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 is treated as ordinary income and is 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). Gains obtained by a resident on the sale of a property are taxed only if there is a profit distribution.

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. The bad debt 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. Donations made from the declaration of emergency until the end of 2020 in an effort to limit the impact of the COVID-19 pandemic are fully deductible.
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. Employers are required to pay a solidarity tax of 23.59% for any annual salary exceeding EUR 62,800.
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.

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,
- 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)
- Contributions to private pension funds (10% of taxable income, capped at EUR 4,000) and to life insurance schemes
- Differential personal allowance (DPA): A lump-sum deduction varying between EUR 0 and EUR 300 a month depending on the annual taxable income: for tax year 2021, 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.