Taxation in Latvia

Corporate tax

The corporate income tax rate is 15%. Latvian (resident) companies are subject to income tax on their worldwide income, while non-resident companies that do not have a permanent establishment in Latvia are taxed on their income only from Latvian source.

Branches of foreign legal entities are subject to tax on profits received by the branch worldwide. Taxable income is based on accounting profit, which is adjusted in accordance with the provisions of the Corporate Income Tax Act. Companies are required to make advance tax payments based on the previous year's tax. Shipping companies may alternatively apply a tonnage tax.

Tax benefits:

1. Companies that enter into an agreement with the management of specialized economic zones or free ports enjoy several tax benefits, including an 80% corporate income tax rebate on income derived from the respective zone.
2. Companies that invest more than 10 million euros in supported long-term investment projects can apply for the following corporate income tax credits:
   • 25% - on the entire amount of the initial investment up to 50 million Euros
   • 15% - on a part of the total initial investment from 50 million Euros to 100 million Euros
   • 0% - on the part of the total amount of the initial investment that exceeds 100 million Euros
3. for research and development can be deducted three times the cost. This incentive applies to the following expenses:
   • Research staff or technical staff costs
   • Remuneration for research services provided by a scientific institution, included in a special list
   • A fee paid to accredited certification, testing, and calibration institutions for the testing, certification, and calibration required to develop a new product or technology

To provide tax benefits, project documentation must be developed and all procedures specified in the Regulations of the Cabinet of Ministers of Latvia must be observed.

Foreign tax incentives

A foreign tax credit is granted to a resident company on foreign tax paid on taxable income earned abroad. The loan amount cannot exceed the amount of tax that will be charged in Latvia on income received abroad.

Capital gains tax

Income from the disposal of shares is excluded from the taxpayer's taxable income, except for the shares of a commercial company that is a resident of a state or territory recognized by the state (territory) with low or no taxes in accordance with the Regulations of the Cabinet of Ministers.

Withholding Tax

For non-resident companies that do not have a permanent establishment in Latvia, withholding tax is levied on income received from the sale of real estate in Latvia, as well as from the sale of company shares in the tax year of the sale or in the previous year, 50% or more of the company's assets directly or indirectly consisting of real estate located in Latvia. A withholding tax of 2% is levied on income from the sale of Latvian real estate or from the sale of company shares.

Non-resident companies that are residents in other EU countries or states that have concluded double taxation avoidance agreements (DTAs) with Latvia can submit a tax return to the State Revenue Service in accordance with the procedures established by the Cabinet of Ministers, along with documents confirming the amount of expenses related to earned income and apply a tax rate of 15% to estimated income. Recalculation of taxable income can be made in relation to the following income subject to withholding:

• Remuneration for management and consulting services
• Remuneration for the use of property located in Latvia
• Alienation of real estate in Latvia

Dividends

Dividends paid by a resident company out of profits subject to company income tax are not included in the taxable income of the resident company recipient. This rule does not apply if the payer enjoys tax holidays. A resident company is not taxed on dividends received from a non-resident company if the payer is not a resident of a state or territory that has been recognized by the state (territory) with low taxation or no taxes.

Micro-business Tax (MBT)

Both established and newly established businesses can qualify for microbusiness status and register for MBT if they meet the following criteria:

• Shareholders are individuals
• Turnover does not exceed 100,000 euros in a calendar year
• The number of employees does not exceed five
• Members of the board are at the same time employees of the payer of the Office
• The remuneration of each employee of the MBT payer does not exceed 720 Euros per month
• The standard MBT rate is based on a micro-business turnover of up to €100,000 and covers payroll taxes, business risk obligations and corporate income tax

As of January 1, 2017, the MBT rate of 12% is applicable to micro-enterprises with a turnover of up to 7,000 Euros, and for businesses with a turnover of 7,000.01 to 100,000 Euros, MBT is charged at a rate of 15%. From 2018, there will be a single MBT rate of 15% applicable to turnover up to 100,000 Euros.

