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 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.
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.
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.
If the expenses have been incurred due to the employee’s work, they are non-taxable
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.
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.
The employer applies a 20% PIT to a monthly gross income of up to €1,667 (20,004/12).
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.
The employee has not filed their payroll tax book and pays Latvian NSI contributions.
All income attracts a 23% PIT
The employee has filed their payroll tax book, but a foreign A1 certificate has been received and Latvian NSI contributions are not paid.
The employer applies a 20% PIT to a monthly gross income of up to €1,667.
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.
The employee has not filed their payroll tax book and holds a foreign A1 certificate and Latvian NSI contributions are not paid.
The employer applies a 23% PIT to a monthly gross income of up to €4,583.
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.
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.
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.
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 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.
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 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:
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.
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.
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.
Companies are subject to income tax at a rate of 15%.
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.
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
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 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.
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.