Doing Business in Latvia 2010

DOING BUSINESS IN LATVIA
2010
DOING BUSINESS IN
LATVIA 2010
November 2010
INTRODUCTION
The aim of this publication, which has been prepared for the exclusive use of BDO Member Firms
and their clients and prospective clients, is to provide the essential background information on
setting up and running a business in Latvia. It is of use to anyone who is thinking of establishing a
business in Latvia as a separate entity, as a branch of a foreign company or as a subsidiary of an
existing foreign company. It also covers the essential background tax information for individuals
considering coming to work or living permanently in Latvia.
This publication describes the business environment in Latvia and covers the most common forms of
business entity and the taxation aspects of running or working for such a business. For individual
taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some
detail. The most important issues are included, but it is not feasible to discuss every subject in
comprehensive detail within this format. If you would like to know more, please contact the BDO
Member Firms with which you normally deal, who will be able to provide you with information on
any further issues and on the impact of any legislation and developments subsequent to the date
mentioned below.
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Doing Business in Latvia 2010 has been written by the Latvian member firm of BDO. Its contact
details may be found at the end of this publication, which is up to date to 1 September 2010.
© Brussels Worldwide Services BVBA, November 2010
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Contents
1. THE BUSINESS ENVIRONMENT ..............................................................................7
GENERAL INFORMATION .............................................................................................. 7
Geography ..................................................................................................... 7
History .......................................................................................................... 7
Government and political powers.......................................................................... 7
Population and language .................................................................................... 8
Currency........................................................................................................ 8
Time, weights and measures ............................................................................... 8
Business entities .............................................................................................. 8
Forms of business organisation ............................................................................. 8
Limited-liability companies ................................................................................. 9
Joint-stock companies ....................................................................................... 9
Representative offices ..................................................................................... 10
Branches of foreign companies ........................................................................... 10
Business reorganisation and liquidation ................................................................ 10
LABOUR RELATIONS AND WORKING CONDITIONS ..................................................................... 10
Information on the employment market ............................................................... 10
Employment regulations and laws ....................................................................... 11
The State Labour Inspectorate ........................................................................... 11
Working conditions ......................................................................................... 11
Social security ............................................................................................... 12
FOREIGN EMPLOYEES ............................................................................................... 12
Visa requirements .......................................................................................... 12
Schengen visa ................................................................................................ 13
National or long-term visa ................................................................................ 13
Short-term entry and stay in connection with employment......................................... 13
Visa with work permit ..................................................................................... 13
2. FINANCE AND INVESTMENT ................................................................................... 14
BANKING AND LOCAL FINANCE ...................................................................................... 14
Equity market ............................................................................................... 14
ACCOUNTING AND AUDIT REQUIREMENTS ............................................................................ 15
Accounting records ......................................................................................... 15
Confidentiality .............................................................................................. 15
Consolidated reporting .................................................................................... 15
Statutory audit of financial statements ................................................................ 15
Development of the accounting and auditing profession ............................................ 16
Accounting software ....................................................................................... 16
Foreign exchange policy ................................................................................... 16
INVESTMENT OPPORTUNITIES AND INCENTIVES ....................................................................... 16
Performance requirements and incentives ............................................................. 16
Repatriation of initial investment and profits ........................................................ 17
3. THE TAX SYSTEM ............................................................................................. 18
INTRODUCTION ..................................................................................................... 18
Direct taxes .................................................................................................. 18
Indirect taxes................................................................................................ 18
Other taxes .................................................................................................. 18
PAYMENT .......................................................................................................... 18
ASSESSMENT........................................................................................................ 18
APPEAL PROCEDURES ............................................................................................... 19
ANTI-AVOIDANCE PRINCIPLE ........................................................................................ 19
4. TAXES ON BUSINESS .......................................................................................... 20
CORPORATE TAX SYSTEM ........................................................................................... 20
Scope and extent ........................................................................................... 20
Company residence ......................................................................................... 20
Taxable entities............................................................................................. 20
Taxable income ............................................................................................. 20
Deductions ................................................................................................... 21
Capital gains ................................................................................................. 22
Dividends, interest and royalties ........................................................................ 22
Withholding taxes .......................................................................................... 22
Losses ......................................................................................................... 24
Group treatment............................................................................................ 24
Tax incentives ............................................................................................... 24
Thin capitalisation ......................................................................................... 24
Transfer pricing ............................................................................................. 25
Controlled foreign companies ............................................................................ 25
Tax rate ...................................................................................................... 25
Micro-enterprises ........................................................................................... 25
Assessment procedure ..................................................................................... 26
Returns and payments ..................................................................................... 26
VALUE ADDED TAX .................................................................................................. 27
Taxable entities............................................................................................. 27
Taxable activities ........................................................................................... 27
Place of supply, acquisition and importation into the European Union ........................... 27
Exempt supplies............................................................................................. 28
Standard, reduced and zero rates ....................................................................... 29
VAT registration ............................................................................................ 29
Non-deductible input VAT ................................................................................. 29
VAT returns and payment ................................................................................. 29
VAT refunds for foreign taxable persons ............................................................... 30
5. TAXES ON INDIVIDUALS ....................................................................................... 32
INCOME TAX ........................................................................................................ 32
Territoriality and residence .............................................................................. 32
Structure of income tax ................................................................................... 32
Exempt income .............................................................................................. 33
The family unit ............................................................................................. 34
Taxation of employment income ......................................................................... 34
Taxation of personal business income .................................................................. 35
Taxation of investment income .......................................................................... 38
Capital gains ................................................................................................. 38
Taxation of other income ................................................................................. 39
Deductions and allowances................................................................................ 39
Tax rates ..................................................................................................... 39
The taxation of non-residents ............................................................................ 40
Returns and payment ...................................................................................... 41
Appeals ....................................................................................................... 42
GIFT AND INHERITANCE TAX ........................................................................................ 42
WEALTH TAX ....................................................................................................... 42
6. OTHER TAXES ................................................................................................ 43
NATURAL RESOURCES TAX .......................................................................................... 43
TAX ON LOTTERIES AND GAMES OF CHANCE.......................................................................... 43
REAL PROPERTY TAX ............................................................................................... 43
Property Transfer Duty .................................................................................... 44
EXCISE DUTY ....................................................................................................... 44
General provisions .......................................................................................... 44
CUSTOMS DUTIES ................................................................................................... 45
VEHICLE TAXES ..................................................................................................... 45
ELECTRICAL ENERGY TAX ........................................................................................... 46
7. SOCIAL SECURITY CONTRIBUTIONS ............................................................................ 47
INTRODUCTION ..................................................................................................... 47
Employee contributions ................................................................................... 47
Employer contributions .................................................................................... 47
Self-employed contributions.............................................................................. 47

DOING BUSINESS IN LATVIA 2010
1. THE BUSINESS ENVIRONMENT

General information
Geography
Latvia is located in Northern Europe on the eastern shores of the Baltic Sea, between
Estonia and Lithuania. It has also borders to the east with Russia and Belarus as well as a
maritime border with Sweden. The climate resembles that of New England. Latvia has over
12 000 rivers, although only 17 of them are longer than 97 km, and over 3000 small lakes,
most of which are located in the eastern province of Latgale. The major rivers are the
Daugava, the Lielupe, the Gauja, the Venta and the Salaca. Woodlands, mostly pine,
comprise 41% of Latvian territory. Other than peat, dolomite and limestone, natural
resources are scarce. Latvia has 531 km of sandy coastline, and the ports of Riga, Liepaja
and Ventspils.
With an area of 64 589 km² and a population of about 2.25 million, Latvia is a small
European country.
The capital of the country, Riga (Rīga) has nearly 900 000 inhabitants (in the metropolitan
area). The second largest city in Latvia is Daugavpils, with a population of approximately
150 000. Other major cities are Liepāja, Ventspils and Jelgava.
History
The Latvians (or Letts as they are sometimes known) were still organised under separate
tribal chieftains when they were conquered and converted to Christianity in the 13th
century by German crusading orders. Subsequently, the territory of modern Latvia passed
under Polish and Swedish suzerainty. During the 18th century, following the conclusion of
the Great Northern War in 1721 and the final partition of Poland in 1795, the whole of
Latvian territory became part of the Russian empire.
In the middle of the 19th century a Latvian national revival began, and following the
collapse of Russia and Germany at the end of World War I, an independent Latvian republic
was proclaimed in November 1918. Despite serious devastation as the result of the World
War and the subsequent War of Independence, Latvia rapidly recovered economically and
culturally, and by 1940 had achieved a standard of living comparable with that of
Scandinavia at the time. The Latvian constitution (1922) established a democratic
parliamentary republic. In 1934, the Prime Minister, Kārlis Ulmanis, staged a coup d’état,
suspending Parliament indefinitely, and becoming a virtual dictator. In 1936, he also
assumed the position of President. In June 1940, under the provisions of the Nazi-Soviet
Non-Aggression Pact, Latvia was occupied by the USSR and made a Soviet Socialist
Republic. In 1941, Latvia was occupied by German forces, and reconquered by the USSR
during 1944-45.
In May 1990, the parliament of Latvia reasserted Latvia’s independence. In 1993, under the
restored 1922 constitution, and new parliamentary and presidential elections were held.
Latvia became a member of the United Nations in 1991, and in 1993 signed a free-trade
agreement with its fellow Baltic States, Estonia and Lithuania. In 2004 the country became
a member of NATO and the European Union.
Government and political powers
According to the Constitution (Latvijas Satversme), Latvia is an independent democratic
parliamentary republic. It has a unicameral parliament (Saeima), composed of one hundred
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members elected by the list system of proportional representation. The President, who is
the head of state, is elected by the Saeima for a four-year term. Executive power rests
with the prime minister, who is appointed by the President, and the Cabinet. Currently,
the President of Latvia is Valdis Zatlers and the Prime Minister is Valdis Dombrovskis, of
the Vienotība (Unity) electoral alliance. He heads a coalition of four centre-right parties.
For administrative purposes, the country is divided into 26 counties and seven
municipalities.
Latvia became a full member of the European Union on 1 May 2004.
Population and language
The official language is Latvian; Latvian is one of the two surviving members (the other
being Lithuanian) of the Baltic branch of the Indo-European language family. Latvian and
Russian are commonly spoken languages. English is also widely spoken. Some 59% of the
population is ethnic Latvian and 28.0% are Russian. No other ethnic group comprises as
much as 5% of the population.
Currency
The currency of Latvia is the lats (international abbreviation LVL), which is subdivided into
100 santīmi. Since 1 January 2005, the lats has been pegged to the euro at a rate of
LVL 0.702804 = EUR 1 and joined the SDR mechanism. At the time of going to press (late
November 2010), the lats was quoted against the US dollar at USD 1 = LVL 0.5250.
Time, weights and measures
Latvia uses Eastern European Time, which is two hours ahead of Greenwich Mean Time
(GMT+2 hours). Between March and September, every year, Latvia introduces Daylight
Saving Time (GMT+3 hours).
Latvia uses the metric system of weights and measures and the Celsius scale of
temperature.
Business entities
There are no specific requirements for foreigners wishing to establish a business in Latvia.
Investors, whether Latvian or foreign, benefit from equal legal treatment and have the
same right to establish business operations in Latvia by incorporating separate legal
entities. The procedure requires the fulfilment of certain legal formalities (registration
with the Latvian Commercial Register (Latvijas Republikas Uzņēmumu reģistrs) and the
State Revenue Service (Valsts Ieņēmumu dienests – abbreviated here as SRS).
Forms of business organisation
The common forms of carrying on business in Latvia are companies, organised mainly as
limited-liability companies or joint-stock companies. Companies are required to have their
own name, share capital (the minimal amount of which is also established by law),
management, registered offices and bank accounts. Companies established in Latvia are
subject to Latvian law, but agreements concluded by Latvian companies can be governed
by the law agreed between the parties. No permit is required by foreigners wishing to
subscribe for the shares or to be appointed as a member of the board of a Latvian
company. The legal address has to be local to ensure the delivery of official
correspondence.
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The activity of Latvian businesses is governed mostly by the Latvian Commercial Code
(Komerclikums), enacted in 2000 and further amended. The Commercial Code allows for
and defines five forms of business entity:
• individual trader (individuālais komersants)
• general partnership (pilnsabiedrība)
• limited partnership (komandītsabiedrība)
• limited-liability company (sabiedrība ar ierobežoto atbildību, abbreviation SIA)
• joint-stock company (akciju sabiedrība, abbreviation AS)
Other forms of doing business are representative offices (pārstāvniecības) and branches
(filiāles) of foreign companies. However, representative offices have limited
functionalities and do not perform business activity; therefore, do not give rise to a
permanent establishment in Latvia. Individuals or partnerships providing professional
services (lawyers, tax consultants, insolvency specialists etc.) have special forms of
organisation that may be or not recognised as distinct legal entities. Latvian law recognises
two forms of partnership (personālsabiedrība): the general partnership and the limited
partnership.
Other forms of doing business in Latvia are:
• the European Economic Interest Grouping (Eiropas ekonomisko interešu grupa)
• the European company (Eiropas sabiedrība)
• the European cooperative association (Eiropas kooperatīvā sabiedrība)
• the cooperative association (kooperatīvā sabiedrība)
Latvian legislation does not recognise the concept of a trust. However, there is an active
discussion about the necessity of introducing the concept of a trust in Latvia.
Limited-liability companies
The most common form of doing business in Latvia is the limited-liability company. The
designation of a limited-liability company is abbreviated to SIA
The share capital of SIA cannot be less than LVL 2000 (EUR 2850; USD 3800) and is normally
divided into 100 shares with a nominal value of LVL 20 each. Accordingly, it is the most
appropriate form of starting business, which does not require any considerable amount of
investment initially.
The organisational structure of an SIA requires an executive board (valde) of directors,
although one director is sufficient. A supervisory board (padome) and auditor (revidents)
are optional, where not expressly required by law (see Chapter 2).
Usually it takes about one week to establish a new SIA in Latvia and costs about LVL 124
(EUR 175; USD 225) in registration etc duties, exclusive of professional expenses. A limited-
liability company must be registered with the local office of the State Revenue Service and
file tax returns on a regular basis.
Joint-stock companies
A joint-stock company must bear the initials AS in its name. It has a minimum share capital
of LVL 25 000 (EUR 35 575; USD 47 625) and at least two shareholders. The shares can be
either registered shares or bearer shares and they can be freely traded or pledged. The
share capital must be paid up no later than 12 months after the incorporation and entry in
the Commercial Register.
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A joint-stock company may be set up privately or by public subscription.