VAT

The supply of goods and services in Latvia is subject to tax, as well as the purchase of goods from the EU and the import of goods into Latvia. Export of goods or services is taxed at a rate of 0%. The standard rate is 21%. The reduced rate is 12%. At this rate, medical goods are taxed, as well as the supply of baby food, books, printed publications, public transport services in the domestic market, hotel services (accommodation) and the supply of heat transfer fluids to the population. Export and related services, as well as the supply of goods within the EU (to a customer registered as a VAT payer in another Member State using the reverse charge mechanism) are taxed at a rate of 0%. The reverse charge mechanism also applies to construction services, and from April 1, 2016 - to the supply of smartphones, laptops, tablets and integrated circuit devices (including microprocessors and central processing units).

Not subject to VAT:

• sale of land (excluding building land with a building permit issued after December 31, 2009) and use of real estate;
• provision of medical services;
• rent of apartments for individuals;
• most banking and insurance services;

Employer contributions

Compulsory state social insurance contributions must be paid by insured persons and their employers. The general rate is 34.09%, of which 23.59% is paid by the employer, 10.5% is paid by the employee. Most employee benefits are subject to payroll taxes. Only a few benefits are exempt from taxation. These include:

• sickness and accident insurance payments made under contracts entered into by employers on behalf of employees;
• contributions to private pension funds or life insurance premiums on behalf of an employee.

Health and life insurance premiums and contributions to private pension plans that do not exceed 10% of an employee's gross remuneration in a taxable year are exempt from tax. It is necessary to comply with certain conditions, such as that the insurance premiums for health and accident insurance cannot exceed 426.86 Euros.

Currency control in Latvia

The official currency of Latvia is the euro (EUR). There are no significant foreign exchange controls in Latvia.

Transfer pricing rules in Latvia

Latvian law requires compliance with the arm's length principle in all transactions with related parties. The Latvian tax authorities may review transactions between related parties and recalculate the tax base if the prices applied in such transactions do not comply with the arm's length principle. Transfer pricing methods such as comparable uncontrolled price method, resale prices, cost plus, profit sharing, comparable profitability method can be used to assess whether prices in controlled transactions comply with the arm's length principle.

Latvian taxpayers with an annual net turnover exceeding EUR 1,430,000 must prepare transfer pricing documentation that includes industrial, corporate, functional and economic analysis. Documentation requirements apply to all transactions with related parties with an annual value greater than EUR 14,300. Common practice in transfer pricing matters is based on the OECD Guidelines on Pricing for Organizations in Multinational and Tax Administrations.

Taxpayers may enter into advance pricing agreements with the tax administration to set a "fair" price for a transaction with a relevant foreign company if the estimated annual value of the transaction exceeds EUR 1,430,000. If the taxpayer follows a pre-pricing agreement, the tax administration cannot correct the "fair" price set for the transaction in the tax audit.

Thin capitalization rules in Latvia

Thin capitalization rules apply when claiming a tax deduction for interest payments on loans and finance leases. Taxable income must be adjusted for:

• Interest paid in excess of interest calculated by applying to the liability at 1.57 the weighted average annual interest rate applicable to domestic non-financial companies determined by the Bank of Latvia (weighted average interest rate), or
• Interest in proportion to the excess of the average amount of liabilities by an amount equal to four nominal balances of shareholders at the beginning of the tax year, less the revaluation reserve.

Amounts in excess of these calculations should be added to taxable income.

• The following interest payments are fully deductible:
• Interest paid on borrowings from credit institutions located in Latvia, EEA member states or countries with which Latvia has an effective DTA.
• Interest paid to the Latvian Treasury, Nordic Investment Bank, European Bank for Reconstruction and Development, European Investment Bank, European Council Development Bank or the World Bank Group.
• Interest paid on Latvian or EEA debt securities at a public auction.
• Interest expenses incurred by credit institutions and insurance companies, regardless of the creditor.
• Interest paid on borrowings from a financial institution is deductible up to the amount of interest calculated by applying to the liability 1.57 times the weighted average annual interest rate applicable to domestic non-financial companies determined by the Bank of Latvia (weighted average interest rate).

An eligible financial institution must meet the following criteria:

• Is a resident of Latvia, an EEA country or a country with which Latvia has an effective DTT.
• Provides credit services or financial leases and is supervised by an authority that regulates credit institutions or the financial sector.

CFC (Controlled Foreign Companies) regulations in Latvia

There is no CFC regime in Latvia regarding the taxation of companies with their significant participation. The CFC regime applies only to individual shareholders.

Corporate Legislation of Latvia