Corporate tax in Latvia

Summary

Corporate Income Tax Rate (%) 15
Branch Tax Rate (%) 15
Withholding Tax (%) (a)
Dividends 0 / 15 / 30 (b)
Interest 0 / 5 / 15 (c)
Royalties 0 / 15 (d)
Management and Consulting Fees 0 / 10 / 15 (e)
Payments for the Use of Property Located in Latvia 5
Gains on Transfers of Real Estate or Shares of Real Estate Companies Located in Latvia 2 (f)
Net Operating Losses (Years)
Carryback 0
Carryforward Unlimited (g)

a) These taxes apply to payments by Latvian residents or permanent establish­ments to nonresidents.

b) No withholding tax is imposed on dividends paid by Latvian entities, except for dividends paid to a resident of a state or territory that has been recognized as a low-tax or no-tax state or territory in accordance with Cabinet Regula­tions. The 30% rate applies to payments of interim (extraordinary) dividends (the Commercial Law contains specific rules regarding these dividends), and the 15% rate applies to the payments of all other dividends made to a resident of a state or territory that has been recognized as a low-tax or no-tax state or territory in accordance with Cabinet Regulations. The holder of a securities account that settles payments with a state or territory that has been recog­nized as a low-tax or no-tax state or territory in accordance with Cabinet Regulations must withhold the tax on dividends that have been disbursed by stock companies with publicly traded shares.

c) No withholding tax is imposed on interest payments made by Latvian entities except for interest paid to a resident of a state or territory that has been rec­ognized as a low-tax or no-tax state or territory in accordance with Cabinet Regulations. The 5% rate applies to the interest paid by Latvian-registered banks, and the 15% rate applies to all other interest payments made to a resi­dent of a low-tax or no-tax state or territory in accordance with Cabinet Regulations.

d) No withholding tax is imposed on royalties, except for royalties paid by Latvian entities to a resident of a state or territory that has been recognized as a low-tax or no-tax state or territory in accordance with Cabinet Regulations. A 15% tax rate applies to payments made to a resident of a low-tax or no-tax state or territory in accordance with Cabinet Regulations.

e) The 10% rate applies to management and consulting fees. The 0% rate applies
to management and consulting fees paid to residents of countries that have entered into double tax treaties with Latvia (the residence certificate must be submitted). The 15% rate applies to payments of management and consulting fees made to a resident of a state or territory that has been recognized as a low-tax or no-tax state or territory in accordance with Cabinet Regulations. Also, see Section B.

f) This is a final withholding tax imposed on gains derived by nonresident companies without a permanent establishment in Latvia from sales of Latvian real estate. This tax also applies to sales of shares if certain conditions are met (see Section B).

g) Losses incurred in or after 2008 may be carried forward for an unlimited number of years.

Taxes on corporate income and gains

Corporate income tax. Under the Law on Corporate Income Tax, Latvian (resident) companies are subject to income tax on their worldwide income. Nonresident companies without a permanent establishment in Latvia are subject to tax on their Latvian-source income.

Resident companies include companies registered in Latvia and companies incorporated in foreign countries that are registered in Latvia as branches or permanent establishments. All other com­panies are considered to be nonresident companies. Nonresident companies operating through a permanent establishment in Latvia are subject to tax on income derived by the permanent establish­ment in Latvia as well as on income independently derived abroad by the permanent establishment. If a nonresident company en­gages directly in business activities in Latvia that are similar to the business activities performed by its permanent establishment or sub sidiary in Latvia, income derived from the nonresident com-pany’s activities is included in the taxable income of the perma­nent establishment or the subsidiary.

Tax rates. Companies are subject to income tax at a rate of 15%.

Tax incentives. Companies that enter into an agreement with the management of the Liepaja or Rezekne special-economic zones or the Riga and Ventspils free ports benefit from several tax incen­tives including an 80% rebate of corporate income tax on income derived from the relevant zone.

