Latvian tax system general overview
Latvian tax system includes four elements: state taxes, state fees, fees of self-governments and taxes, provided under the laws of the European Union. Though, essentially, tax system is a much more complex mechanism, which also includes public institutions, principles of tax law and all interactions, related to the taxation process.
The main law that regulates Latvian tax system in general is the Law on taxes and fees, which was passed in year 1995. Despite the fact that the law had been passed 18 years ago, Latvian tax system is still developing very active. It constantly goes through changes, aimed to optimize and raise the effectiveness of taxation process. Webpages of the State revenue service and the Ministry of finances can help you track all the changes in legislation and stay in touch with the innovations. In addition, each type of tax is being regulated separately by the special legal act. In total, there are fourteen types of taxes in Latvia for today.
Corporate tax in Latvia
The latest innovation in tax legislation, which gave Latvia a title of the „new tax haven”, refers to a reduction of the corporate income tax rate. Starting from the 1st of January 2013, corporate income tax rate is only 15%, which is much lower than average rate in European Union (23,5%). As a result, Latvia and Lithuania take third place in Europe. There is a lower corporate income tax rate in Bulgaria and Cyprus (10%) and in Ireland (12,5%).
Also, starting from 1st January 2013, dividends are not being taxed, if the Latvian company pays out dividends to the non-resident company, unless it is located, established or founded in low tax or no-tax states or territories. Dividends received from the non-resident company are not taxable as well, unless the company is located, established or founded in low tax or no-tax states or territories.
Many local businessmen are concerned that Latvia is going to share the same fate as Cyprus, while the experts state, that such measures will attract new investment from abroad and play a positive role in the development of Latvian economy.
Micro tax in Latvia
Quite a pleasant innovation became an introduction of micro tax in year 2010. The micro tax is special tax regime for business start-up purposes. The company may apply for micro taxpayer status if: all of the shareholders are natural persons (individuals), annual turnover of an enterprise does not exceed 70 000 LVL (EUR 99 657), the company employs not more than 5 employees, all of the members of the board do participate in this company only. Micro tax must be paid each quarter (four times a year) and its rate is 9%. Micro tax comprises of compulsory social insurance contributions, corporate income tax and personal income tax, therefore, it may be a good way to save money if you run a small business.
Excise tax in Latvia
There are five groups of products, which are taxed by an excise tax: alcohol drinks, tobacco, petroleum products, natural gas, non-alcohol drinks and coffee. Excise tax rate depends on the type and amount of product. Excise tax rate is being regulated more specifically by the Law on excise tax. Since excise tax rate can strongly impact competition between member states of the European Union (within common market), EU strictly regulates terms of excise taxation of three groups of products: alcohol drinks, tobacco and petroleum products. For the successful achievement of the goal, mentioned above, European Union executes policy of excise tax harmonization between its member states. This policy regulates minimum excise tax rate, terms of distribution of excise products and the procedure of payment of excise tax.
Value added tax (VAT) in Latvia
Basic VAT rate in Latvia is 21%, which is about the same as an average VAT rate in Europe (20,3%). In year 2012 government of Latvia have reduced VAT rate for 1% (from 22%). Such actions did require 16,5 million lats from the state budget last year, and 40 million lats have been funded from state budget this year. According to the Ministry of finances – basic VAT rate is being reduced in order to bring it closer to the VAT rate of the neighbouring states (Lithuania and Estonia) to improve competition of the Latvia on a regional level and to reduce the impact of inflation.
Recent initiatives concerning tax system in Latvia
Taxation system itself and consequently the tax rates have been developing for the last twenty years and it is going to keep on developing in future. New initiatives on increasing the efficiency and optimization of tax system are being proposed.
One of such initiatives has been approved by the council of coalition on 19th of August. According to this proposal, starting from the 1st of January year 2014, the major ports of Latvia (Riga, Ventspils and Liepaja) will be taxed 20% from their income. The Reform Party, which is the author of the initiative, made a promise to prepare the bill until the 26th of August. However, we should keep in mind that it is only an initiative so far and the initiation should be negotiated at the Government and Parliament.
Another initiative refers to employment taxes. The recent discussion addressed several issues regarding the reduction of labour taxes and the most effective way to do that. On the 19th of August coalition has approved the proposal of the Ministry of finances to keep the personal income tax at the same level (25%), while reducing social tax for employees and employers for 0,5%. Despite active discussions on the internet and in mass media, it is too early to measure efficiency and correctness of such decision.
In case you have any questions about taxes in Latvia or if you need help – feel free to contact us by phone or e-mail at any time.