Latvia Tax & Business Guide - Deloitte

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Basic facts
Population 2.3m Inflation 6.7% (2005)*
Main languages Latvian (official), Lithuanian, Russian GDP per head US$6,862
Currency Latvian lat (LVL) GDP growth 10.3% (2005)*
Economic communities European Economic Area, EU, WTO
GDP sources 4.0% agriculture, 26.0% industry, 70.0% services
*Economist Intelligence Unit.
Political environment

Latvia is a parliamentary democracy. Deputies are elected to the Saeima (the parliament) under a system of proportional representation.

A centre-right coalition government headed by Aigars Kalvitis comprises the PeopleÌs Party, the Union of Greens and Farmers and the First Party. In LatviaÌs parliamentary elections on October 7th 2006, Mr KalvitisÌs PeopleÌs Party emerged victorious, and now commands a narrow majority in parliament.
Foreign trade and investment
Exports US$6.1bn (2005)* Imports US$8.6bn (2005)*
*Economist Intelligence Unit.

Major exports: Wood and wood products, textiles and metals.

Leading export markets: EU countries, primarily the UK, Germany and Sweden.

Foreign investors enjoy treatment on a par with local investors. Investment incentives include free ports and special economic zones. Structural reforms and EU membership are likely to encourage further foreign investment.
Business and financing
Business forms Limited liability companies, joint stock companies

Foreign investors prefer the limited liability company because it requires fewer organisational formalities, although joint stock companies, branches and representative offices are also possible. Branches and representative offices are treated as independent legal entities and are subject to requirements similar to those of companies. A foreigner may be the sole owner of a Latvian company.

Riga, the capital, is the financial centre.
Labour environment
Unemployment rate 7.4% (2005)* Minimum wage LVL 90 (monthly)
*Economist Intelligence Unit.

The employer pays 24.09% of the wage bill as a contribution to social insurance and the employee contributes another 9%. Expatriates employed by a non-resident employer pay a 31.11% social tax. Income in excess of LVL 20,700 is not subject to social insurance payments.
Taxation
Corporate tax
Main rate Flat rate of 15%

Resident companies are taxed on their worldwide income; non-resident companies are taxed only on Latvian-source income. A company is resident if it is established and registered under Latvian law. Corporate tax is imposed at a flat rate of 15%. Dividends paid by a Latvian resident company to non-resident legal entities or individuals are subject to a 10% withholding tax unless reduced under the EC Parent-Subsidiary Directive or the terms of an applicable tax treaty.
Individual tax
Flat rate of 25%

Resident individuals are taxed on their worldwide income; non-residents are taxed only on Latvian-source income. An individual whose permanent place of residence is in Latvia, or who is in Latvia for 183 days or more in any 12-month period ending or beginning in the tax year, is considered to be resident in that tax year. Tax is charged at a flat rate of 25%. Dividends received are exempt, except where the distributing company is non-resident or is a resident company entitled to tax benefits in the special economic zones or free ports.
Capital gains
Generally taxed as income

Capital gains of companies are generally taxed as income. Capital losses realised by companies on taxable securities may only be offset against gains on such securities, but other capital losses may be offset against general income. Gains on the sale of publicly traded securities are exempt. Capital gains derived by individuals on personal property, including shares and immovable property, are exempt unless the property was acquired for the purpose of resale or the property was held for less than 12 months.
Indirect tax
Standard rate 18% Lower rates 5%, 0%

Value-added tax (VAT) applies to most transactions. The standard rate is 18%, and a lower 5% rate applies to certain services, such as hotel services, veterinary services, and water and waste collection. The export of goods and related services, and supplies and maintenance relating to vessels used by international shipping lines are zero-rated. Exemptions include cultural services, insurance, rent paid for dwellings, some financial services and copyright royalties.

Registration is compulsory for businesses with annual turnover above LVL 10,000 or for individuals or legal persons doing business or acquiring goods within the EU exceeding LVL 7,000 in a calendar year.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

Companies must make monthly advance payments by the 15th day of the month. A tax return is due within four months after the year-end, with any balance of tax due paid within 15 days after the tax return is submitted. The employment income of individuals is taxed by withholding. Individuals deriving business income must make four quarterly advance payments. The tax return is due by April 1st following the year-end, and any final tax is payable within 15 days after submitting the return.
Additional tax information
Withholding taxes Dividends and Interest 10%, Royalties 5% or 15%, Management fees 10%, Income from a participation in a partnership 15%, Rental income from real estate situated in Latvia 5%, Income from the sale of real estate in Latvia 2%. Rates may be reduced under an applicable tax treaty or EC directives.
Tax treaties Latvia has concluded 39 tax treaties.
Dividends Domestic dividends and dividends paid by an EU company are exempt; foreign dividends paid by third-country resident companies are taxable (but with a participation exemption).
Revenue protection There is transfer-pricing and thin-capitalisation legislation and rules against offshore companies.
Groups Tax losses may be transferred between group companies within Latvia.
Incentives Special economic zones; free ports; special regions; special depreciation rules for new technology equipment; investment in agriculture.
Other taxes Customs duties, Excise taxes, Gambling and lottery tax, Natural resources tax, Real estate tax.