Companies that invest more than EUR10 million in supportable long-term investment projects may apply for the following corpo­rate income tax rebates:

  • 25% of the whole initial investment amount up to EUR50 mil­lion
  • 15% of the part of the whole initial investment amount from EUR50 million to EUR100 million
  • 0% of the part of the whole initial investment amount that ex­ceeds EUR100 million

The Ministry of Economics of Latvia needs to agree to the above investment projects, and criteria specified in the Law on Corpo­rate Income Tax for the granting of the tax benefits must be met.

Three times the amount of research and development (R&D) ex­penses may be deducted. This incentive applies to the following expenses:

  • Costs of an employee of the scientific staff or research technical staff
  • Remuneration for research services provided by a listed scien­tific institution
  • Remuneration payable to accredited certification, testing and calibration institutions for testing, certifying and calibration services necessary for the development of a new product or technology

The project documentation must be developed. Compliance, eval­uation, adaptation, and accounting procedures and requirements for project documentation of R&D activities that are specified in the Regulations of Latvian Cabinet of Ministers for the granting of the tax benefits must be met.

Capital gains. Income on the disposal of equity shares is excluded from the taxable revenue of the taxpayer, except for shares of a commercial company that is a resident of a state or territory that has been recognized as a low-tax or tax-free state or territory in accordance with Cabinet Regulations.

For nonresident companies without a permanent establishment in Latvia, the final withholding tax is imposed on proceeds received from the sale of Latvian real estate, as well as from the sale of shares of a company if in the tax year of the sale or in the preced­ing year, 50% or more of the company’s assets directly or indi­rectly consists of real estate located in Latvia. Withholding tax at a rate of 2% is imposed on income from the sale of Latvian real estate or from the sale of a company’s shares.

Nonresident companies that are residents of European Union (EU) member states or residents of states that have entered into a double tax treaty with Latvia may file a tax calculation statement with the State Revenue Service in accordance with the proce­dures stipulated by the Cabinet Regulations, together with docu­ments that prove the amount of the expenses related to the earned income, and apply the tax rate of 15% to the calculated income. Recalculation of taxable income can be made with respect to the following income subject to withholding tax:

  • Remuneration for management and consultancy services
  • Remuneration for use of property located in Latvia
  • Alienation of immovable property in Latvia

Administration. The tax year is either the calendar year or another year stipulated in the charter of the company.

An annual income declaration must be filed with the State Rev­enue Service within 30 days after the annual shareholders’ meet­ing, but not later than four months after the end of the tax year. In certain cases, the annual income tax declaration can be filed within seven months after the end of the tax year.

Companies must make advance payments of tax by the 15th day of each month. For the months before and including the month of filing the annual income declaration, up to a maximum of four months, the monthly advance payments are equal to 1/12 of the tax calculated for the year two years before the current year, adjusted for inflation. For the remaining months, monthly advance pay­ments are equal to 1/8 of the tax calculated for the preceding year, adjusted for inflation and reduced by the advance tax payments made in accordance with the rule described in the preceding sentence.

Any balance of tax due must be paid to the State Revenue Service within 15 days after the submission date for the annual income declaration, or within 15 days after the filing deadline for the annual income tax declaration if the declaration was submitted after the deadline.

Dividends. Dividends paid by a resident company out of profits taxed under the Law on Corporate Income Tax are not included in the taxable income of a resident recipient company. This rule does not apply if the payer is enjoying a tax holiday.

A resident company is not taxable on dividends received from a nonresident company unless the payer company is a resident of a state or territory that has been recognized as a low-tax or no-tax state or territory in accordance with Cabinet Regulations.

Foreign tax relief. A foreign tax credit is available to resident com­panies for foreign tax paid on taxable income earned abroad. The amount of credit may not exceed an amount equal to the tax that would be imposed in Latvia on the income earned abroad.

