Mazars in LATVIA

Corporate taxes and other direct taxes

As of 2018, the corporate income tax (hereinafter - CIT) system in Latvia has changed – CIT is payable only upon distribution of profit, deemed profit or deemed dividends.

The CIT rate is 20% from gross taxable value (expense/distribution value) or 25% from net value (i.e., rate 20/80).

The Latvian companies are allowed to apply tax incentives for donations to public benefit organizations. The tax rebate is also applied in case donations are made to non-governmental organizations registered in a member state of the European Union or the European Economic Area with which Latvia has concluded a double tax treaty.

In Latvia, tax losses accrued until 31 December 2017 can be utilized over the following five taxation years (i.e. till 2022). The companies may use 15% of these losses to decrease CIT payable for dividends but not more than 50% of CIT payable on dividends.

As of 2018 the following thin capitalization rules will apply:

  1. the debt/equity ratio exceeds 4 to 1,
  2. the amount of interest paid exceeds EUR 3 million and it exceeds 30% of EBITDA.

If any of the thin capitalization rules is exceeded, the interest payment will be treated as deemed dividends and will be subject to 25% CIT from net excess interest value.

Tax exempt capital gains - starting from 2018 distributed profit from the sale of shares (except for shares of low/tax free companies) is not subject to CIT unless the company has held the relevant shares for less than 36 months. The exemption will not apply in case the main purpose of setting up of the taxpayer or the structure is to benefit from the holding regime (i.e. tax optimization or avoidance of taxes has taken place).

Tax exemption is not applicable to profits from the sale of financial instruments (e.g. investment fund notes, securities, bonds, etc.) as well as to royalties and interest received.

Transfer pricing documentation requirements

Latvian companies are required to submit to the Latvian tax authorities within 12 months period after the end of the financial year a master file if [1] annual turnover exceeds 50 million euros and the total value of related party transactions exceeds 5 million or [2] the total value of related party transactions exceeds 15 million euros.

A local file is required to be submitted to the Latvian tax authorities within 12 months after the end of the financial year if the total value of related party transactions exceeds 5 million euros.

The company is required to prepare within 12 months after the end of the financial year and submit to the Latvian tax authorities in 30 days’ time if a request by the Latvian tax authorities is made a master file if the sum of the tax payer’s controlled transactions in the respective financial year exceeded 5 million euros (it is possible that two thresholds are overlapping).

The company is required to prepare within 12 months after the end of the financial year and submit to the Latvian tax authorities in 30 days’ time if a request by the said authorities is made a local file if the sum of the tax payer’s controlled transactions in the respective financial year exceeded 250 thousand euros.

Transfer pricing in Latvia
Arm’s lenght principle since 2005
Documentation liability since 2013
APA since 2013
Country-by-Country liability since 2017
Master file-local file (OECD BEPS 13) applicable   since 2018
Penalty
lack of documentation penalty up to 1% of the controlled transaction, but not exceeding 100 000 euro
tax shortage 20% tax on gross value of underpayment + late payment interest
Related parties 20% < direct control for foreign companies or common managing director
  50% < indirect control for foreign companies or common managing director
Safe harbours  

Level of attention paid by Tax Authority:

8/10

Withholding tax of 20% is applied on management and consulting service fees paid by Latvian companies to foreign companies.

Still, under the active international treaty network consisting of more than 61 double tax treaties, the withholding tax might be avoided.

A 3% withholding tax will be applied to remuneration paid to a foreign company for the disposal of real estate located in Latvia or disposal of shares, holding real estate located in Latvia.

A withholding tax of 20% is applied on all payments to offshore companies.

VAT and other indirect taxes

The general rate is 21% for the sale of goods and services. A reduced rate of 12% is used, for example, for medical goods, periodicals, accommodation services, and thermal energy supplied for private individuals. Furthermore, reduced 5% VAT rate is applicable to supply of fruits and vegetables, which are typically grown in Latvia. Basically, a 0% rate is applicable for the export of goods. Exemptions are in place for postal services, medical and health services, certain financial services, etc. Entrepreneurs with annual sales below EUR 40,000 are exempted from VAT obligations. Monthly returns are electronically recorded. The options/limits based on the EU Directive are determined in the VAT Act.

VAT Options in Latvia Applicable / limits Remarks
Distance selling EUR 35,000/year  
Call-off stock  
VAT group registration*  
Cash accounting EUR 300,000/year, applicable to private enterpreneurs or agricultural companies  
Import VAT deferment if conditions are met
Local reverse charge construction works and goods, deals with the scrap metal, metal products and related services, precious metlas, timber and related services, electronic goods (computers, mobile phones), grain crops, electronic communications, broadcasting and electronically provided services, household electronic appliances
Option for taxation - letting of real estate  
Option for taxation - supply of used real estate  
VAT registration threshold 40,000/year voluntary registration is possible

Other indirect tax types in Latvia are excise and customs duties. Also some transactions related to public administrative actions (e.g. submitting application forms, issuing certificates, granting permissions, etc.) are subject to stamp duty.

Personal income tax / Social security system

Starting from 1 January 2018, a progressive PIT rate has been introduced. It foresees the following: 20% should be applied for income not exceeding EUR 20 004 per year; 23% - for income between EUR 20 004 to EUR 62 800 per year; 31.4% for income exceeding EUR 62 800 per year.

 

The tax on annual income of more than EUR 62 800 per year will be calculated in a recapitulative order when submitting the annual income declaration. If a payroll tax book is not submitted at a place of employment, the salary tax rate will be 23% regardless of monthly income.

Income from capital and capital gains is taxed at 20% PIT rate.

Active incomes fall under the scope of the SSC system: individual social contributions equal altogether 35.09% out of which employer’s contribution is 24.09% and employee’s contribution is 11%. Benefits in kind are taxed with PIT and SSC at standard rates. The examples below show the cost of the employer and employee in case of minimum wage level and the average wage in the private sector.

Wage related taxes in Latvia Minimum wage Average wage in private sector
  in EUR   in EUR  
  430   1006  
TOTAL WAGE COST 534 124,09% 1248 124,09%
Vocational training contribution - 0% - 0%
Social contribution tax 104 24,09% 242 24,09%
GROSS SALARY 430 100,00% 1006 100,00%
Personal income tax* 76 23,00% 207 23,00%
Personal income tax** 89 20,00% 177 20,00%
Employees' contributions 47 11,00% 111 11,00%
NET SALARY** 249 68,37% 719 71,45%
NET SALARY* 307 71,40% 689 68,46%

*if employee has not submitted salary tax book to the employer

**if the employee has submitted salary tax book to the employer

Latvia
SIA TAXLINK BALTIC
Duntes iela 6-213,
Riga, Latvia, LV-1013
Andris Jaunzemis
Tax partner