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:
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  annual turnover exceeds 50 million euros and the total value of related party transactions exceeds 5 million or  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|
|Country-by-Country liability||since 2017|
|Master file-local file (OECD BEPS 13) applicable||since 2018|
|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|
Level of attention paid by Tax Authority:
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.
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|
|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.
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|
|TOTAL WAGE COST||534||124,09%||1248||124,09%|
|Vocational training contribution||-||0%||-||0%|
|Social contribution tax||104||24,09%||242||24,09%|
|Personal income tax*||76||23,00%||207||23,00%|
|Personal income tax**||89||20,00%||177||20,00%|
*if employee has not submitted salary tax book to the employer
**if the employee has submitted salary tax book to the employer