Determination of taxable income

General. Taxable income is the income reported in a company’s profit and loss statements, prepared in accordance with the Latvian accounting law and subject to certain adjustments specified in the Law on Corporate Income Tax.

For corporate income tax purposes, companies may not deduct interest expenses that exceed the lower of the following amounts:

  • An amount equal to the average amount of liabilities multiplied by the annual weighted average interest rate for loans issued to domestic non-financial companies (calculated based on statisti­cal indicators of monetary financial institutions), which is mul­tiplied by a coefficient of 1.57. The annual weighted average interest rate for loans issued to domestic non-financial compa­nies is published on the Bank of Latvia website within a month after the end of a tax period.
  • The actual amount of the interest divided by a coefficient C. Co efficient C is calculated using the following formula:

C =

D

(E – R) x 4

  • The following are the values of the items in the formula:

— D = average liabilities

— E = total equity

— R = amounts in long-term revaluation reserve and similar

reserves that have not resulted from profit distributions

The thin-capitalization rules do not apply to interest on loans obtained from the following:

  • Credit institutions that are residents of the EU, European Eco­nomic Area (EEA) or a country with which Latvia has entered into a double tax treaty
  • Latvian Treasury
  • Development Finance Institution
  • Nordic Investment Bank
  • European Bank for Reconstruction and Development
  • European Investment Bank
  • Council of Europe Development Bank
  • World Bank Group

The second calculation described above for calculating the limi­tation on the interest deduction does not apply if the loans are obtained from financial institutions (as defined in the Credit Institution Law) that are resident in the EU, EEA or a country with which Latvia has entered into a double tax treaty and if such financial institution provides crediting or financial leasing ser­vices and is under the supervision of credit institutions or the financial monitoring agency.

The thin-capitalization rules do not apply to credit institutions and insurance companies.

The amount of interest that exceeds the deductible amount may not be used to reduce taxable income in future tax years.

Inventories. Inventories can be valued using the first-in, first-out (FIFO) or weighted average methods.

Expenditure on low-value inventory may be fully deducted in the year of the expenditure.

Tax depreciation. Tax depreciation is calculated using the declining-balance method.

Depreciation rates range from 10% (buildings and structures) to 70% (computing devices and related equipment).

The Law on Corporate Income Tax provides for the depreciation of the acquisition value or establishment value of new manufac­turing technological equipment. For this purpose, “acquisition value” is the amount paid to purchase such equipment, while “establishment value” is the total expenditure incurred to create such equipment. Before calculating the depreciation, the acquisi­tion or establishment value may be increased by multiplying such value by a coefficient, which is 1.5 for assets acquired from 2014 through 2020.

The acquisition price of patents, licenses and trademarks is amor­tized using the straight-line method for 5 years, but concessions (as defined in the Latvian Concession Law) are amortized over 10 years. Patents, licenses and trademarks that are issued for a term of less than five years can be written off for tax purposes during the period of their validity.

Research and development costs can be written off for tax pur­poses in the same year in which they are incurred. Taxable income may be reduced by the amount of specific expenses incurred in research and development activities multiplied by a coefficient of three if certain criteria are met.

Tax depreciation may not be claimed for a “representation auto­mobile,” which is defined as an automobile that meets all of the following criteria:

  • It has no more than eight passenger seats plus the driver’s seat.
  • The purchase value is greater than EUR50,000 without value-added tax.
  • It is not an emergency vehicle.
  • It is not a specialized automobile for disabled persons.
  • It is not a promotion automobile.

Relief for losses. Losses incurred in or before 2007 may be carried forward eight years. Tax losses incurred in 2008 and subsequent years may be carried forward indefinitely. Losses may not be car­ried back.

