
From 1 January 2013,
there is controlled foreign company (CFC) regime in Latvia. The income from
substantial participation in controlled foreign entities located in blacklisted
jurisdictions (so-called 'tax havens') is subject to progressive PIT rate as of
2018 (23% PIT rate in 2017).
Micro-business tax (MBT):
Sole traders may apply
for the status of MBT payers. See the Taxes on corporate income section in the
Corporate tax summary for more information on MBT.
Residency Rule:
An individual is
regarded a Latvian resident if:
· the individual’s declared place of
residence is in Latvia or
· the individual resides in Latvia for 183
days or more in any 12-month period which starts or ends in the taxation year
or
· the individual is a Latvian citizen
employed abroad by the government of the Republic of Latvia.
In order to recognize
the individual as a Latvian resident, at least one of the conditions mentioned
above has to be met. When a foreign individual receives a residency permit in
Latvia, he/she becomes a Latvian resident from the moment the residency permit
is issued.
Double tax treaty
provisions are also considered when defining an individual a resident of
Latvia.
Exempt Income:
Contributions to private pension
plans:
Contributions made to
private pension funds by employers can be excluded from the annual taxable
income if the contributions made do not exceed 10 percent from the individual’s
gross employment income for the taxation year.
Accident and health insurance
premiums:
Insurance premiums paid
by the employer are excluded from the taxable income up to a limit of EUR 427
per year provided that:
The term of the life
insurance agreement (with accumulation of funds) is not shorter than 5 years;
The term of the life,
health and accident insurance agreement (without accumulation of funds) is not
shorter than 1 year;
The provisions of the
life, health and accident insurance agreement state that insurance award for
the insurance case is paid to the insured person or his/her beneficiary.
The excess amount of
premium payments is not considered as justified expenses and cannot be deducted
from the taxable income.
Meals, lodging and transport:
If expenses are
incurred during business trip, the costs are fully non-taxable if there are
justifying documents in place such as tickets and cash receipts.
Moving expenses:
If the expenses have
been incurred due to the employee’s work, they are non-taxable
Per diems:
Per diems are tax
exempt if the amount does not exceed the limits set for different countries in
the Latvian tax legislation. If the limit is exceeded, then the excess amount
is subject to payroll taxes.
Compensation for business use of
private car:
Compensations up to EUR
57 per month are tax exempt.
Sale of personal real estate:
If the real estate has
been owned by the individual for at least 60 months and has been his/her
declared residence for at least 12 months prior to the sale of real estate, the
proceeds are tax exempt.
Taxable Income:
Employment income:
As of 1 January 2018,
major changes have been made to legislation affecting the calculation of
employment income of residents and non-residents.
Application of Personal Income Tax
(PIT) by the employer monthly:
As of 1 January 2018
employers will be required to apply PIT rates according to monthly income
thresholds, calculated by dividing the annual income thresholds by 12 as
follows:
The
employee has filed their payroll tax book and pays Latvian National Social
Insurance (NSI) contributions.
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The
employer applies a 20% PIT to a monthly gross income of up to €1,667
(20,004/12).
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The
employer applies a 23% PIT to a monthly gross income exceeding €1,667, but
does not apply the higher threshold or the top rate.
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The
employee has not filed their payroll tax book and pays Latvian NSI
contributions.
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All
income attracts a 23% PIT
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The
employee has filed their payroll tax book, but a foreign A1 certificate has
been received and Latvian NSI contributions are not paid.
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The
employer applies a 20% PIT to a monthly gross income of up to €1,667.
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The
employer applies a 23% PIT to a monthly gross income between €1,667 and
€4,583 and a 31.4% PIT to any excess.
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The
employee has not filed their payroll tax book and holds a foreign A1
certificate and Latvian NSI contributions are not paid.
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The
employer applies a 23% PIT to a monthly gross income of up to €4,583.
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If
the employee holds a foreign A1 and does not pay Latvian NSI contributions,
the employer applies a 31.4% PIT to any excess income of €4,583.
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Application of PIT by
individuals annually
A person whose annual
income exceeds €55,000 is required to file the annual income tax return on
mandatory basis. Mandatory submission of tax return is also for individuals who
need to pay additional PIT due to the wrongly applied allowances or tax rates.
Voluntary individual may fill the return in order to request refund for
overpaid taxes.