A joint-stock company must have both an executive board and a supervisory board. The
members of the supervisory board are elected by the shareholders’ meeting, but it is the
supervisory board that appoints the executive board. Managers or directors do not
necessarily need to be shareholders.
Usually it takes about one week to establish a new AS in Latvia and costs about LVL 274
(EUR 390; USD 525) in registration etc duties, exclusive of professional expenses. A joint-
stock company must be registered with the local office of the State Revenue Service and
file tax returns on regular basis. If a joint-stock company decides to go public there are
more requirements to be met before listing.
Representative offices
Foreign companies may set up representative offices in Latvia in order to carry out non-
income generating activities such as promoting and supervising the business of their parent
companies. Representative offices cannot perform commercial activities in Latvia.
Branches of foreign companies
Branches of foreign companies may be registered with the Latvian Commercial Register to
carry out business in Latvia. The foreign company will be liable to the employees and
creditors of the branch for the actions of, and debts contracted by, its managers and
agents on behalf of the branch. Branches can carry out only those activities for which the
parent company is authorised.
Further to registration with the Commercial Register, the branch must also register for tax
purposes with the State Revenue Service and it is subject to corporate tax as a permanent
establishment. There is no branch remittance tax in Latvia.
Usually it takes about one week to establish a new branch in Latvia and costs about LVL 36
(EUR 50; USD 70) in registration etc duties, exclusive of professional expenses.
Business reorganisation and liquidation
Liquidation of a company may occur voluntarily by a decision of the company’s
shareholders or in other cases as prescribed by law. According to the law the minimal
length of the procedure is about six months, but in practice the procedure is very long,
and it takes about two years to obtain approval from state institutions.
Both the company and a creditor may file a bankruptcy petition.
Mergers and acquisitions are regulated by the provisions of the Latvian Commercial Code
and it takes approximately six to eight months to finish all formalities. A reorganisation
must be approved by all shareholders of the company.
Labour relations and working conditions
With just over 2 million inhabitants, Latvia is a small market in Eastern Europe. One of the
main advantages of the Latvian labour market consists in its qualified specialists in: social
sciences, economics and law (53%), as well as IT, engineering, manufacturing and
construction (10%).
Information on the employment market
According to official statistics at the end of 2009, the occupied workforce was 1.6 million,
and unemployment stood at about 15.1%. The level of unemployment varies greatly
between regions (and is considerably higher in Latgale, in the eastern part of the country).
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There is a minimum monthly wage set by law – LVL 180 (EUR 250; USD 345). The average
monthly gross wage at the end of 2009 was estimated at LVL 433 (EUR 615; USD 825).
A majority of employees work in wholesale and retail sales and equipment repair (16%),
manufacturing industry (15.6%) and construction (11.3%). The service and construction
sectors have shown a continuous growth of employment in the last few years.
Employment regulations and laws
Employment relationships are mainly governed by the Employment Code (Darba likums).
There are special laws enforcing rules for labour conflicts, trade unions and employers’
organisations as well as collective employment.
According to the Employment Code, an employment contract has to be in written form.
However, a non-written contract will be considered in force if at least one party has
fulfilled the provisions of the contract. Some mandatory conditions like working hours and
salary have to be included in the provisions of the contract.
The State Labour Inspectorate
The State Labour Inspectorate (Valsts Darba inspekcija) is authorised to supervise
employment relationships, labour safety and supervision of industrial equipment.
Inspections can find violation of the provisions of legal acts in force and impose a penalty.
Working conditions
Working hours
The normal working period is eight hours daily with a one-hour lunch break, five days per
week. There are specific working conditions for night work, hard labour, and employment
of juveniles. Any overtime work has to be remunerated additionally.
Holidays
• 1 and 2 January New Year’s Holiday
• 2 days (set yearly) Easter
• 1 May Labour Day
• 4 May Day of proclamation of restored independence
• 23 and 24 June Midsummer Day
• 18 November National (Independence) Day
• 25 and 26 December Christmas
There are also paid absence periods for family events (childbirth, funerals etc).
Termination of an employment contract
Cancellation of an employment contract can be effected in one of the following ways:
• by agreement of both parties
• by declaration with notice
• by expiry of the contract, if applicable
• by performance of the specific task covered, if applicable
• under circumstances prescribed by law
Under conditions prescribed by the Employment Code, a written notice of termination of
the employment must be submitted one month in advance by either the employee or the
employer, depending on the circumstances.
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Employees are not obliged by law to state their reason for leaving. However, the employer
is obliged to state and ground the reasons for the termination of the contract.
The maximum probation period prescribed by law is three months. The termination of the
employment contract during this period is permissible with three days’ notice. However,
the employer is obliged to mention the grounds for the termination of the employment
contract exactly as under the usual procedure.
Under certain conditions, dismissal of personnel qualifies as a collective lay-off, which
must be notified to and supervised by unemployment agencies. For example, there is a
collective lay-off if there is a dismissal, within 30 days, of:
• at least 5 employees in a company with a staff between 20 and 50 people
• at least 10 employees in a company with a staff between 50 and 100 people
• at least 10% of the staff in a company with a staff between 101 and 299 people
• at least 30 employees in a company with more than 300 people
Fringe benefits
Among most typical fringe benefits granted to employees are: extra holiday pay, medical
insurance, share-option plans and paid subscriptions for mobile phones and public
transport.
Social security
At present, Latvian social security legislation comprises five essential areas:
• pensions and other social security benefits for employees
• provision of healthcare services
• unemployment benefits and assistance
• allowances and support for the family (child allowance, supplementary allowance
for families with children, allowance for single-parent families) and
• social assistance for disadvantaged individuals, including special protection for
disabled persons
The first three areas are part of the social insurance system for employees, with the
principal objective of providing support to insured persons who cannot obtain regular
remuneration in certain risk situations (temporary or permanent incapacity to work,
maternity, retirement, unemployment etc.). The social insurance system is based on
collecting funds from insured persons and distributing those funds to those qualifying for
the insured benefits.
Unlike the social insurance system, which is contributory, family and social assistance are
non-contributory systems, financed by the state budget.
Both Latvian and foreign employees are governed by the same social security, health,
pension and unemployment social insurance provisions, subject to any relief given under
EU regulations and international social security conventions signed by the Latvian
government.
Foreign employees
Visa requirements
Non-resident individuals, with the exception of EU residents, who intend to carry on a
business, to be employed or simply to enter Latvia must obtain a visa,.
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November 2010
Schengen visa
Latvia is a member of the Schengen area. There is consequently a Uniform or Schengen
visa, which entitles foreigners to stay in Latvia and other Schengen countries – Austria,
Belgium, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Iceland, Italy, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland,
Portugal, Slovakia, Slovenia, Spain and Sweden, Switzerland.
National or long-term visa
Foreigners staying in Latvia for a period longer than 90 days in any six-month period have
to apply for a long-term visa or residence permit depending on the circumstances of the
particular case. This visa is valid only for stay in Latvia.
The maximum term of the long-term visa under general conditions is one year.
Short-term entry and stay in connection with employment
If the employment of the foreigner is linked with a short-term or irregular stay in Latvia,
which does not exceed 90 days in any six-month period, the foreign national has to obtain
a visa or residence permit for a certain term and a work permit. This condition is also
applicable to those foreigners who are not required to obtain an entry visa.
If the employment of the foreigner is linked to a regular stay in Latvia of more than 90
days in any six-month period, the foreign national has to obtain a residence permit for a
certain term and a work permit.
Visa with work permit
The competent state institution issues the work permit according to the expiry date of the
visa if the foreigner meets certain conditions prescribed by law.
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November 2010
2. FINANCE AND INVESTMENT

