Highlights of tax reform in Latvia
Since January 1, 2018, new legal acts regulating the main types of taxes have entered into force in Latvia, such as the Corporate Income Tax Law, the Value Added Tax Law and the Personal Income Tax Law. All these acts were approved by the Saeima of Latvia in 2017. Below we bring to your attention the highlights of the main changes that have been implemented as a result of this reform.
- Definition of the tax residency for individuals and legal entities in Latvia.
- Corporate income tax.
- Withholding tax.
- Value added tax (VAT).
- Personal income tax (PIT).
- Summary table of main changes.
1. Definition of the tax residency for individuals and legal entities in Latvia
Tax residency of legal entities in Latvia is determined using the criterion of place of incorporation: any legal entity incorporated in Latvia is considered to be a tax resident of Latvia. In addition, any legal entity incorporated in Latvia as a branch or representative office of a foreign organization is considered to be a tax resident of Latvia.
All income of Latvian residents from any source are taxable in Latvia. For non-residents there is a duty to pay tax in Latvia only for the income from sources in Latvia.
For determination of tax residency of private individuals the "183 days rule" is applied. Any individual who stays in Latvia for 183 days or more during 12 months is recognized as a tax resident of Latvia. Such period begins in the day of arrival in Latvia (i.e. the day of arrival is included in the number of days of stay).
If a double tax treaty (DTT) concluded between Latvia and any foreign country provides other rules for determining tax residency for private individuals or legal entities, such rules shall be applied as a priority in relation to the norms of national legislation.
2. Corporate income tax
After entry into force of the new Corporate Income Tax Law, effective since January 1, 2018, the following rules for this type of tax are applied:
- The profits of a legal entity are subject to taxation only within the amounts distributed to the members or shareholders of entity and other payments equated to the distribution of profits. Thus, if a legal entity does not distribute profits, but reinvests all its income into business development, it has no duty to pay tax.
- The payments equated to the distribution of profits are:
- expenses not related to the economic activity;
- doubtful receivables;
- excessive interest payments;
- loans to related persons;
- transactions with related persons with non-market prices;
- provision of assets by a non-resident to employees of its permanent establishment in Latvia;
- liquidation quota.
- The standard tax rate is 20%. At the same time, if the corporate income tax was paid after the distribution of dividends by any legal entity and if the recipient of dividends is a private individual resident in Latvia, such individual does not include the amount of dividends received in his tax base for purposes of calculation of personal income tax.
- Dividends paid by any company (except for offshore companies) to a Latvian company are not subject to taxation. Also, the income from sale of shares of a Latvian company owned by other person for 36 months or more is not taxed.
- The effective tax rate can be 25%, as the calculation of the tax base is made with the application of the coefficient 0, 8 (the amounts of income shall be divided by such coefficient, as a result the taxpayer calculates the tax base, to which, in turn, the base rate is applied).
Example: A shareholder of a company received dividends in the amount of 100 Euro. The tax base is 100 / 0,8 = 125 Euro. The amount of tax payable is 125 * 20% = 25 Euros, which is actually 25% of the amount of 100 Euro.
- The pre-existing requirement to pay advance payments for corporate income tax has been abolished (the payment of 1/12 of the tax paid for estimated income of the future tax period). The provision abolishing this requirement will be applicable since July 1, 2018.
- The tax period for the corporate income tax is a calendar month, except for companies to which the tax period is legally established as a quarter (in particular, for agricultural companies). The tax return is to be filed to the tax authority (the State Revenue Service) until the 20th day of the month following the tax period. If in tax period the distribution of profits did not take place, the filing of the declaration is not obligatory.
- The procedure of payment of tax involves withholding of such tax from the amounts of dividends payable by a legal entity to its members. The amounts of the withheld tax are to be transferred to the budget before the 20th day of the month following the tax period.
- The reporting period for income tax, as before, is the calendar year. The Corporate Income Tax Law will be applicable starting with the reporting period that corresponds the calendar year 2018. For periods before December 31, 2017, the rules of the previous act on the corporate income tax are applicable (i.e. 15% rate for all profits, including undistributed; advance payments for tax in the amount of 1/12; the terms and the procedure of filing of tax returns).
- The rate of corporate income tax for microenterprises is 15%, and the tax base consists of all profits received by the company, regardless of its distribution to members or shareholders. Microenterprises are legal entities of any legal form, complying with the following requirements:
- the annual turnover of the company does not exceed 40 000 Euros (previously it was 100 000 Euro);
- all members or shareholders of the company are private individuals;
- there are less than 5 employees in the company (including members or shareholders);
- salary of one employee does not exceed 720 Euros per month.
- The law provides the possibility of transferring the undistributed earnings to future periods, as well as reducing its amounts to losses and accrued dividends for purposes of tax assessment.