Individuals will be
required to apply progressive PIT rates on their taxable income. While
assessing applicable rates whole taxable income, including the applying flat
tax rates, should be counted.
For persons who pay
Latvian NSI contributions and Solidarity Tax (ST) on full income, applying the
rate of 31.4% through the annual income tax return is a formal procedure to
compensate them for the additional PIT charge at the expense of ST already
paid. So the highest effective rate of PIT for persons paying ST on their full
income is still 23%. Otherwise, individuals not paying NSI and ST on whole of
their income are affected, since they are required to pay additional tax.
Allowances and differential
personal allowance (DPA):
From 1 January 2018 the
employer will be required to apply a DPA forecast by the State Revenue Service
(SRS) to employees that have filed their payroll tax book. The SRS will notify
employers via the Electronic Declaration System (EDS) by 1 January 2018 about
the forecast DPAs applicable from 1 January to 31 July. Additional forecast
will be made by 1 August 2018.
For PIT purposes the
employer is still permitted to deduct the employee part of NSI.
Dependant allowances go
up to reach €200 for each dependant monthly.
Additionally, the
lawmaker has determined that as of 2018 allowances should be applied to the
employee as if they were effectively reducing their income subject to a 20%
PIT.
Equity compensation:
The PIT Act states that
any income from exercising stock options is exempt from PIT, provided the
below-mentioned criteria are met:
· The employee has an employment
relationship with the company or related group company.
·The stock option plan has at least a
three-year holding (vesting) period.
·The employer has provided the SRS with
statutory information on the terms of the stock option plan according to the
PIT Act not later than two months after the awards granting date.
If one of the main
criteria for holding stock options is not met, namely the employee having an
employment contract with the employer who granted the stock options, then the
employer should pay National Social Insurance Contributions (NSIC) out of their
own pocket at the rate applicable when the employment ends.
Business income:
Amendments to the PIT
Act affective form 1 January 2018 stipulate the new approach for traders, i.e.,
PIT payable on at least 20% of income.
The amendments provide
that when calculating taxable operating income, business expenses that do not
exceed 80% of the individual’s total operating revenue can be written off as
operating expenses. At the same time, certain types of expenses are defined
that can be fully included in business expenses without applying the statutory
cap.
The taxpayer’s
operating loss (a negative operating income, ignoring the 80% cap on operating
expenses) can be offset in a chronological sequence against taxable operating
income in the next three tax years, subject to the 80% cap.
Capital gains:
Capital gains realised
on disposal of capital assets are taxed at 20% as of 2018 (15% in 2017).
Capital assets include the following: real estate, shares and similar,
investment fund certificates, debentures and similar, intellectual property.
Real estate:
Income arising on the
disposal of real estate (if the taxpayer owns no other real estate), is not
taxable if this income is invested in functionally similar real estate within
12 months after or before the disposal. In this case, the income is considered
to be earned on the next day when 12 months have passed from the date of
disposal.
As of 1 January 2015,
Latvian tax residents (individuals) as well as non-residents are allowed to
apply exemption on income from alienation of real estate in Latvia if:
· real estate is held for at least 60
months and registered as the seller's primary residence for at least 12 months
before the sale during the period of 60 months,
· real estate is held for at least 60
months and during the 60 months prior to sale it has been the sole real estate
of the taxpayer, or
· the sole real estate has been reinvested
during the 12-month period from the sale into another real estate of the same
function.
Dividend/interest income:
Dividend income,
interest income, alienation of bonds, and income from life insurance contracts
and private pension funds is taxed at 20% as of 2018 (10% in 2017).This type of
income should still be reported and charged to PIT through the annual income
tax return, unless such income is paid by a Latvian tax payer who has already
withheld PIT at source.
Dividends are
zero-rated for PIT if paid by Latvian, EU, EEA company or other country, if it
is possible to prove that Corporate Income Tax (CIT) or PIT is withheld at
source. Dividends will enjoy a special period of transition, i.e. dividends
paid before 2020 out of profits arising before 2018 will still attract a 10% PIT
unless received from a payer of micro-business tax.
In any case, dividends
received from tax havens and micro-business tax payers will attract a 20% PIT.