Banking and local finance
Banking in Latvia is regulated under The Credit Institutions Act (Kredītiestāžu likums), in
force from 24 October 1995.
The central bank of the Republic of Latvia is the Bank of Latvia (Latvijas Banka), which is
one of the key public institutions and carries out economic functions as prescribed by law.
In order to ensure the implementation of monetary policy, the Supreme Council (which
predated the Fifth Saeima, elected in 1993) adopted the law founding the Bank of Latvia
on 7 September 1992. The principal objective of the Bank of Latvia is to regulate currency
in circulation by implementing monetary policy so as to maintain price stability in Latvia.
The activity of the Bank of Latvia is regulated by the Bank of Latvia Act (likums “Par
Latvijas Banku”), in force from 19 May 1992.
Currently, the banking system consists of several types of credit institutions:
• commercial banks
• credit institutions
• mortgage banks
• subsidiaries, branches and agencies of foreign banks
The minimum capital required for establishing a bank is the equivalent of EUR 5 million
(LVL 3.514 million; USD 9.523 million) and must be subscribed and paid up fully in cash.
The supervision of Latvian banks, insurance companies, participants in the financial
instruments market, as well as of private pension funds is carried by the Financial and
Capital Market Commission (Finanšu un kapitāla tirgus komisija). The activity of the
Financial and Capital Market Commission is regulated by the Financial and Capital Market
Commission Act (likums “Par Finanšu un kapitāla tirgus komisiju”), in force from 1 July
2001.
Since 1 February 2008, Latvia has fully implemented the MiFiD Directive 2004/39/EC,
which regulates the financial markets. The central aim of the MiFiD Directive is to ensure
the protection of investors’ interests and the perfect functioning of the financial
instrument market. Therefore, Latvian banks have introduced a number of improvements
in their activity in order to ensure better protection for investors and improve the
provision of investment services.
The Association of Commercial Banks of Latvia (Latvijas Komercbanku asociācija) is a
public organisation uniting on a voluntary basis banks registered in Latvia and branches of
foreign banks, currently 21 and 2 respectively. It was founded on 23 July 1992. The
purpose of the Association is to contribute to the strengthening and development of the
banking system in Latvia.
Equity market
The official Stock Exchange is located in Riga. The Riga Stock Exchange (Rīgas Fondu birža)
is the sole stock exchange operating in Latvia. It is owned by OMX.
The Central Depository of Latvia (Latvijas Centrālais depozitārijs) administers all publicly
issued securities in Latvia. Its operation is supervised by the Financial and Capital Market
Commission. It main functions are as follows:
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November 2010
• to keep safe custody of securities, clearing and settlement for the securities trading
and management of corporate actions;
• to provide other services related to securities;
• to keep a register of numerous non-public joint stock company, private limited
company and other corporate debt securities;
• to keep initial lists of shareholders for privatised enterprises;
• to administer the state-funded pension scheme, i.e. the second pillar of the
pension system.
Accounting and audit requirements
Bookkeeping and financial reporting in Latvia are mainly regulated by the Accounting Act
(likums “Par grāmatvedību”) and the Annual Financial Statements of Enterprises Act
(likums “Par uzņēmumu gada pārskatiem”) as well as the Certified Auditors Act (likums
“Par zvērinātiem revidentiem”) and Latvian Accounting Standards (Latvijas Grāmatvedības
standarti).
Accounting records
Accounting records have to be kept so that it is possible to enable any person qualified in
accounting to clearly identify the financial situation of the company, transactions made
during the accounting period, and to ascertain both the beginning and the sequence of
each transaction.
Accounting records must be kept in the Latvian language and in national currency.
However, a second language, if agreed upon by the parties and acceptable to the auditors,
may be used.
The accounting records and all relevant mandatory documentation have to be stored in
Latvia.
Confidentiality
The information included in annual reports, consisting of financial statements and a
management report, is not considered a trade secret of the company and is also available
publicly under request. All other information in the accounting records is confidential. The
only exception is made with respect to the auditors, to the tax administration reviewing
reported taxes, as well as to other state institutions in circumstances directly prescribed
by law.
The reporting period is normally 12 months.
Consolidated reporting
Preparation of a consolidated annual report is an obligation of the parent company if, for
two successive years, figures for the parent company together with its subsidiaries have
exceeded any two of the following criteria:
• total assets: LVL 1 000 000 (EUR 1 422 900; USD 1 904 675)
• net turnover: LVL 2 400 000 (EUR 3 415 000; USD 4 571 200)
• average number of employees in the reporting year: 250
Statutory audit of financial statements
The financial statements have to be audited by a certified auditor or by a firm of certified
auditors if the company exceeds two of the following criteria:
• total assets: LVL 250 000 (EUR 355 725; USD 476 175)
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November 2010
• net turnover: LVL 500 000 (EUR 711 500; USD 952 325)
• average number of the employees in the reporting year: 25
Development of the accounting and auditing profession
All the largest international audit firms are represented in the Latvian market, and they
have also the dominant position in servicing large companies. About 30 local audit firms
operate in the largest cities of Latvia, mostly in Riga. Unlike the large networks, local
firms rarely provide business consulting. However, the prices for the provision of services
by local firms are generally significantly lower.
Accounting software
According to law, computerised accounting is allowed only if the law is not violated.
Moreover, the data output must be understandable to an independent third person.
Foreign and local accounting software packages are used; foreign packages are generally
designed for large and medium-sized enterprises, but locally developed packages for small
and medium-sized enterprises.
Foreign exchange policy
The exchange rate of the lats varies according to movements in the global foreign
exchange market. The foreign reserves of the Bank of Latvia are comprised of gold,
convertible foreign currencies, and XDRs. The Bank of Latvia invests in safe and liquid
financial instruments, predominantly in government and government agencies’ securities
of the United States of America, Germany, France, the United Kingdom and Japan, as well
as in securities of international institutions.
Investment opportunities and incentives
As a small country with limited private capital resources, Latvia appreciates the impact of
foreign direct investment on its continuing economic development. The government and
local authorities, cooperating with different business organisations, are committed to
further improvement of the legal and administrative environment for foreign and local
business ventures wishing to establish themselves in the country, by a number of methods
and means. As an example, Latvia was one of the first countries to execute a gradual
reduction of the standard rate of corporate income tax from 25% in 2001 to 15% from
January 2004.
The Latvian constitution guarantees the right to private ownership. Both domestic and
foreign private entities have the right to establish and own business enterprises and
engage in all forms of commercial activity, except those prohibited by the law. Private
enterprises have competitive equality with public enterprises with respect to access to
markets and business operations.
Performance requirements and incentives
The government extends national treatment to foreign investors. Therefore most
investment incentives and requirements apply equally to local and foreign businesses. The
Latvian government has prepared a series of incentive schemes for investment, both
foreign and domestic, in several free ports, special economic zones, and in special assisted
regions. Two other incentive packages apply to companies producing hi-tech products and
to projects that have received the status of a ‘state-supported investment’. In addition, all
investors are exempt from VAT and customs duties on fixed assets imported as long-term
investments.
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November 2010
Repatriation of initial investment and profits

Latvia's foreign investment law provides for unrestricted repatriation of profits associated
with an investment. Investors can freely convert local currency into foreign exchange at
market rates, and have no difficulty obtaining foreign exchange from Latvian commercial
banks for investment remittances.
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November 2010
3. THE TAX SYSTEM