Groups of companies. Effective from 1 January 2014, the intra-group transfer of losses was abolished.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value-added tax on goods and services,
including imports
Standard rate 21
Medical services, and supplies of books
and subscriptions
12
Exports 0
Social security contributions, paid by
Employer 23.59
Employee 10.5
Property tax; applies to land, engineering structures and buildings, except for
residential buildings
1.5
Property tax on residential buildings
Cadastral value under EUR56,915 0.2
Cadastral value between EUR56,915
and EUR106,715
0.4
Cadastral value above EUR106,715 0.6

Miscellaneous matters

Foreign-exchange controls. The official currency of Latvia is the euro (EUR). No significant foreign-exchange controls are im­posed in Latvia.

Transfer pricing. Latvian law requires the arm’s-length principle to be followed in all related-party transactions. The Latvian tax authorities may reassess transactions between related parties and recalculate the tax base if the prices applied in related-party trans­actions are not arm’s length. Transfer-pricing methods, such as the comparable uncontrolled price, resale price, cost-plus, profit-split and transactional net margin methods, may be used to assess whether the prices applied in controlled transactions are consis­tent with the arm’s-length principle.

Latvian taxpayers with annual net turnover exceeding EUR1,430,000 are required to prepare transfer-pricing documen­tation containing industry, company, functional and economic analysis. The documentation requirements apply to all related-party transactions with an annual value over EUR14,300. The generally accepted practice for transfer-pricing issues is based on the Organisation for Eco nom ic Co-operation and Development (OECD) transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Taxpayers can enter into an advance pricing agreement (APA) with the tax administration on the establishment of an arm’s-length price (value) for a transaction conducted with a related foreign company if the transaction annual value is planned to exceed EUR1,430,000. If a taxpayer complies with an APA, the tax administration may not adjust in a tax audit the arm’s-length price established for the transaction.

Treaty withholding tax rates

The domestic withholding tax rate for dividends, interest and royalties is 0% (with certain exceptions, but these exceptions do not apply to treaty countries). The following table lists the with­holding tax rates under Latvia’s tax treaties.

  Dividends

%

Interest

%

Royalties

%

Albania 5/10 (a) 5/10 (p) 5
Armenia 5/15 (a) 10 10
Austria 5/10 (a) 10 5/10 (b)
Azerbaijan 5/10 (a) 10 5/10 (b)
Belarus 10 10 10
Belgium 5/15 (a) 10 5/10 (b)
Bulgaria 5/15 (a) 5 5/7 (k)
Canada 5/15 (c) 10 10
China 5/10 (a) 10 7
Croatia 5/15 (a) 10 10
Czech Republic 5/15 (a) 10 10
Denmark 5/15 (a) 10 5/10 (b)
Estonia 5/15 (a) 10 5/10 (b)
Finland 5/15 (a) 10 5/10 (b)
France 5/15 (h) 10 5/10 (b)
Georgia 5/10 (g) 5 5
Germany 5/10 (a) 10 5/10 (b)
Greece 5/10 (a) 10 5/10 (b)
Hungary 5/10 (a) 10 5/10 (b)
Iceland 5/15 (a) 10 5/10 (b)
India 10 10 10
Ireland 5/15 (c) 10 5/10 (b)
Israel 5/10/15 (m) 5/10 (n) 5
Italy 5/15 (q) 10 5/10 (b)
Kazakhstan 5/15 (a) 10 10
Korea (South) 5/10 (a) 10 5/10 (b)
Kuwait (s) 0/5 5 5
Kyrgyzstan 5/10 (c) 10 5
Lithuania 0/15 (d) 0 0
Luxembourg 5/10 (a) 10 5/10 (b)
Macedonia 5 5 5/10 (l)
Malta 5/10 (a) 10 10
Mexico 5/10 5/10 10
Moldova 10 10 10
Montenegro 5/10 (a) 10 5/10 (o)
Morocco 6/10 (r) 10 10
Netherlands 5/15 (a) 10 5/10 (b)
Norway 5/15 (a) 10 5/10 (b)
Poland 5/15 (a) 10 10
Portugal 10 10 10
Qatar 0/5 (t) 0/5 (t) 5
Romania 10 10 10
       