Income from substantial
participation in controlled foreign entities:
The income from
substantial participation in controlled foreign entities is subject to
progressive PIT rate as of 2018. This is applicable to Latvian tax residents
that directly or indirectly hold at least 25% of a foreign entity’s equity,
stock, or voting power, or are in any other manner (e.g. by virtue of a
specific contract) entitled to a substantial proportion of distributed profits
or in a position to influence decisions about the foreign entity’s profit
distribution policy. An exception applies to a participation in such foreign entities
through a public company that is listed on an EU/EEA regulated market.
Deductions from Income:
Personal deductions:
Residents may deduct
the following non-business expenses:
· Compulsory National Social Insurance
Contributions (NSIC) employee's part paid from income taxable for Personal
Income Tax (PIT) purposes in Latvia. NSIC shall be paid in Latvia/EU/EEA/OECD
countries;
· Spending on education and medical
services (incuding, dental services and scheduled operations), donations to
public benefit organisations and donations to political parties up to 50% of
the person’s annual taxable income, capped at €600 a year for each family
member.
· Amounts paid by the individual during
the year to an insurance company registered in Latvia or the EU/EEA should not
exceed 10% of the total gross taxable income for the tax year are not subject
to payroll taxes. The policy matures in at least ten years.
· Contributions to private pension funds
and endowment insurance at 10% of taxable income, up to €4,000.
A person planning to
deduct expenses for completing their children’s interest-related programmes
should consider the following factors:
· These expenses do not apply to any
income a microbusiness employee and owner derives from the microbusiness,
borrowing treated as income, any income from capital (other than capital
gains), income from property, seasonal farm workers’ income, or business income
for which so-called 'patent fees' are paid.
·These expenses are not deductible if
covered out of funds received from public benefit organisations or as a gift.
Both residents and
non-residents (who are residents of EU/EEA member states earning at least 75%
of worldwide income is earned in Latvia) can deduct these expenses from total
taxable income, except, income from capital and capital gains.
Personal allowances:
As of 1 January 2016,
the differential personal allowance is introduced. In 2017 the minimum personal
allowance was €60, which has been applied on a monthly basis. Further as of 1
January 2018, there would be minimal personal allowance. Allowance would be in
range between €0-200 per month depending on total annual taxable income. €2,400
total annual allowance will apply to annual income not exceeding €5,280, but €0
to income exceeding €12,000. Income between €5,280-12,000 will enjoy
differential personal allowance based on the level of income.
From 1 January 2018 the
employer will be required to apply a Differential Personal Allowance (DPA)
forecast by the State Revenue Service (SRS) to employees that have filed their
payroll tax book. The SRS will notify employers via the Electronic Declaration
System (EDS) twice a year, i.e. by 1 January 2018, by 1 August 2018 etc., about
forecast DPAs applicable during the next 7 or 5 months period. The same timing
principles will be used for calculating and reporting the SRS DPA forecast in
subsequent tax years.
The employer will be
required to apply the SRS DPA forecast for the relevant period to employees
that have filed their payroll tax book.
A monthly allowance of
€200 for each qualifying dependant (as of 1 January 2016 only a person under
the age of 18 or a child/student under the age of 24 can be a dependant).
As of 1 January 2017, a
dependant allowance is also available for a non-working spouse taking care of a
minor child with certain conditions.
Business deductions:
If a person is
registered as a sole trader, business expenses are deductible, provided that
appropriate supporting documents are in place and the expenses do not exceed
80% of the individual’s total operating revenue.
Corporate Income Tax:
Under the Law on
Corporate Income Tax, Latvian (resident) companies are subject to income tax on
their worldwide income. Nonresident companies without a permanent establishment
in Latvia are subject to tax on their Latvian-source income.
Resident companies
include companies registered in Latvia and companies incorporated in foreign
countries that are registered in Latvia as branches or permanent
establishments. All other companies are considered to be nonresident companies.
Nonresident companies operating through a permanent establishment in Latvia are
subject to tax on income derived by the permanent establishment in Latvia as
well as on income independently derived abroad by the permanent establishment.
If a nonresident company engages directly in business activities in Latvia that
are similar to the business activities performed by its permanent establishment
or subsidiary in Latvia, income derived from the nonresident company’s
activities is included in the taxable income of the permanent establishment or
the subsidiary.
Tax rates:
Companies are subject
to income tax at a rate of 15%.