Introduction
The system of taxes and duties in Latvia consists of:
• national taxes, the object and rate of which is set by the Saeima
• national duties, applicable under the Taxes and Duties Act (likums “Par nodokļiem
un nodevām”), other laws and regulations of the Cabinet of Ministers
• local duties applicable under the Taxes and Duties Act and binding regulations
issued by the local authority concerned
• directly applicable taxes and other obligatory payments set in the European Union’s
regulatory enactments
The taxes subject to the Taxes and Duties Act are as follows:
Direct taxes
• corporate income tax (uzņēmumu ienākuma nodoklis)
• personal income tax (iedzīvotāju ienākuma nodoklis)
• mandatory social insurance contributions (valsts sociālās apdrošināšanas obligātās
iemaksas)
• real property tax (nekustamā īpašuma nodoklis)
Indirect taxes
• value added tax (pievienotās vērtības nodoklis)
• excise duty (akcīzes nodoklis)
• electrical energy tax (elektroenerģijas nodoklis)
• tax on cars and motorcycles (vieglo automobiļu un motociklu nodoklis)
• customs duty (muitas nodoklis)
Other taxes
• natural resources tax (dabas resursu nodoklis)
• tax on lotteries and games of chance(izložu un azartspēļu nodoklis)
Payment
Taxes and duties are assessed and paid in Latvian currency.
The tax administration may not waive its rights to claim for unpaid tax in favour of another
person or transfer to any other person its rights to claim in relation to taxes, duties and
related payments with the exception of tax-debt recovery and the sale of confiscated and
inventoried property in cases provided for in other tax laws.
The set-off of taxes, duties and payments related thereto against other liabilities is not
permitted.
The due date for payment is provided by the legislation regulating the tax or duty.
Assessment
The Latvian tax system is generally one of self-assessment. Taxpayers are responsible for
computing their own tax payable on the basis of their tax return as well as for deduction of
the amount of tax payable as provided for in specific tax laws. Taxpayers except for those
individuals who are not economic actors are obliged to file tax and information returns in
electronic format. The taxpayer is also responsible for the preservation of documents
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November 2010
verifying income from and expenditures on financial and economic activities for at least
five years (with some exceptions)
The tax administration has the right to perform tax audits provided that it informs the
taxpayer regarding the performance of a tax review (audit), indicating its time period, the
taxes, duties or other mandatory payments to be examined, the tax returns to be
examined and the taxable periods under review.
The tax administration has the right, after a tax review (audit), to adjust the amount of
taxes and to impose fines.
Appeal procedures
Any person who disagrees with a fiscal administrative document (including an assessment)
or a refusal to issue such a document has the right to submit an appeal.
Decisions taken by local-authority officers regarding tax issues may be appealed within a
period of 30 days from the receipt of the decision.
If the taxpayer is dissatisfied by the result of the first-stage appeal, he may appeal against
the decision to the courts.
If a taxpayer does not agree with a decision of the tax administration in respect of market
prices or the determination of market value for a specific transaction, he has the right
within a period of 10 days to request an opinion from the Transaction Evaluation
Commission (Darījumu novērtēšanas komisija). The Transaction Evaluation Commission is
appointed by the Cabinet of Ministers from experts in the field. After receipt of an opinion
from the Commission both the tax administration and the taxpayer have the right to
appeal to the courts.
Anti-avoidance principle
Latvia provides for specific anti-avoidance rules. As a matter of principle, where tax
liability is not calculated or is calculated on a taxable base that differs from that existing
in reality, thereby artificially avoiding or reducing a liability to tax, tax liability is to be
recalculated on the real taxable base (‘substance over form principle’).
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November 2010
4. TAXES ON BUSINESS
Corporate tax system
Scope and extent
Corporate income tax (called business income tax – uzņēmumu ienākuma nodoklis – in
Latvian) is applicable to worldwide profits realised by Latvian legal persons and profits
derived by non-resident legal persons through a permanent establishment in Latvia. Non-
resident legal persons without a permanent establishment in Latvia are liable to corporate
income tax on income and capital gains sourced in Latvia.
Company residence
For the purposes of tax legislation, a taxpayer who is not a natural person is considered a
resident of Latvia if it is established and registered or if it should have been established
and registered in accordance with the laws of the Republic of Latvia. Hence a Latvian
company is resident even if its management and control are situated abroad, and it is not
possible for a Latvian company to change its residence without being dissolved and
reincorporated abroad.
Taxable entities
Persons liable to corporate income tax are:
• resident entities carrying on a business (performing economic activities)
• foreign companies and other foreign legal persons deriving income or capital gains
in Latvia
• permanent establishments of non-residents carrying on a business in Latvia
The following are not liable to corporate income tax:
• individual (family) undertakings that do not have to submit annual accounts in
accordance with the Annual Financial Statements of Enterprises Act
• institutions financed from the national or local-government budgets whose income
from economic activity is provided for in the relevant budget
• private pension funds
• associations (biedrības) or foundations (nodibinājumi) if the disclosed or
undisclosed aim of the foundation is not the acquisition of profit or the growth of
capital for the benefit of their members and
• religious organisations, trade unions, and political parties
Investment funds, general and limited partnerships, and cooperative associations are
transparent for the purposes of corporate income tax. Their partners are liable to income
tax or corporate tax on their share of the partnership profits.
Taxable income
Latvian tax authorities levy corporate income tax on the worldwide profits of Latvian legal
entities and on the profits sourced in Latvia and derived by foreign legal entities either
through a permanent establishment or an association that does not give rise to a legal
person.
All types of business income including dividends, interest income, royalties, capital gains
and rental income are subject to corporate income tax.
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November 2010
Taxable income is calculated by adjusting accounting profit for non-taxable items and non-
deductible items, and any other adjustments required by law.
Deductions
As a general rule, an expense is deductible only if it is directly related to a company’s
business. There are expenses with limited deductibility and wholly disallowed expenses.
For instance, entertaining expenses are deductible to the extent of 40% only.
Expenses not directly related to the company’s business are generally not deductible.
These expenses include entertainment, relaxation, pleasure trips and recreational events
for owners or employees, and private (not business-related) travel in company vehicles of
the taxpayer, and grants, gifts, gratuitous loan waivers, as well as other disbursements in
cash or some other form (in kind) to owners or employees that are not by way of
remuneration for work performed or that are not related to the economic activity of the
company.
A coefficient of 1.5 is applicable to expenses not directly related to the company’s
business and losses incurred as a result of maintaining social infrastructure objects. When
adding back these items, taxable income is increased by 1.5 times the disallowed expense.
Tax depreciation
There are two methods mostly used to compute depreciation:
• Straight-line. The straight-line method consists of depreciating fixed assets at a
uniform rate over their useful life. Intangibles (concessions, patents, licences, and
trademarks) are depreciable on a straight-line basis over their estimated life.
Depreciation of other intangible investments is not deductible for tax purposes.
• Reducing-balance method. All tangible fixed assets are depreciated for tax
purposes by applying the declining-balance method.
The Corporate Income Tax Act specifies depreciation rates for five different classes of
fixed asset. Depreciation is calculated under the reducing-balance method by applying
twice the rates prescribed by the Act. The effective rates are thus as shown in Table 1.
Table 1
Type of asset Effective depreciation rate (%)
Class 1: buildings, constructions and long-term
10
plantations
Class 2: railway rolling stock and technological
equipment, technical equipment of the
20
merchant marine and harbours; energy
equipment
Class 2: sea-going and river vessels 20
Class 3: computers and peripheral equipment,
information systems, software, data-storage
70
systems, means of communication, copiers and
ancillary equipment
Class 4: aircraft, light motor vehicles in general 40
Class 4: other fixed tangible assets, excluding
40
those in Class 5
Class 5: oil exploration and extraction platforms,
15
oil exploration and extraction vessels
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November 2010
Capital gains
Latvia has no separate capital gains tax; capital gains arising in Latvia to persons subject
to corporate income tax are taxed at the same rate as income.
No tax is imposed on the gains derived from the sale of listed shares traded on Latvian
securities markets or on the securities market of another EU Member State or EEA country.
Capital gains from the sale of securities or from the sale of real property are represented
by the difference between the acquisition price and the sales price.
Dividends, interest and royalties
Dividends
Dividends received by a Latvian company from another Latvian company are not taxed in
the hands of the recipient company, neither are they subject to any withholding tax when
paid. However, where dividends are received from a company enjoying tax exemptions or
relief under Latvian legislation, the recipient company is taxable on those dividends to the
extent of the relief enjoyed by the distributing company.
Where the dividend originates from a company resident in another EU or EEA Member
State, the dividend is exempt from tax, provided that:
• the foreign distributing company is of a type listed in Schedule 1 to the EEC Mergers
Directive (90/434/EEC), is not treated under the terms of a treaty concluded with a
third country as resident outside the European Union and is subject to corporate
income tax or
• if the foreign company is resident in the European Economic Area but not in the
European Union, that it is subject to a corporate income tax similar to that of
Latvia and is not treated under the terms of a treaty concluded with a third country
as resident outside the European Economic Area
Dividends received from a third country are generally liable to tax at rate of 15%.
However, if the Latvian company receiving the dividend owns at least 25% of the share
capital and the voting power in the foreign distributing company and that company is not
resident in a country or territory recognised by Latvia as a low-tax or tax-free territory,
the dividend will not be taxable.
Interest and royalties
Interest income from debt obligations as well as interest income from deposits in Latvia,
elsewhere in the European Union, the European Economic Area or third countries received
by Latvian-resident companies is fully taxable.
For the treatment of interest receivable by non-residents, see under ‘Withholding taxes’
below.
Withholding taxes
Table 2 shows withholding tax rates for non-resident legal entities, which are applicable if
a double tax treaty does not state otherwise.
Table 2
Type of payment EU or EEA recipient Third-country recipient
Dividends 0% 10%
Interest 0%/5%1, 2 0%/5%/10%1
Literary or artistic royalties3 5%4 15%
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November 2010
Other royalties 5% 5%
Rents for movable or immovable 5% 5%
property
Management and consultancy fees 10% 10%
Proceeds from alienation of Latvian 2% 2%
immovable property5
Remittances of partnership profits 15% 15%
Notes
1
The rate is zero if the recipient company is not an affiliate; the rate is 10% (for third-country
recipient) if the recipient company is affiliated, but 5% if the paying company is a bank
registered in Latvia
2
Under Latvia’s derogation from the EC Interest and Royalties Directive (2003/49/EC), the rate
reduces to zero from 1 July 2013
3
Royalties payable in respect of copyrights on works of literature or art, including films, videos
and sound recordings
4
The rate reduces to zero from 1 July 2013
5
Includes proceeds from the alienation of shares in a company more than 50% of whose assets in
the current or immediately previous taxable period consists of Latvian immovable property
In all cases, if the payments are made to persons resident in a tax haven, the rate of
withholding tax is 15%, unless the State Revenue Service is satisfied that the transaction
has not been entered into with the purpose of avoiding Latvian tax.
The jurisdictions considered to be tax havens are prescribed by regulation and are listed in
Table 3.
Table 3
Alderney Guatemala New Caledonia
Andorra Guernsey Niue
Anguilla Hong Kong Panama
Antigua and Barbuda Isle of Man Qatar
Aruba Jamaica St Helena
Bahamas Jersey St Kitts and Nevis
Bahrain Jordan St Lucia
Barbados Kenya St Pierre et Miquelon
Belize Kuwait St Vincent and the Grenadines
Bermuda Labuan Samoa
British Virgin Islands Lebanon San Marino
Brunei Liberia São Tomé and Principe
Cayman Islands Liechtenstein1 Seychelles
Cook Islands Macao Tahiti
Costa Rica Maldives Tonga
Djibouti Marshall Islands Turks and Caicos Islands
Dominica Mauritius United Arab Emirates
Ecuador Monaco Uruguay
Gibraltar Montserrat US Virgin Islands
Grenada Nauru Vanuatu
Guam Netherlands Antilles Venezuela
Note
1
But see above as regards dividends, interest and royalties to EEA countries
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November 2010
Losses
Tax losses may be carried forward for up to eight years starting from tax year 2010. In the
taxable period that starts in 2010, a taxpayer is allowed to set off tax losses that it was
entitled to set off in 2008 and 2009 but was unable to do so owing to an insufficiency of
taxable income. Carry-back of tax losses is not allowed. Taxpayers registered in Special
Economic Zones have a 10-year limit.
Group treatment
Tax losses are transferrable between group companies within Latvia. A group consists of a
principal and its subsidiaries. A principal may be a legal or natural person, resident in
Latvia, in another EU Member State or in a jurisdiction with which Latvia has a tax treaty
(a ‘treaty-partner jurisdiction’). A subsidiary for this purpose is a Latvian-resident
company or a company resident in another EU Member State in which the principal or one
or more of the subsidiaries or the principal and one or more subsidiaries together hold an
interest of at least 90%.
Subject to certain conditions, a loss incurred by a group member resident in another EU
Member State or in a treaty-partner jurisdiction may transfer that loss to one or more
group members or their Latvian permanent establishments, if all possibility of relieving the
loss in the home state has been exhausted.
Tax incentives
There are certain general incentives available in Latvia, including free ports, special
economic zones, special depreciation rules for new technology equipment, investment in
agriculture.
In 2008, the Latvian government introduced a notional interest deduction. A company is
allowed, in respect of taxable periods beginning after 31 December 2008, to claim a
deduction in each taxable period equal to the aggregate of all its retained profits for any
taxable period beginning after 31 December 2008, multiplied by the annual weighted
average interest rate on loans denominated in Latvian currency and extended to non-
financial enterprises in that year. The appropriate interest rate is published by the Bank of
Latvia.
Thin capitalisation
Latvian legislation has two distinct rules limiting the deductibility of interest payments.
Interest payments generally are not deductible to the extent that they exceed 1.2 times
the average annual short-term credit rate.
Separately, to the extent that a company’s interest-bearing debt exceeds four times its
equity capital, excess interest is treated as non-deductible to the same extent,
recharacterised as dividend income and taxed accordingly.
Where both rules would otherwise apply, the rule giving rise to the greater restriction is
the one that is applied.
Neither rule applies to interest paid by credit institutions or insurance companies, or to
interest on loans obtained from credit institutions registered in the Republic of Latvia or in
another Member State of the European Union or in a country with which Latvia has
concluded a convention or a double tax treaty in force, the Latvian Treasury, the Nordic
Investment Bank, the European Bank for Reconstruction and Development, the European
Investment bank, the World Bank group or the Council of Europe Development Bank.
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November 2010
The second rule does not apply to the interest on loans obtained from financial institutions
meeting both of the following requirements:
• it is registered in the Republic of Latvia or in another Member State of the
European Union or in a country with which Latvia has concluded a convention or a
double tax treaty in force;
• it provides credit or financial-leasing services and it is supervised in its country of
residence by the appropriate financial supervisory authority.
Transfer pricing
Rules apply to residents and non-residents if they are deemed to be related parties. The
tax authorities can adjust prices according to market value if goods within a transaction
between related parties are sold below market price or bought above market price.
Controlled foreign companies
Latvia has no CFC legislation. However, as already noted, withholding tax at a rate of 15%
is imposed on payments made by Latvian companies to entities or individuals registered or
domiciled in tax-haven jurisdictions (see Table 3). Certain exceptions apply.
Tax rate
The current standard rate of corporate income tax on all taxable income is 15%.
Micro-enterprises
Micro-enterprises may elect for an alternative tax régime, effective from 1 September
2010. Under that régime, they pay micro-enterprise tax at 9% of their turnover.
In order to qualify as a micro-enterprise, a company must fulfil all of the requirements set
out below.
• It must be a limited-liability company (SIA). Joint-stock companies are not eligible
• Its members must all be natural persons and each of them must be a director
• The number of employees and members together must at any time exceed five
• No employee nor any member with an employment contract with the company may
earn more than LVL 500 (EUR 700; USD 950) per month (excluding dividends) from
the company and
• Its annual turnover must be no more than LVL 70 000 (EUR 99 600; USD 133 275)
A further condition is that the company must secure the agreement of all its employees to
enter the régime. This is due to the fact that micro-enterprise tax replaces not only
corporate income tax, but also, inter alia, employer’s and employee’s social security
contributions and salary tax (see further below).
Existing micro-enterprises fulfilling the above criteria may apply for the micro-enterprise
tax régime no later than 15 December of the previous taxable period. If accepted, they
enter the régime from the following 1 January. They may not opt back out of the régime
until at least one whole taxable period has come to an end. New micro-enterprises may
enter the régime on registration, provided that they expect to fulfil the criteria for at
least their first taxable period.
Micro-enterprise tax returns must be made quarterly, and the tax is payable each quarter
on that quarter’s turnover.
Companies in the micro-enterprise tax régime are exempt from:
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November 2010
• Corporate income tax