Russian Federation 5/10 5/10 5

 

Serbia 5/10 (a) 10 5/10 (o)
Singapore 5/10 (a) 10 7.5
Slovak Republic 10 10 10
Slovenia 5/15 (a) 10 10
Spain 5/10 (a) 10 5/10 (b)
Sweden 5/15 (a) 10 5/10 (b)
Switzerland 5/15 (j) 10 5/10 (b)
Tajikistan 0/5/10 (f) 0/7 (i) 5/10 (b)
Turkey 10 10 5/10 (b)
Turkmenistan 5/10 (a) 10 10
Ukraine 5/15 (a) 10 10
       
United Arab Emirates 5 2.5 5
United Kingdom 5/15 (c) 10 5/10 (b)
United States 5/15 (g) 10 5/10 (b)
Uzbekistan 10 10 10
Non-treaty
countries
0/15/30 (e) 0/5/15 (e) 0/15 (e)

 

a) The 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 25% of the capital of the payer of the dividends.

b) The 5% rate applies to royalties paid for the use of industrial, commercial or scientific equipment.

c) The 5% rate applies if the beneficial owner of the dividends is a company that holds directly at least 25% of the voting power of the payer of the dividends.

d) The 0% rate applies if the recipient of the dividends is a company (or a part­nership) that holds 25% of the capital and voting power of the payer of the dividends.

e) See Section A.

f) The 0% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 75% of the capital of the payer of the dividends. The 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 25% of the capital of the payer of the dividends. The 10% rate applies to all other dividends.

g) The 5% rate applies if the beneficial owner of the dividends is a company that holds directly at least 10% of the voting power of the payer of the dividends.

h) The 5% rate applies if the beneficial owner of the dividends is a company that holds directly at least 10% of the capital of the payer of the dividends.

i) The 0% rate applies to interest paid on loans granted by banks, or to the govern ment, the central bank or any financial institution controlled by the government of Tajikistan.

j) The 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 20% of the capital of the payer of the dividends.

k) The 7% rate applies to royalties paid for the use of, or the right to use, cine­matographic films and films or tapes for radio or television broadcasting, patents, trademarks, designs, and models, plans, secret formulas or processes. The 5% rate applies to other royalties.

l) The 10% rate applies to royalties paid for the use of, or the right to use, cin­ematographic films or films or tapes for radio or television broadcasting. The 5% rate applies to other royalties.

m) The 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 10% of the capital of the payer of the dividends. The 10% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 10% of the capital of the payer of the dividends and if the dividends are paid out of profits that are exempt from tax or subject to tax at a rate lower than the normal Israel tax rate under the Israel investment encouragement law.

n) The 5% rate applies to interest paid by Israel-registered banks. The 10% rate applies to other interest payments.

(o)   The 5% rate applies to royalties paid for the use of, or the right to use, copy­rights of literary, artistic or scientific works, including cinematographic films and films or tapes and other means of image or sound reproduction for radio or television broadcasting. The 10% rate applies to royalties paid for the fol­lowing:

  • The use of, or the right to use, patents, trademarks, designs or models, plans, secret formulas or processes, or industrial, commercial or scientific equipment
  • Information concerning industrial, commercial or scientific experience

p) The 5% rate applies to interest paid on loans granted by banks.

q) The 5% rate applies if the beneficial owner of the dividends is a company that holds directly at least 10% of the voting capital of the company paying the dividends.

r) The 6% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 25% of the capital of the company paying the dividends.

s) Latvia has ratified the tax treaty with Kuwait, which will enter into force when Latvia receives notification that Kuwait has also ratified the treaty.

t) The 0% rate applies if the beneficial owner of the dividends or interest is a company (other than a partnership). The 5% rate applies to dividends or inter­est in all other cases.