Tax incentives:
Companies that enter
into an agreement with the management of the Liepaja or Rezekne
special-economic zones or the Riga and Ventspils free ports benefit from
several tax incentives including an 80% rebate of corporate income tax on
income derived from the relevant zone.
Companies that invest
more than EUR10 million in supportable long-term investment projects may apply
for the following corporate income tax rebates:
· 25% of the whole initial investment
amount up to EUR50 million
·15% of the part of the whole initial
investment amount from EUR50 million to EUR100 million
· 0% of the part of the whole initial
investment amount that exceeds EUR100 million
The Ministry of
Economics of Latvia needs to agree to the above investment projects, and
criteria specified in the Law on Corporate Income Tax for the granting of the
tax benefits must be met.
Three times the amount
of research and development (R&D) expenses may be deducted. This incentive
applies to the following expenses:
· Costs of an employee of the scientific
staff or research technical staff
· Remuneration for research services
provided by a listed scientific institution
· Remuneration payable to accredited
certification, testing and calibration institutions for testing, certifying and
calibration services necessary for the development of a new product or
technology
The project
documentation must be developed. Compliance, evaluation, adaptation, and
accounting procedures and requirements for project documentation of R&D
activities that are specified in the Regulations of Latvian Cabinet of
Ministers for the granting of the tax benefits must be met.
Capital gains:
Income on the disposal
of equity shares is excluded from the taxable revenue of the taxpayer, except
for shares of a commercial company that is a resident of a state or territory
that has been recognized as a low-tax or tax-free state or territory in
accordance with Cabinet Regulations.
For nonresident
companies without a permanent establishment in Latvia, the final withholding
tax is imposed on proceeds received from the sale of Latvian real estate, as
well as from the sale of shares of a company if in the tax year of the sale or
in the preceding year, 50% or more of the company’s assets directly or
indirectly consists of real estate located in Latvia. Withholding tax at a rate
of 2% is imposed on income from the sale of Latvian real estate or from the
sale of a company’s shares.
Nonresident companies
that are residents of European Union (EU) member states or residents of states
that have entered into a double tax treaty with Latvia may file a tax
calculation statement with the State Revenue Service in accordance with the
procedures stipulated by the Cabinet Regulations, together with documents that
prove the amount of the expenses related to the earned income, and apply the
tax rate of 15% to the calculated income. Recalculation of taxable income can
be made with respect to the following income subject to withholding tax:
· Remuneration for management and
consultancy services
· Remuneration for use of property located
in Latvia
·Alienation of immovable property in
Latvia
Administration:
The tax year is either
the calendar year or another year stipulated in the charter of the company.
An annual income
declaration must be filed with the State Revenue Service within 30 days after
the annual shareholders’ meeting, but not later than four months after the end
of the tax year. In certain cases, the annual income tax declaration can be
filed within seven months after the end of the tax year.
Companies must make
advance payments of tax by the 15th day of each month. For the months before
and including the month of filing the annual income declaration, up to a
maximum of four months, the monthly advance payments are equal to 1/12 of the
tax calculated for the year two years before the current year. For the
remaining months, monthly advance payments are equal to 1/8 of the tax
calculated for the preceding year reduced by the advance tax payments made in
accordance with the rule described in the preceding sentence. The State Revenue
Service calculates advance tax payments and, based on this calculation,
companies pay advance payments to the state budget.
Any balance of tax due
must be paid to the State Revenue Service within 15 days after the submission
date for the annual income declaration, or within 15 days after the filing
deadline for the annual income tax declaration if the declaration was submitted
after the deadline.
Dividends:
Dividends paid by a
resident company out of profits taxed under the Law on Corporate Income Tax are
not included in the taxable income of a resident recipient company. This rule
does not apply if the payer is enjoying a tax holiday.
A resident company is not
taxable on dividends received from a nonresident company unless the payer
company is a resident of a state or territory that has been recognized as a
low-tax or no-tax state or territory in accordance with Cabinet Regulations.
Foreign tax relief:
A foreign tax credit is
available to resident companies for foreign tax paid on taxable income earned
abroad. The amount of credit may not exceed an amount equal to the tax that
would be imposed in Latvia on the income earned abroad.
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Note:
Information
placed here in above is only for general perception. This may not reflect the
latest status on law and may have changed in recent time. Please seek our
professional opinion before applying the provision. Thanks.
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