• Employer’s social security contributions
They are also relieved of the requirement to deduct salary tax and employee’s social
security contributions from their employees’ and members’ remuneration.
Certain individuals carrying on a business may also opt to pay micro-enterprise tax (see
below, under ‘Taxation of Individuals’).
Assessment procedure
As already mentioned, corporate income tax is self-assessed. Companies are responsible
for their own calculations of tax payable, which must be declared in their tax return.
Returns and payments
Returns
A company’s corporate income tax return is generally due within four or seven months of
the year-end, so is generally due no later than 30 April or 31 July for companies with
calendar-year periods of account. Four months is the time period for small and medium-
sized companies; seven months is the period for large companies. A large company for this
purpose is one in respect of which any two of the following indicators is exceeded for the
period of account in question:
• total assets: LVL 1 000 000 (EUR 1 422 300; USD 1 904 675)
• net turnover: LVL 2 400 000 (EUR 3 414 950; USD 4 571 200)
• average number of employees in the reporting year: 250
Different due dates may apply to credit institutions, insurance companies and savings-and-
loan institutions.
Returns for micro-enterprise tax must be made every quarter, by the 15th day of the
following month.
Payment of tax
The payment of any tax outstanding is due no later than 15 days after the filing date,
hence no later than 15 May or 15 August, in most cases.
However, most companies must make also make monthly payments on account. These are
due and payable by the 15th of every month. For the first months of the tax year, up to and
including the month in which the tax return and annual financial statements are due, the
amount of the payment on account is one-twelfth of the final tax liability for the
antepenultimate tax year, adjusted for inflation. Thus, if the current tax year is 2010, the
first payments on account are based on the liability for the tax year 2008. For the
remaining months of the year (May onwards for smaller companies and August onwards for
larger companies, in most cases), payments are given by the following formula:
Final tax liability for previous tax year (adjusted for inflation) – tax already paid on
account
______________________________________________________________________________
Remaining months of the year
Micro-enterprise tax is payable quarterly, on the turnover the previous quarter. Payment
must be made by the 15th day of the month following the end of the quarter.
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November 2010
Value added tax

Taxable entities
A taxable person is any person supplying taxable goods or services in the course of
business. The VAT paid may be deducted from the VAT invoiced on deliveries of goods and
services provided. A person is registered in the SRS Register of VAT Taxable Persons within
15 working days of the day of the submission of the application.
Taxable activities
As a general rule, value added tax is imposed on all supplies of goods and services that
take place in Latvia. VAT is payable on every transaction involving the supply of goods and
services for consideration, also on ‘own consumption’, the importation of goods, the
supply of goods within the territory of the European Union and on the acquisition of new
means of transport by non-taxable persons in the territory of the European Union.
Place of supply, acquisition and importation into the European Union
Place of supply
If the goods are dispatched or transported from one Member State of the European Union
to another Member State of the European Union, the place of supply is that Member State
of the European Union in which the dispatch or transportation of the goods commences.
The place of supply of installed or assembled goods is that Member State of the European
Union in which the goods are installed or assembled.
Place of acquisition
The place of acquisition is that Member State of the European Union in which the dispatch
or transportation of the goods ends.
The place of acquisition of a new means of transport is that Member State of the European
Union in which the means of transport is registered.
Place of importation
The place of importation of goods into the territory of the European Union is that Member
State of the European Union in which the customs procedure for the release of goods into
free circulation is concluded.
Importation of goods
According to the Value Added Tax Act (likums “Par pievienotās vērtības nodokli”), the
importation of goods means the importation of goods onto the territory of Latvia from
third countries or third territories.
A ‘third territory’ is a territory of an EU Member State to which, in accordance with
Article 349 of the Treaty on the Functioning of the European Union, the Treaty does not
apply, as well as the following territories of EU Member States:
• Federal Republic of Germany – the Island of Heligoland, the territory of Büsingen
• Kingdom of Spain – Ceuta, Melilla, the Canary Islands
• Republic of Italy – Livigno, Campione d’Italia, the Italian waters of Lake Lugano
• French Republic – the overseas departments and
• Greece – Mount Athos
The term ‘third country’ is applicable to states that are not Member States of the
European Union.
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November 2010
Intra-Community trade
Intra-Community supplies and acquisitions are those made by Latvian taxable persons
carrying out transactions with taxable persons from other EU Member States. Subject to
certain exceptions, intra-Community supplies are VAT-exempt with the right of deduction
(i.e. zero-rated). The same régime is applicable for transactions with new means of
transport.
If a taxable person from another Member State provides services consisting of the
transportation of goods in the territory of the European Union to a Latvian taxable person,
it is the Latvian customer that must account for the VAT due (‘reverse-charge principle’).
It is the customer who must account for the VAT due where services are supplied by a
Latvian taxable person to a taxable person from another EU Member State. If services are
supplied by a Latvian taxable person to a non-taxable person from another EU Member
State, VAT is charged and accounted for by the supplier of services. There are exceptions
from these rules with regard to the following services:
• services associated with immoveable property, the reloading and storage of goods,
as well as other services associated with transportation
• services associated with moveable (corporeal) property (including valuation, repair
and maintenance), except for the leasing of such property
• Intermediary Agent Services in the territory of the European Union
• Transportation services
• Catering services
• Culture, education, sport
Exempt supplies
The following are among supplies exempt from VAT:
• the provision of healthcare and social security benefits
• the provision of approved educational programmes
• publicly funded scientific research
• consular services
• cultural services and events, including theatres, concerts, circuses, libraries and
museums, provided that the services are supplied not for profit (or, where profit is
generated, it is reinvested in improving the supply of these services)
• professional training or retraining of the unemployed organised by the State
Employment Service (Valsts nodarbinātības aģentūra)
• state-funded catering services provided in corrective institutions and places of
imprisonment
• supplies of gold, coins and banknotes to the Bank of Latvia
• certain financial services
• rental of residential accommodation to private persons
• transactions in shares and other securities
• betting, lotteries and games of chance
• the sale of immovable property, except for the first sale of unused immovable
property and the sale of construction land
• insurance services (including those provided by intermediaries) and reinsurance
services
• postal services provided by the Latvian postal service (Latvijas pasts)
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November 2010
• services (including catering) provided by retirement or old people’s homes, welfare

and rehabilitation centres
Also exempt are imports of:
• all goods the supply of which is exempt
• consignments of foreign financial assistance pursuant to procedures prescribed by
the Cabinet of Ministers
• goods that are not subject to customs duty, except for such goods on which a 0%
rate of customs duty is imposed.
Standard, reduced and zero rates
The standard VAT rate is 21% while the reduced VAT rate of 10% is applicable to certain
services and goods such as:
• certain medicines and medical equipment
• baby food
• inland public transport
• supplies of domestic heating, electricity and natural gas
• educational literature
• other books, magazines and newspapers (until 1 January 2011, when the standard
rate will apply)
The zero rate is applied to the export of goods and to intra-Community supplies,
international passenger traffic, supplies of goods and services under diplomatic and
consular arrangements etc.
VAT registration
All businesses whose annual taxable turnover equals or exceeds LVL 10 000 (EUR 14 225;
USD 19 050) are obliged to register for VAT. Businesses with a lower turnover may register
voluntarily.
No threshold is applicable to foreign companies; they are obliged to register if they are
engaged in taxable transactions in Latvia.
Non-deductible input VAT
A taxable person is not entitled to deduct input VAT if the relevant goods or services were
purchased for other than business purposes. VAT paid on fuel for a car used for the
purposes of the taxable person’s business is deductible.
VAT returns and payment
Returns
The taxable period is one calendar month for taxable persons whose taxable turnover in
the previous year exceeded LVL 35 000 (EUR 49 800; USD 66 675). For those taxable
persons whose taxable turnover in the previous year did not exceed LVL 10 000 the taxable
period is six months. For other taxable persons, the taxable period is the calendar quarter.
A VAT return must be filed within 15 days of the end of the taxable period, if the VAT
return is submitted in hard-copy format or within 20 days of the end of the taxable period,
if the VAT return is submitted electronically by using the Electronic Declaration System.
A taxable person must pay the excess of output VAT over deductible input VAT for a
taxable period within 20 days of the end of the period.
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If input VAT exceeds output VAT, a new repayment system is applicable to overpayments
arising after 30 June 2010. The normal rule is that excess input tax is carried over to the
next taxable period, unless the taxable person has outstanding arrears of VAT or any other
tax. In such a case, the excess is first applied to those arrears in the order stipulated in
the Taxes and Duties Act. Subject to that rule, successive excess input tax is carried over
until the end of the calendar year, after which any remaining excess is automatically
repaid within 30 days of the receipt of the final VAT return for the calendar year.
Immediate refunds may be made on application, but only where any of the following
conditions is satisfied:
• At least 90% of the taxable person’s taxable turnover consists of zero-rated supplies
or supplies the place of which is abroad
• The excess is greater than LVL 1000 and at least 20% of the taxable person’s taxable
turnover consists of zero-rated supplies or supplies the place of which is abroad
• The excess is greater than LVL 100 and arises from the acquisition of fixed assets
• The excess is greater than LVL 1000 and arises from the acquisition of goods or the
receipt of supplies in the course of carrying out transactions with timber products
(to which a special scheme applies)
• The excess is greater than LVL 15 000
For excess input tax arising before 1 July 2010, the default rule was that repayments
would be made within 30 days of a properly evidenced application. Repayment could be
delayed if, for example, the tax authorities wished to make further enquiries. Repayments
could be refused and instead applied to arrears or where the taxable person’s zero-rated
turnover did not exceed 50% of his total taxable turnover, in which case they would be
carried over. Taxable persons could also apply to have the excess set against other tax
liabilities.
VAT refunds for foreign taxable persons
For a foreign taxable person to receive a refund of Latvian VAT:
• that taxable person must not be engaged in economic activities that have to be
registered in Latvia
• the taxable person has not carried out taxable transactions in Latvia requiring him
to register in Latvia for VAT purposes
• the VAT must actually have been paid
Starting from 1 January 2010, foreign taxable persons must apply electronically to their
own tax authorities for a refund of Latvian VAT. The application must be filed in Latvian or
in English
The minimum amount for which a claim may be made is:
• if the refund is claimed for a period of three months or more, but for less than one
calendar year, the total amount refundable must be not less than EUR 400
(LVL 281.12)
• if the refund is claimed for a period of one calendar year or for the remaining part
of a calendar year (the last two months of the calendar year), the minimum amount
of VAT is EUR 50 (LVL 35.14).
Applications may be made no later than 30 September of the year following that in which
the period in respect of which the application js made ended. However, to compensate for
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November 2010
delays in various Member States in setting up the required portals, in respect of 2009
repayments only, the deadline has been extended to 31 March 2011.
VAT is not refundable:
• for the acquisition of unused immovable property and services received in relation
to the construction, reconstruction, renovation, restoration or repair of immovable
property
• if the invoices do not conform to the requirements of the Value Added Tax Act
• for goods purchased and services received for personal use (e.g. car hire and fuel,
restaurant bills, accommodation)
• to tour operators making use in Latvia of the tour operators margin scheme
Reapplication
If the application is rejected, the applicants have the right to submit a reapplication
within one month of the receipt of the decision. The applicant must in that case submit
the following documents:
• corrected or updated documents or documents that have to be submitted
additionally
• original invoices, customs declarations
• proofs of payment of the invoices
• a letter stating the date of receipt of the previous decision and listing the enclosed
documents
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November 2010
5. TAXES ON INDIVIDUALS
Income tax
Individuals resident for tax purposes in Latvia are subject to income tax (iedzīvotāju
ienākuma nodoklis) on their worldwide income. Non-residents are subject to Latvian
income tax on their Latvian-source income only.
Territoriality and residence
Under the Taxes and Duties Act (likums ‘Par nodokļiem un nodevām’), an individual is
considered to be resident for tax purposes in Latvia if he or she meets at least one of the
following conditions:
• he/she has a permanent place of abode (pastāvīga dzīvesvieta) in Latvia or
• is present in Latvia for more than 183 days in a 12-month period or
• is a citizen of Latvia and is employed abroad in the service of the Latvian
Government
Double taxation treaties may stipulate more beneficial tax conditions. The treaty
provisions concerning residence will also prevail over the domestic definition of residence
where there is a conflict.
Structure of income tax
Income tax is charged under six specific heads:
• salary tax charged on the income of employees
• lump-sum tax on revenue from a business
• tax on income from a business if not liable to corporate income tax and tax on
other sources of income
• tax on income from capital (including capital gains)
• the licence fee (patentmaksa) on certain types of economic activity and
• (from 1 September 2010) a proportion of the micro-enterprise tax
The Individual Income Tax Act (likums ‘Par iedzīvotāju ienākumu nodokli’) – IITA – provides
that taxable income is all income received in cash, in kind or in services. In addition, it
specifies what forms of income, other than income from employment, are taxable. These
are:
• income from individual labour, from a contract for services (uzņēmuma līgums),
and from activity as a commercial agent or broker
• income from an individual enterprise (individuālais uzņēmums), from a farming or
fishing enterprise (where not subject to corporate income tax), and from a
registered sole tradership (individuālā komersanta darbība)
• income from a partnership, and from the distributed surplus of an agricultural-
services cooperative, and from the distributed profits of various forms of
cooperative
• income from the liquidation or reorganisation of a company, cooperative
association, organisation, association or foundation
• income from the leasing or rental of immovable property
• income from subletting of property
• income from the leasing of movable property
• income from intellectual property and the rights thereto
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• gifts from traders, cooperatives, individual undertakings, farming or fishing

