Latvia: Business Environment

Company Tax

20% (effective rate at 25% with the application of a 0.8 coefficient to increase the tax base)

Tax Rate For Foreign Companies

Resident companies are taxed on profits distributed from their worldwide income, whereas permanent establishments of non-resident entities are taxed only on profits distributed from Latvian-source income. Other Latvian-source income derived by non-residents may be subject to a final withholding tax or corporate income tax by way of assessment.

Capital Gains Taxation

Capital gains arising from the disposal of assets are treated as ordinary income and are subject to a 20% corporate income tax when profit is distributed.
Gains obtained by a non-resident on the sale of a property or a company's shares where more than 50% of its assets consist of Latvian real estate, is subject to a 3% tax on gross proceeds (exemptions apply for residents of EU/EEA countries). A nonresident’s income from the sale (or from the contribution into share capital) of real estate located in Latvia, or the sale of shares of a company where more than half of the company’s assets consist of Latvian real estate, is subject to a 3% withholding tax.

Main Allowable Deductions and Tax Credits

The new tax model only includes distributed profits in the tax base; therefore, no provision is made for the depreciation of tangible and intangible assets.
The tax code does not provide any specific treatment for start-up expenses. On the other hand, VAT on goods and services acquired before the VAT registration of the company can be recovered.
Excess interest payments are considered a deemed profit distribution and subject to a 20% income tax. Bad debts remaining unrecovered 36 months after a provision was made are generally deductible.
Entertainment and all other "non-commercial" expenses (including benefits in kind offered to employees) are exempt from corporation tax up to 5% of gross salary. Excess amounts are subject to corporation tax. Costs related to passenger cars whose value excluding VAT is above EUR 50,000 are considered non-business expenses and subject to a 20% tax rate (except for special purpose vehicles).
Donations to Latvian charities or their equivalents in the EU Member States or the European Economic Area (that have concluded a tax treaty with Latvia) are eligible for deductions which may apply to the tax base at up to 5% of profit or up to 2% of total gross wages. Alternatively, donations may give rise to a 75% reduction in corporate income tax on dividends.
Tax losses accumulated up to 2017 can be carried forward up to five years (until 31 December 2022) to reduce taxable distributed profits by 50% (or 15% of the loss per year). Payments to foreign affiliates must respect the arm’s length principle or are considered a profit distribution and are taxed at a 20% rate.

Other Corporate Taxes

The property tax is payable on commercial properties but also on technical structures owned by private companies (highway, parking space, bridge, tunnels, etc.) and property that is part of a residential complex but used by legal entities for non-residential purposes. The rate can be determined by municipalities (between 0.2 and 3% with the standard rate at 1.5%). The rates provided for in the Latvian Tax Code apply if a municipality refuses to announce its rates before 1 November.
Stamp duties are collected on a number of legal transactions, including the registration of real estate (at 2% of the sale price or the cadastral value). Contributions in kind to the capital of the company are subject to a stamp duty of 1%.
Social security contributions payable by the employer amount to 23.59% of the salary. The amount of annual income subject to social security contributions is capped at EUR 78,100, but income above the threshold is subject to solidarity tax at 25% (borne partly by the employer and partly withheld from the employee’s salary).

Natural resources obtained through a commercial activity, products harmful to the environment, radioactive substances and polluting activities are subject to a tax on natural resources (variable rate depending on the weight, volume and quantity of the product).
Other taxes apply on vehicles, electricity, lottery and gambling (EUR 2,000-427,000 license fee).

Other Domestic Resources

Consult Doing Business Website, to obtain a summary of the taxes and mandatory contributions.

Tax Rate

Allowable Deductions and Tax Credits

The following items are exempt from the scope of personal income tax:
- income from investments in private pension funds and insurance indemnities (10% of taxable income, capped at EUR 4,000),
- gain on the sale of personal property.

Moreover, individuals may deduct from the income reported on their tax returns:
- Donations to acceptable charitable organisations
- Education and medical expenses (up to 50% of taxable income, capped at EUR 600 per year for expenses on behalf of other family members)
- Differential personal allowance (DPA): A lump-sum deduction varying between EUR 0 and EUR 350 a month depending on the annual taxable income (increased to EUR 500 from July 1 2022): for tax year 2022, the full DPA only applies to individuals with a monthly income up to EUR 1,800, varying according to the level of income. An additional deduction of EUR 250 per month applies for each qualifying dependant.

Special Expatriate Tax Regime

Non-residents are only taxed on their Latvia-source income, whereas Latvian residents are subject to Latvian income tax on their worldwide income.
An individual is resident in Latvia if the individual’s permanent place of residence is in Latvia or if the individual is present in Latvia for 183 days or more in any 12-month period.