Taxes in Latvia
In 2018 in Latvia was implement new tax system. The most fundamental changes affected corporate income tax in terms of the rate and terms of tax payment.
As of January 2018, corporate income tax rate shall constitute 20%, however, liability to taxation shall only arise in the event of distribution of profit (payment of dividends). In other words, if the company does not distribute dividends, liability to taxation does not arise. Previously, the tax rate constituted 15%, but it had to be paid annually irrespective of the fact whether dividends were distributed or not. It is important that taxes are imposed on both distributed profit and “conditionally” distributed profit, in other words, on the company expenses equalized to the distributed profit (see details below).
Furthermore, according to the new law, if the company paid the 20% income tax, when it comes to distribution of dividends, the dividend tax rate shall constitute 0% (formerly: 15% – income tax + 10% – physical person dividend tax). Please note that the 20% rate is charged on gross income, for instance, if the company decides to pay dividends amounting to 100 EUR, in this case 20 EUR shall be payable to the budget and 80 EUR – to the dividend receiver. Consequently, the effective tax rate if calculated on the net dividend amount will constitute 25% (20/80 = 25%). The law also envisages a 2-year period of transitional regulations when earlier undistributed profit may be paid as dividends applying the former rate of 10%.
Certain provisions of legislation pertaining to holding regime adopted in 2013 were partially retained and complemented:
- withholding tax for payment of royalty – 0%
- withholding tax for payment of interest – 0% (there are limitations with regard to debt-to-equity ratio 4:1, thin capitalisation rules)
- dividends received from subsidiaries are further distributed without deduction of a 20% income tax, including the ultimate beneficiary of dividends – a physical person (new regulation), if the tax was imposed in the country, the source of dividend payment.
- income gained from the sale of the shares of the subsidiaries are further distributed without deduction of a 20% income tax, including the ultimate beneficiary of dividends – a physical person (new regulation), if the company was the owner of the shares of a subsidiary for more than 36 months.
The said concessional tax rates do not apply to transactions with the companies registered in the low tax or tax-free zones. However, as of 2018, the list of these jurisdictions was seriously abridged.
The rates of the personal income tax, social contributions and the sum of the minimum wages, etc (see below) were also amended.
Another important alteration concerns disclosure of ultimate beneficiaries of the companies in the Register of Enterprises of Latvia. This change is based on the 4th Directive of the EU on the prevention of the use of the financial system of the European Union for the purpose of money laundering and terrorism financing. In the context of the local legislation, the beneficiary of the company is a physical entity holding directly or indirectly more than 25% shares of the company, directly or indirectly controlling the company and for the benefit of whom transactions in the name of the legal entity are implemented.
Corporate income tax
As of January 2018, corporate income tax rate shall amount to 20%.
Tax base liable to the income tax
1. Distributed profit
2. Conditionally distributed profit
! Representational expenses and expenses for the events for sustainability of personnel exceeding five percent of pre-taxation year’s gross wage of which the national social insurance contributions have been paid are taxed with the corporate income tax of 20%.
Furthermore, at the moment of payment, corporate income tax is withheld from such payments to non-residents:
- for managing and advisory services – 20%
- for sale of immovable property in Latvia – 3%
- payments to non-residents located in low-taxed or tax-free zones (dividends, interests, payments for intellectual property) – 20%
Taxation period – one calendar month, i.e. the income tax declaration is submitted on a monthly basis, until the 2oth date of the current month for the preceding month.
The new procedure applies to the profits received after January 1, 2018 onwards.
Personal income tax
As of January 1, 2018, Latvia introduces progressive rate of the personal income tax:
20 % – for the annual income below 20 004 EUR
23 % – for the part of the annual income from 20 004 EUR to 62 800 EUR
31,4 % – for the part of annual income exceeding 62 800 EUR
Wage tax rates:
20 % – for the monthly income below 1667 EUR
23% – for the part of the monthly income exceeding 1667 EUR
For the capital income, which includes capital increase, a 20% personal income tax rate shall apply.
Received dividends are not subject to personal income tax, if upon distribution of profits they were taxed with a 20% corporate income tax of a Latvian enterprise or if the dividends of non-resident companies were taxed with the income tax abroad.
As of January 1, 2018, total rate of social contributions amounts to 35,09% (11% – the employee’s part, 24,09% – the employer’s part).
Enterprises – payers of royalty shall pay contributions from their funds amounting to 5% of the royalty, to the pension insurance of its receiver.
Minimum wages – 430,00 EUR before computation of taxes.