enterprises, institutions, organisations, associations and foundations, including gifts
from an individual carrying on a business and made in the course of that business
• pensions from whatever source
• income from the alienation of immovable property and other capital assets
• other income from capital not specified elsewhere
• dividends
• interest and income assimilable to interest
• the increase in value of immovable property at the end of a lease arising from
works carried out by the lessee for which the lessee has not been compensated
• income from the alienation of forestry land for felling and the value of timber
therefrom
• surplus received by a member of an agricultural services cooperative
• profit shares from residential owners’, garage owners’ and boathouse owners’
cooperatives
• income from investments in private pension funds
• income from personnel hire
• income from with-profits life policies and
• any other income that is not exempt income
Exempt income
Major types of income that are exempt are as follows:
• income from agricultural production or rural tourism services, provided that it does
not exceed LVL 2000 (EUR 2850; USD 3800)
• insurance benefits, except those benefits paid on the basis of a life, health and
accident insurance contract entered into by the employer (or other legal person) on
behalf of the insured, on the occasion of the maturation date of the policy or on a
premature termination
• income from Latvian or other EU or EEA state government bonds
• scholarships paid by the state or by approved institutions
• income obtained as a result of inheritance, except inherited royalties
• material and monetary prizes and awards received in competitions and contests,
the total value of which does not exceed LVL 100 (EUR 140; USD 190) in the tax
year from Latvian sources, or which does not exceed LVL 1000 (EUR 1425;
USD 1900) from international sources
• maintenance (alimony)
• income from alienation of personal movable property, except the income from:
alienation of products (goods) produced or obtained for sale
capital gains and other income from capital
• alienation of immovable property that has been in the taxpayer’s possession for
more than 60 months and has for at least 12 months before the date of the
alienation been the person’s declared principal place of abode. If the immovable
property was inherited from the spouse for the purposes of IIT it is considered to be
in the surviving spouse’s possession as from the day of its registration as part of the
deceased person’s estate
• income from alienation of immovable property gained in connection with the
division of property in divorce proceedings if it has for at least 12 months before
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the date of the alienation been the declared principal place of abode of both
spouses
• Income in the form of gifts from natural persons:
In full if the donee and donor are related by marriage or by blood up to the
third degree (except gifts within business activities of such relative);
Up to LVL 1000 in other cases subject to some exceptions
• Ex gratia gifts to an employee from the employer
Subject to some exceptions, non-residents are not exempt from taxation on the types of
income listed above.
The family unit
There is no joint taxation for married couples in Latvian tax legislation. Individuals are
taxed separately. However, tax deductions are allowed for children or other persons under
the care of the taxpayer.
Taxation of employment income
Employment income consists of wages, salaries, bonuses, single or systematic
compensation and other income and benefits that an employee receives as a result of his
or her current or previous employment with a company, cooperative association, European
Company, European Cooperative Association, European Economic Interest Grouping, state
or local-authority institution, association, foundation, individual undertaking, farming or
fishing enterprise, or organisation, or with a natural person (including a sole trader), also
remuneration for service in the civil service, and as consideration for performance of any
other type of contract of employment, and benefits. Employee benefits include cost of
living allowances, use of a company car, medical care, lunch vouchers, benefits received
from share options etc.
Employment income also includes fees for service as a director on an executive or
supervisory board, and remuneration to an elected or appointed officeholder.
Benefits are normally valued at their market value or at the cost to the provider. Certain
employee benefits/allowances are exempt from taxation, however. These include:
• reimbursements for business-related expenses
• premiums paid by the employer on the employee’s behalf to an approved pension
plan or with-profits life policy, provided that they do not exceed 10% of the
employee’s gross salary
• premiums paid on behalf of the employee to a term-assurance, health or accident
policy, provided that they do not exceed the lower of 10% of the employee’s gross
salary and LVL 300 (EUR 425; USD 575)
• gifts up to LVL 150 (EUR 215; USD 275) per year
There is no standard deduction for employment-related expenses.
Foreigners working in Latvia for a non-Latvian employer must register with the tax
authorities and either the employer or the foreigner must, on a monthly basis, pay
personal income tax based on their monthly salary.
Foreign nationals with an employment contract with a Latvian employer are fully and
immediately liable to Latvian income tax and social security contributions, subject to any
contrary provisions in a double tax treaty, social security agreement or the EC social
security regulations.
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Pensions
Pensions are taxed as income from employment; state pensions that were granted before
the year 1996 as well as the first LVL 1980 (EUR 2825; USD 3775) of more recent state
pensions are exempt.
Salary tax
Employers must withhold income tax and social security contributions from an employee’s
salary and wage payments, unless the employee is employed by a micro-enterprise that has
opted to pay micro-enterprise tax (see below).
Taxation of personal business income
Income from a business, where not subject to corporate income tax, is taxed in one of four
ways:
• by a lump-sum payment varying according to the turnover from the business or
• by the payment of a licence fee or
• by the payment of micro-enterprise tax or
• at the standard rate on income minus expenditure
Income from a business
A business (economic activity) for this purpose includes any activity the purpose of which is
to manufacture goods, perform work, carry on a trade, or provide services, for a
consideration. It also includes activity connected with a contract for services, a profession,
the management of immovable property, the business of a commercial agent, a broker and
a sole trader, as well as the taxpayer’s individual enterprise (including farming and fishing
enterprises).
An individual is regarded as carrying out an economic activity if the activity meets any of
the following criteria:
• The activity is both regular and systematic (at least three transactions are carried
out in any one taxable period or at least five transactions in three taxable periods)
• The revenue from any one transaction exceeds LVL 10 000, excluding the alienation
of personal property that constitutes a capital gain or income from capital
• The economic substance of the activity or the extent of personal property in the
ownership of the individual is such as to suggest a systematic activity with a view to
profit
Income from a business specifically includes:
• income from the sale of goods, work and services
• income from the hiring or leasing of property and premises
• surplus received by a member of an agricultural services cooperative
• income received from damages and
• other types of income from economic activity
Lump-sum taxation
Individuals registered with the SRS as carrying on a business may, if they have no
employees and their revenues (turnover) from that business did not exceed LVL 10 000
(EUR 14 225; USD 19 050) in the previous tax year, opt to pay tax on a lump-sum basis
according to their turnover. In the year of commencement, taxpayers otherwise fulfilling
the conditions may opt for the lump-sum basis if they estimate their annual turnover will
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November 2010
not exceed LVL 10 000. Taxpayers keeping their books under a double-entry system are not
eligible for the lump-sum basis.
Taxpayers who have opted for the lump-sum basis remain on it in a year in which their
turnover first exceeds LVL 10 000, but in subsequent years they must revert to an income-
minus-expenditure basis.
Opting to pay lump-sum taxation does not absolve the taxpayer from making social security
contributions nor deprive him or her of the opportunity to register voluntarily for VAT.
For the rates of lump-sum taxation, see under ‘Tax rates’ below.
The licence fee
A second method of alternative taxation of small or micro businesses is the so-called
‘licence fee’ (patentmaksa). As with lump-sum taxation, the election to pay the licence
fee is open to individuals whose annual turnover from business does not exceed or is not
expected to exceed LVL 10 000 (linked explicitly in this case to the VAT registration
threshold) and who have no employees. Individuals who have registered for VAT may not
elect to pay the licence fee.
Unlike lump-sum taxation, the option for the licence fee is available to certain specified
trades or occupations only. Those are as follows:
• Leatherworking and textile working
• Making and repairing clothes and shoes, watch and clock repairs, locksmithing and
other household services
• Production of handicraft goods
• Floristry
• Photographic, video and audio recording services
• Beautician’s services
• Private housekeeping services
• Domestic services
• Harvesting fruits of the forest and field (mushroom gathering, fruit picking or the
picking of wild medicinal herbs and flowers)
The licence fee may be paid monthly, quarterly, biannually or annually. The precise
amount varies (between LVL 30 and LVL 120 per month) according to the trade or
occupation and may be set a higher rate if the individual concerned lives in the Riga
region.
The licence fee replaces both income tax and social security contributions in respect of the
trade or occupation concerned.
Individuals who have opted for the licence fee may not also opt for lump-sum taxation or
micro-enterprise tax.
Micro-enterprise tax
Individuals carrying on a micro-enterprise may elect for an alternative tax régime,
effective from 1 September 2010. Under that régime, they pay micro-enterprise tax at 9%
of their turnover.
A micro-enterprise is any registered sole trader, individual enterprise, farming or fishing
enterprise or natural person registered as carrying on an economic activity (or also a
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November 2010
limited-liability company – see above under ‘Corporate taxation’) that fulfils all of the
requirements set out below.
• The number of employees and owners together must not at any time exceed five
• No employee nor owner may receive income of more than LVL 500 (EUR 700;
USD 950) per month (excluding dividends) from the enterprise and
• Its annual turnover must be no more than LVL 70 000 (EUR 99 600; USD 133 325)
A further condition is that the enterprise must secure the agreement of all its employees
to enter the régime. This is due to the fact that micro-enterprise tax replaces not only
personal income tax, but also, inter alia, employer’s and employee’s social security
contributions and salary tax (see further below).
Existing micro-enterprises fulfilling the above criteria may apply for the micro-enterprise
tax régime no later than 15 December of the previous taxable period. If accepted, they
enter the régime from the following 1 January. They may not opt back out of the régime
until at least one whole taxable period has come to an end. New micro-enterprises may
enter the régime on registration, provided that they expect to fulfil the criteria for at
least their first taxable period.
Micro-enterprise tax returns must be made quarterly, and the tax is payable each quarter
on that quarter’s turnover. The tax is payable whether or not the business is making losses.
Enterprises in the micro-enterprise tax régime are exempt from:
• Personal income tax
• Employer’s and self-employed social security contributions
They are also relieved of the requirement to deduct salary tax and employee’s social
security contributions from their employees’ and members’ remuneration.
The income-minus-expenditure basis
Income tax in respect of income from those businesses not subject to any of the special
regimes is based on the difference between income and expenditure calculated on a cash
basis, i.e. only income actually received and expenditure actually incurred in the tax year
is taken into account. For the cash basis, what expenditure is deductible is prescribed in
the IITA. Those taxpayers who are obliged under the Accounting Act to keep double-entry
books (broadly, those with a turnover of LVL 200 000 (EUR 284 575; USD 380 925) or more,
and those who have chosen to do so, must prepare their accounts on an accruals basis and
compute their taxable profits in a manner analogous to that prescribed for companies by
the Corporate Income Tax Act.
Losses
Taxpayers on the income-minus-expenditure basis may carry losses forward for a maximum
of three years (six years if the business is located in an assisted region and is of an
approved type). There is no carry-back of losses.
Losses incurred during a period in which the business was subject to micro-enterprise tax
are forfeited when the business leaves that régime and becomes subject to personal
income tax.
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Taxation of investment income

