General Information
Country Name: Latvia
Currency: Euro (€) (EUR)
Primary Tax Authority: State Revenue Service (Valsts Ieņēmumu Dienests – VID)
Key Legislation:
- Corporate Income Tax Law 1995
- Personal Income Tax Law 1993
- Value Added Tax Law 2012
Fiscal Authority Allocation
Centralized Fiscal System:
Latvia operates a centralized fiscal system. Taxes are collected and managed by the State Revenue Service (VID), which administers corporate, individual, and indirect taxes. There are no regional taxes, but municipalities receive a portion of collected revenue for local services.
Corporate Income Tax (CIT)
Standard Rate: 20% (on distributed profits)
Latvia applies a CIT system similar to Estonia, where corporate income tax is only levied on distributed profits or deemed distributions. Retained earnings that are reinvested back into the company are not subject to tax.
Corporate Forms and Taxation:
- Limited Liability Company (SIA): The most common corporate form, taxed at 20% on distributed profits.
- Public Limited Company (AS): Used for larger enterprises, also taxed on distributed profits.
- Branches of Foreign Companies: Taxed on profits derived from Latvia-sourced income at the same 20% rate when profits are distributed.
Exemptions and Incentives:
- Reinvested Earnings: Profits that are reinvested into the business remain untaxed, encouraging business expansion and investment.
- Special Economic Zones (SEZs): Companies operating within SEZs may benefit from CIT reductions and other tax incentives.
- Start-Up Support: Latvia offers several tax incentives for start-ups, particularly in the IT and innovation sectors.
Goods and Services Tax (GST) / Value-Added Tax (VAT)
Standard Rate: 21%
Latvia applies a VAT rate of 21%, which is the standard rate for most goods and services. Reduced rates of 12% apply to some essential goods, including pharmaceuticals and medical supplies.
Exemptions:
Certain goods and services, such as healthcare, education, and financial services, are exempt from VAT. Exported goods and services are zero-rated, allowing companies to reclaim VAT on inputs.
Personal Income Tax (PIT)
Progressive Rates:
Latvia uses a progressive income tax system with the following rates:
- Income up to €20,004: 20%
- Income between €20,005 and €78,100: 23%
- Income above €78,101: 31%
Capital Income:
Capital gains are taxed at a flat rate of 20%, and dividends are taxed at 20%.
Additional Mandatory Contributions
Social Security Contributions:
Both employers and employees must contribute to the social security system, which funds healthcare, pensions, and unemployment benefits.
- Employer Contribution: 23.59% of gross salary.
- Employee Contribution: 10.5% of gross salary.
Self-Employed Contribution: Self-employed individuals contribute 31.07% of their income for social security.
Withholding Taxes
- Dividends: 20%
- Interest: 20%
- Royalties: 20%
These rates may be reduced or eliminated under Latvia’s extensive network of double taxation agreements (DTAs).
Transfer Pricing Rules
Latvia adheres to OECD transfer pricing guidelines. Transactions between related parties must be conducted on an arm’s-length basis, and documentation is required for cross-border transactions exceeding certain thresholds.
Special Tax Regimes
- Special Economic Zones (SEZs): Companies operating in Latvia’s SEZs benefit from a 80% reduction in CIT and property tax, along with a 100% exemption from customs duties and VAT for goods exported outside the EU.
- Micro-Enterprise Tax (MET): Micro-enterprises with an annual turnover below €40,000 may opt for a simplified tax regime, paying a flat tax rate of 25% instead of CIT, PIT, and social security contributions.
Other Taxes
- Real Estate Tax: Levied on land and buildings, with rates between 0.2% and 3% of the cadastral value of the property, depending on the type of property and municipality.
- Capital Gains Tax: 20% on the sale of property, shares, and other assets. Some exemptions apply, such as gains from the sale of a primary residence.
- Excise Duties: Applied to specific goods, such as alcohol, tobacco, and fuel.
Double Taxation Agreements (DTAs)
Latvia has signed over 60 double taxation agreements with countries around the world, including the United States, Germany, and China. These treaties aim to prevent double taxation of income and provide reduced withholding tax rates on dividends, interest, and royalties.
Local Taxes
Although Latvia’s tax system is centralized, local governments are entitled to a portion of income taxes for public services and may levy real estate taxes within their jurisdiction.
Compliance and Reporting
Annual Filing:
Corporate income tax returns must be filed by June 30th of the following year. For personal income tax, returns must be filed by June 1st of the following year. The tax year in Latvia coincides with the calendar year.
Penalties for Late Filing:
Penalties and interest charges apply for late filing or underpayment of taxes. The State Revenue Service (VID) imposes penalties ranging from 0.05% to 0.1% per day on the outstanding amount.
Recent Developments
Green Taxation:
Latvia is exploring the introduction of new environmental taxes to support sustainability goals and reduce carbon emissions. This includes higher excise duties on fuel and incentives for renewable energy investments.
Digital Economy Taxation:
Latvia is considering measures to address the taxation of digital services and the digital economy, in line with broader EU initiatives to tax multinational technology companies.
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