3. Withholding tax
All payments of dividends to any person (including offshore companies) are subject to corporate income tax at a rate of 20%. The withholding tax on dividends paid to non-EU legal entities is not charged, as it was previously. Taking into account the procedure of determining the tax base for the corporate income tax, the mechanisms of its calculation and payment, corporate income tax works like withholding tax in a new system. Currently the matter of application of the withholding tax itself according to the DTT of Russia and Latvia after the tax reform in Latvia is not clarified. The taxation in case if dividends were paid to Russia with the use DTT before 2018 was as following:
After tax reform of 2018 such scheme may change in the following manner:
* Currently there are some reasons to consider that the tax credit provided by article 24 of DTT of Russia and Latvia will not be applicable since 2018. Starting from this year dividends form the tax base of corporate income tax in Latvia, and tax base of personal income tax of private individual in Russia. It is important to understand that taxpayers in Latvia and in Russia are different persons (legal entity and private individual), and this circumstance may be a reason to reject tax credit application.
** The procedure of payment of withholding tax provided by the DTT and taking into account all changes in national legislation of Latvia is to be clarified.
4. Value added tax (VAT)
There are changes in tax system that also concern some aspects of VAT. Firstly, the annual turnover threshold for registration of the company as a VAT taxpayer and giving of VAT number to such company was decreased in 2018 from 50 000 Euro to 40 000 Euro. Secondly, if the total price of all VAT taxable goods and services exceeds the threshold of 150 Euro, then the taxpayer shall provide a detailed description of such goods and services in a VAT tax return (previously the threshold was 1 430 Euro).
Standard VAT tax rate has not been changed and still is 21 %. One new reduced tax rate of 5% (applicable to specific agricultural products produced in Latvia) was added to the number of existing reduced tax rates, such as 12% (i.e. for pharmaceuticals) and 0% (for export of all types of goods and services within the EU).
5. Personal income tax (PIT)
The legislation that regulates personal income tax also was amended fundamentally. Firstly, the progressive scale of tax rates was introduced as a substitution to one fixed standard tax rate of 23 % that was applicable before the reform.
|Annual income does not exceed 20 000 Euro (that is 1 667 Euro or less per month)||20 %|
|Annual income from 20 000 to 55 000 Euro (that is from 1 667 to 4 583 Euro per month)||23 %|
|Annual income exceeds 55 000 Euro (that is exceeds 4 583 Euro per month)||31,4 %|
The next important amendment is the establishment of exempt limit, the amount of income or its part that does not form tax base of personal income tax. For several periods after the tax reform the following values will be applied:
|Maximum value of exempt limit in Euro||200||230||250|
|The income to which the maximum value of exempt limit is applied, in Euro||440||440||440|
|The income to which the reduction coefficient of exempt limit is applied, in Euro||440 - 1000||440 - 1100||440 - 1200|
|The income to which the exempt limit is not applied, in Euro||1000||1100||1200|
As it was mentioned before, if a private individual resident in Latvia who is a member or a shareholder of Latvian company has received dividends and such company has paid a corporate income tax, then such individual may not include the amounts of dividends received in his personal income tax base and may not pay tax. This system will be implemented starting from 2020.
During the transitional periods corresponding to 2018 and 2019 calendar years, the dividends paid by the Latvian company to a private individual resident of Latvia from the income received before December 31, 2017 and taxed at the previous rate of the profit tax of 15%, shall be subject to the personal income tax rate of 10 %.
The social insurance contributions rates as a part of personal income taxation system has also been changed. They are divided into two types: those that the employer withholds from the salary as a tax agent, and those that the employer pays to the budget itself as a taxpayer. The tax base for it is the amount of accrued salary of the employee. The tax period, as in the case of personal income tax, is a calendar month.
|Since 2018||Before 2018|
|Payable by the employer||24,09 %||23,59 %|
|Withheld by the employee from the salary||11 %||10,50 %|
6. Summary table of main changes
|Since 2018||Before 2018|
|Standard rate of corporate income tax||20 %||15 %|
|Effective rate of corporate income tax||25 %||15 %|
|Tax base of corporate income tax||Distributed income and income equated to the distributed||All income|
|Advance payments of corporate income tax||No||Yes|
|Tax period of corporate income tax||Month||Year|
|Tax rate for dividends recieved||0 %||0 %|
|Withholding tax rate for payment of dividends to legal entities||20 %||0 %|
|Withholding tax rate for payment of dividends to private individuals non-residents of EU||20 %||10 %|
|Microenterprises tax rate||15 % of all income||12-15 % of all income|
|VAT registration threshold||40 000 Euro||50 000 Euro|
|Reduced VAT tax rates||12 %, 5 %, 0 %||12 %, 0 %|
|The detailed description of VAT taxable goods and services required when their price exceeds the threshold of||150 Euro||1 430 Euro|
|Personal income tax rates||Progressive scale: 20 %; 23 %; 31,4 %||Fixed tax rate 23 %|
|Exemption limit||200 - 250 Euro||60 - 115 Euro|
|Personal income tax paid for dividends||No||Yes|
|Social insurance contributions paid by the employee||24,09 %||23,59 %|
|Social insurance contributions paid by the employer||11 %||10,50 %|