Dividends
Before 1 January 2010, dividends from Latvian or other EEA-resident companies were
exempt from income tax, unless the distributing company was exempt from tax on
corporate income or benefiting from special tax relief under Latvian law.
From the taxable year 2010, however, all dividends are subject to personal income tax at a
special rate of 10%.
Interest
Before 1 January 2010, interest from deposits or investments in a bank or other credit
institution or savings institution registered in Latvia or in another EEA state was exempt
from tax, as was the interest from mortgage bonds.
From the taxable year 2010, however, interest income is generally subject to personal
income tax at the special rate of 10%. Interest from government or local-authority bonds
from Latvia or another EEA state continues to be exempt.
Royalties
Income from licences granted for the use or right to use intellectual property is taxable.
This includes income from patents, literary and artistic copyrights, know-how etc. Flat-
rate deductions of between 15% to 40% (depending on the nature of the royalty) may be
available.
Rental income
Income from the exploitation of movable or immovable property is taxable for both
residents and non-residents.
In the case of non-residents, tax is payable by assessment and there is no withholding tax
(see under ‘Withholding taxes’ below). There is no imputed income from owner-
occupation.
Capital gains
As from the 2010 taxable year, capital gains are taxable at the special rate of 15%.
Previously, they were largely exempt.
Capital gains are computed as the difference between the alienation proceeds of ‘capital
assets’ and the cost of acquisition and any further investment in the value of the asset
during the period of ownership.
The following are considered to be ‘capital assets’:
• Shares, parts and other investment in the equity capital of a company, interests in
a partnership and other financial instruments
• Investment-fund certificates and other transferable securities
• Debt instruments and money instruments traded on the money markets
• Immovable property and the right to acquire immovable property
• An enterprise (as defined in the Commercial Code) and
• Intellectual property
Acquisition costs include incidental costs of acquisition and interest paid on a loan to
acquire the capital asset concerned. Where a capital asset is inherited, its acquisition cost
is its valuation as part of the estate. Where it was acquired under a deed of gift, the
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November 2010
acquisition cost is the value denoted in the deed, but it may not exceed the proceeds of
alienation. In the case of immovable property acquired before 1 January 2001, the
acquisition cost is the cadastral value of the property in the year of alienation, adjusted
for changes in the consumer price index for the 10 years preceding the alienation.
Income from the sale of immovable property is exempt if the property has been in the
ownership of the alienator for at least 60 months and has for at least the last 12 months
preceding the deed of sale been the alienator’s principal registered residence.
Taxable capital gains are aggregated over the tax year, and capital losses are deductible in
the aggregation. However, if the taxpayer records an aggregate loss, this may not be set
off against taxable income nor carried forward or back against past or future gains.
Taxation of other income
Gambling and prize money
Prizes from lotteries and gambling, which exceed the costs related to obtaining them, are
taxable.
If the prize or its value exceeds LVL 500 (EUR 700; USD 950), the organisers or providers
are required to withhold personal income tax at a rate of 26%.
Deductions and allowances
There are limited deductions applicable in computing taxable income. These are:
• Mandatory social security contributions
• Donations to charity (within certain limits)
• Educational and medical expenses (limited in either case to LVL 150 per year for
the taxpayer and each dependant)
• Contributions to private pension schemes (within certain limits)
Non-resident taxpayers and individuals who are resident for less than six months in a tax
year are entitled to the deduction for social security contributions only.
Personal allowances
Every taxpayer is entitled to a personal allowance (exempt amount) of LVL 420 (EUR 600;
USD 800) per year (or LVL 35 per month).
Disabled taxpayers, victims of political repression and resistance veterans are entitled to
greater allowances.
There is a dependant’s allowance of LVL 756 (EUR 1075; USD 1450) per year (or LVL 63 per
month) for each eligible dependant. Eligible dependants include:
• unemployed spouses
• minor children
• unemployed parents or grandparents
• children under 24 undergoing full-time education
Tax rates
Income that is not subject to a special rate of tax is subject to tax at the standard flat rate
of 26% (23% before 1 January 2010).
Dividends, interest and income from the sale of woodland for felling and the sale of timber
are subject to tax at the special rate of 10%.
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November 2010
Capital gains are subject to tax at the rate of 15%.

For taxpayers on the lump-sum basis for income from a business, the rates are as follows:
Table 4
Turnover of current year (LVL) Tax payable (LVL)
0 - 500.00 25
500.01 – 1000.00 50
1000.01 – 1500.00 75
1500.01-2000.00 100
2000.01-2500.00 125
2500.01-3000.00 150
3000.01-3500.00 175
3500.01-4000.00 200
4000.01-4500.00 225
4500.01-5000.00 250
5000.01-5500.00 275
5500.01-6000.00 300
6000.01-6500.00 325
6500.01-7000.00 350
7000.01-7500.00 375
7500.01-8000.00 400
8000.01-8500.00 425
8500.01-9000.00 450
9000.01-9500.00 475
9500.01-10 000.00 500
above 10 000 500 + 7% of the excess over 10 000
The taxation of non-residents

The IITA specifies what Latvian-source income is taxable for non-residents. This is as
follows:
• income from professional activities performed for Latvian residents or for the
Latvian permanent establishments of non-residents
• income from the professional activities of artists, sportspeople or trainers, whether
accruing to the artists etc directly or to another natural or legal person
• income from employment (including employment carried out in Latvia for a non-
resident employer or for an employer without a permanent establishment in Latvia,
and employment carried out outside Latvia for a Latvian employer)
• income as a director (whether on an executive or supervisory board) of a Latvian
company or cooperative association
• rental income from movable or immovable property
• agricultural and forestry income
• investment income
• dividends
• interest and similar income
• income from the alienation of immovable property, as well as other capital gains
excluding income from the alienation of financial instruments
• income from a partnership registered in the Republic of Latvia
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November 2010
• income in the form of a liquidation distribution from a Latvian company or

cooperative association, to the extent that this exceeds a normal dividend
• payment for intellectual property
• benefits under insurance policies taken out by employers or other proposers
• pensions paid under Latvian law and
• lump-sum payments from supplementary pensions derived from employer
contributions to licensed private pension schemes.
There are no special schemes for expatriate employees.
Withholding taxes
Table 5 below shows the rate of withholding taxes imposed on the income of non-resident
individuals. In all cases where there is a withholding tax, it is final and consequently, in
most cases, the non-resident is relieved of the obligation to file a tax return.
Tax treaties may reduce or eliminate the withholding tax. Where payments are made
directly or indirectly to persons located in a tax haven (see Table 3 above), the rate is
uniformly 26%, unless the payer of the income can prove that no intention to avoid Latvian
tax is present.
Table 5
Type of income or payment Rate of withholding tax (%)
Employment income 26%
Professional income 26%
Income of artists, sportspeople and trainers 26%
Directors’ remuneration 26%
Dividends 10%
Capital gains 15%
Interest income 10%
Income from alienation of immovable property 2%
Income from the sale of woodland for felling or 10%1
from the sale of timber
Gambling and lottery prizes above LVL 500 26%
Other taxable income 26%
Notes
1
The 10% rate is applied only in respect of the owner of the woodland.
Returns and payment
Returns
The taxable period for individual income tax is one calendar month where there are
employment relationships, or the calendar year in other cases.
In most cases the tax on personal income is withheld at source, which is why most
individuals are normally not required to submit returns.
A resident individual is required to submit an annual tax return only in the following
situations:
• if within the taxable period he or she has received income from Latvia from which
tax has not been withheld at source or
• his or her exempt income exceeds four times the personal allowance in the
reporting year (i.e. in respect of 2009, if it exceeds LVL 3000 (EUR 4275; USD 5725)
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November 2010
The normal due date for filing a tax return is 1 April following the taxable year concerned.
Failure to file a tax return on time is subject to a penalty.
Payment
The balance of any tax due (after deducting salary tax and other tax withheld at source) is
due and payable 15 days after the tax return is due (normally, therefore, 15 April).
However, if the balance due is greater than LVL 450 (EUR 650; USD 850), the taxpayer may
pay the amount due in three equal instalments (no later than 16 April, 16 May and
16 June).
Taxpayers with income from a business are required to make advance payments. Those
who are taxed on the income minus expenditure basis and keep double-entry accounts pay
according to the rules for corporate income tax (see Chapter 4). Those who keep single-
entry books on a cash basis are required to pay in total their final liability for the previous
year, in four equal instalments (due on 15 March, 15 May, 15 August and 15 November).
Appeals
The appeal procedure is identical to that for corporate taxpayers (see Chapter 3).
Gift and inheritance tax
Latvia does not have a specific tax on inheritances and gifts.
However, gifts and inheritances may be subject to income tax.
The value of a gift from a natural person is liable to income tax, but the following gifts are
exempt:
• gifts where the donor is the taxpayer’s spouse or a relative to the first, second or
third degree
• the first LVL 1000 (EUR 1425; USD 1900) from any other donor
• gifts intended for and applied to the taxpayer’s educational, professional or
vocational training
Income derived as the result of an inheritance is exempt, except in the case of inherited
royalties.
Wealth tax
There is no wealth tax in Latvia.
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6. OTHER TAXES
Natural resources tax
Businesses that are engaged in extractive activities, sell resources that are harmful to the
environment, or use hazardous goods are subject to natural resources tax (dabas resursu
nodoklis). The tax is also imposed on packaging. Rates vary according to the resource or
good being taxed. Table 6 gives sample rates.
Table 6
Taxable object or transaction Tax rate
Extraction of quartz sand LVL 0.20 per m3
Burial of non-toxic household waste at landfill LVL 3.00 per tonne
site
Emission of ammonia LVL 13.00 per tonne
Use or production of plastic packaging LVL 0.65 per kg
The normal taxable period is the calendar quarter. Returns for the previous period, and
the tax payable, are due by the 20th day of the first month following the quarter.
Returns on the extraction of natural resources and on the commission of environmental
pollution must be approved by an institution authorised by the Ministry of the Environment
prior to filing with the State Revenue Service.
Tax on lotteries and games of chance
The tax (izložu un azartspēļu nodoklis) is imposed on operators that have a licence to
organise and run lotteries and gambling activities.
The tax must be paid monthly, at one-twelfth of the annual rate where applicable. The
rate depends on the type of gambling and the number of participants. Thus, for card and
dice games, the tax is LVL 9600 (EUR 13 650; USD 18 275) per table per year. For games of
chance operated by telecommunications, the tax is 10% of the net takings (income less
prizes).
There is also an annual duty.
Real property tax
Real property tax (nekustamā īpašuma nodoklis) is imposed on companies and individuals
owning real (immovable) property in Latvia. The amount of the tax is 1.5% of the cadastral
value of the immovable property for land and buildings used for business purposes. Exempt
property includes land in a specially protected area on which economic activity is
prohibited by law, and heritage property.
Different rates apply to residential property and unworked agricultural land.
Table 7 shows the rates applicable to residential property.
Table 7
Cadastral value of property Rate of tax
Not exceeding LVL 40 000 0.1%
LVL 40 001 – LVL 75 000 0.2%
Greater than LVL 75 000 0.3%
43
November 2010
Local authorities have the power to increase the nationally set rates by a maximum of 20%.
They may also grant relief of up to 90% for certain categories of taxpayers. The tax is
deductible if the property is used commercially.
Real property tax is payable quarterly – no later than on 31 March, 15 May, 15 August and
15 November – in the amount of one-fourth of the annual sum. The tax can also be paid as
a lump-sum annual advance payment.
Property Transfer Duty
Property transfer duty in Latvia is payable on alienation of immovable property other than
by way of gift at a rate of 2% of the greatest of:
• the purchase price
• cadastral value and
• the valuation for mortgage purposes
of the immovable property concerned.
The maximum duty payable is LVL 30 000 (EUR 42 675; USD 57 150).
Where the transferee is an individual who already has two properties registered in his or
her name, the rate of duty is 4%, with no maximum. Transfers by way of gift are dutiable
at various rates, of up to 6%. If the transferee is a close relative, the duty is no more than
0.5% (with a maximum of LVL 1000 (EUR 1425; USD 1900)) irrespective of whether
consideration is given or not.
Excise duty
Excise duty (akcīzes nodoklis) legislation regulates harmonised excise duties on alcoholic
beverages, tobacco, energy products and electrical energy, and non-harmonised excise
duties on coffee and non-alcoholic beverages (except natural juices and mineral water).
General provisions
For a warehouse-keeper, approved trader and tax representative the taxable period of the
duty is one calendar month.
The persons liable to pay duty are:
• an importer
• a warehouse-keeper in cases prescribed by the Excise Duty Act (likums “Par akcīzes
nodokli”)
• a registered trader, non-registered trader, distance seller or representative of a
dutiable person as prescribed by the Excise Duty Act
• a person that brings into the Republic of Latvia or receives from another Member
State excisable goods that have already been released for free circulation in
another Member State and
• other persons as prescribed by the Excise Duty Act
Dutiable persons must pay the duty on excisable goods imported from third countries into
the Republic of Latvia for release for free circulation before presenting the excisable
goods at a customs authority one calendar month or within five working days of the day
when the goods were received from EU countries or on the border upon importing excise
goods from non-EU countries.
44
November 2010
Table 8 Rates of duty

Product Rate of duty
Wine LVL 45 per hectolitre
Fermented alcoholic beverages LVL 45 per hectolitre
Spirits not exceeding 15% alcohol by volume LVL 45 per hectolitre
Spirits containing more than 15% but not more than LVL 70 per hectolitre
22% alcohol by volume
Other alcoholic beverages LVL 890 per hectolitre of absolute alcohol
Beer LVL 2.181 per hectolitre per percent of
absolute alcohol by volume
LVL 1.091 per hectolitre per percent of
absolute alcohol by volume2
Unleaded petrol LVL 269 per kilolitre
Leaded petrol LVL 300 per kilolitre
Diesel LVL 234 per kilolitre
Paraffin LVL 234 per kilolitre
Liquid petroleum gases (LPG) LVL 90 per tonne
Heavy fuel oil LVL 11 per tonne
Marked oil products for heating purposes LVL 40 per kilolitre
Petrol with 5% bioalcohol3 by volume LVL 256 per 1000 litres
Petrol with 70% to 95% bioalcohol3 by volume proportional reduction of above
Fuel with 5% to under 30% by volume of rapeseed oil LVL 223 per kilolitre
or biodiesel derived from rapeseed oil
Fuel with 30% or more by volume of rapeseed oil or LVL 164 per kilolitre
biodiesel derived from rapeseed oil
100% rapeseed oil or biodiesel derived from 0
rapeseed oil used as fuel or for heating
LPG for heating purposes 0
Fine-cut smoking tobacco LVL 23 per kilogram
Other smoking tobacco LVL 23 per kilogram
Cigars and cigarillos LVL 11 per 1000
Cigarettes LVL 22.5 per thousand + 34.5% MRP
Coffee LVL 100 per 100 kilograms
Non-alcoholic drinks LVL 4 per hectolitre
Notes
1
Not less than LVL 4.00 per hectolitre
2
Special rate applicable to microbreweries on the first million litres per year
3
Alcohol derived from agricultural raw materials and dehydrated to 99.5%
MRP = maximum retail price
Customs duties
There are customs duties (muitas nodoklis) imposed on goods upon importation from non-
EU countries. Rates vary depending on the type of goods.
Vehicle taxes
Latvia charges a registration tax (vieglo automobīļu un motociklu nodoklis) on cars and
motor cycles on their first registration in Latvia. For previously unregistered cars and cars
registered abroad after 1 January 2009, the tax for cars is calculated depending on their
CO2 emissions and for motorcycles – depending on their cylinder capacity (m3). For other
cars, there is a fixed duty according to the vehicle’s age or, in the case of cars with a
cylinder capacity greater than 3000cc, that capacity.
45
November 2010
Where the charge is based on CO2, the duty ranges from LVL 0.30 per gram (for cars with
emissions no greater than 120 g/km) to LVL 5.00 per gram (in respect of emissions greater
than 350 g/km).
There is also an annual duty (transportlīdzekļu ikgadējā nodeva) on vehicles.
The rate for motorcycles, tricycles and quadricycles is 24 LVL.
The rate for cars depends on their weight, as shown in Table 9.
Table 9
Weight of car (in kg) Rate of duty (LVL)
No greater than 1500 24
1501 – 1800 48
1801 – 2100 75
2101 – 2600 95
2601 – 3500 115
Greater than 3500 150
Electrical energy tax

This tax (elektroenerģijas nodoklis) is payable by suppliers of electricity to end-users and
autonomous producers. The tax rate is LVL 0.71 per megawatt-hour.
46
November 2010
7. SOCIAL SECURITY CONTRIBUTIONS

Introduction
Mandatory social security contributions are payable by employers and employees, as well
as by the self-employed. Contributions are payable into five separate funds – the sickness,
pension, unemployment, maternity, and parental insurance funds.
Employee contributions
Employers deduct employees’ contributions from their salary payments. The employee
contribution rate is 9% of gross salary. For resident employees employed by non-resident
employers the rate is 28.99%, except where the employees have their permanent abode in
an EU or EEA country or Switzerland, and who are liable to Latvian social security
contributions under the terms of the EC Social Security Regulations, in which case the
same rates apply as in the case of employment by Latvian employers.
Employer contributions
The effective employer rate is 24.09%. The aggregate of employer and employee
contributions (33.09%) is allocated between the abovementioned funds as follows:
• old-age pension fund – 21.66%
• unemployment fund – 3.81%
• national insurance fund for industrial accidents and occupational diseases – 0.29%
• disability fund – 3.18%
• maternity and sickness fund – 2.47%
• parental insurance fund – 1.68%
Self-employed contributions
The standard social security contribution rate is 28.17% (2010). Self-employed contributors
may freely choose the amount of income on which they pay contributions, subject to an
annual minimum of twelve times the minimum monthly wage, which in 2010 corresponds
to LVL 2160 (EUR 3073; USD 4122). As of 1 January 2010, there is no maximum annual
contribution.
These contributions are allocated as follows:
• old-age pension fund – 21.66%
• disability fund – 2.47%
• maternity fund – 2.36%
• parental insurance fund – 1.68%
47
November 2010
48
November 2010
APPENDIX
Double taxation agreements
Income and capital tax treaties
Latvia has income and capital tax treaties with the following jurisdictions:
Albania Greece Norway
Armenia Hungary Poland
Austria Iceland Portugal
Azerbaijan Ireland Romania
Belarus Israel Serbia1
Belgium Italy Singapore
Bulgaria Kazakhstan Slovakia
Canada Korea Slovenia
China Kyrgyzstan Spain
Croatia Lithuania Sweden
Czech Republic Luxembourg Switzerland
Denmark Macedonia Tajikistan
Estonia Malta Turkey
Finland Morocco Ukraine
France Moldova United Kingdom
Georgia Montenegro1 United States
Germany Netherlands Uzbekistan
1
The treaty with the former Serbia and Montenegro
A treaty has been signed with Kuwait, but this has yet to enter into force.
Latvia has limited air and/or maritime transport treaties with the Netherlands (air and
maritime) and Tajikistan (air).
Estate tax treaties
Latvia has no estate tax treaties.
Social security treaties
As a member of the European Union, Latvia operates the EC Social Security Regulations
663/04 and 987/09 as concerns the interaction between its social security system and
that of other EU Member States. The previous Regulations (1408/71) continue to apply
to Iceland, Liechtenstein, Norway and Switzerland.
Latvia has bilateral agreements with Canada and Ukraine; an agreement with Belarus
has yet to enter into force.
BDO MEMBER FIRM OFFICES
BDO Member Firms have offices in the following countries:
Angola Guatemala Paraguay
Argentina Guernsey Peru
Australia Hong Kong Philippines
Austria Hungary Poland
Azerbaijan India Portugal
Bahamas Indonesia Qatar
Bahrain Ireland Reunion
Belgium Israel Romania
Bolivia Italy Russia
Botswana Jamaica St Lucia
Brazil Japan St Vincent
British Virgin Islands Jersey Saudi Arabia
Bulgaria Jordan Senegal
Cambodia Kazakhstan Serbia
Canada Kenya Seychelles
Cape Verde Korea Singapore
Cayman Islands Latvia Slovakia
Chile Lebanon Slovenia
China (PRC) Liechtenstein South Africa
Colombia Lithuania Spain
Comoros Luxembourg Sri Lanka
Costa Rica Macao Suriname
Croatia Madagascar Tanzania
Cyprus Malaysia Tunisia
Czech Republic Malta Turkey
Denmark Mauritius Turkmenistan
Dominican Republic Mexico Uganda
Ecuador Morocco Ukraine
Egypt Mozambique United Arab Emirates
El Salvador Namibia United Kingdom
Estonia Netherlands United States
Finland Netherlands Antilles Uruguay
France New Zealand Venezuela
Georgia Nigeria Vietnam
Germany Norway Zambia
Gibraltar Oman Zimbabwe
Greece Pakistan
CONTACT
This publication has been prepared by BDO Tax & Legal, a law firm in association with AS BDO.
BDO Tax & Legal Audit, accounting and other services are provided by AS BDO.
Alberta iela 1-2 AS BDO
Riga, LV-1010 Pulkveža Brieža iela 19/1
Tel: +371 6 722 2237 Riga, LV-1010
www.bdolegal.lv Tel: +371 6 722 0320
www.bdo.lv
International Tax Coordinator:
Jānis Zelmenis Contact:
E-mail: janis.zelmenis@bdolegal.lv Dainis Tunsts
E-mail: dainis@bdo.lv
This publication has been carefully prepared, but it has been written in general terms and should be
seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you
should not act, or refrain from acting, upon the information contained therein without obtaining specific
professional advice. Please contact BDO Tax & Legal to discuss these matters in the context of your
particular circumstances. BDO Tax & Legal, its partners, employees and agents do not accept or assume
any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance
on the information in this publication or for any decision based on it.
AS BDO, a Latvian JSC, and BDO Tax & Legal, a Latvian Partnership, are each a member of BDO
International Limited, a UK company limited by guarantee, and form part of the international BDO
network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
www.bdo.lv

Doing Business in Latvia 2010

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DOING BUSINESS IN LATVIA

1. THE BUSINESS ENVIRONMENT

A joint-stock company may be set up privately or by public subscription.

2. FINANCE AND INVESTMENT

Repatriation of initial investment and profits

3. THE TAX SYSTEM

• Corporate income tax

Value added tax

• services (including catering) provided by retirement or old people’s homes, welfare

• gifts from traders, cooperatives, individual undertakings, farming or fishing

Taxation of investment income

Capital gains are subject to tax at the rate of 15%.

The taxation of non-residents

• income in the form of a liquidation distribution from a Latvian company or

Table 8 Rates of duty

Electrical energy tax

7. SOCIAL SECURITY CONTRIBUTIONS

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