Riga GMT +2
EY +371 6704-3801
Muitas Str. 1A Fax: +371 6704-3802 LV-1010 Riga Latvia
Principal Tax Contact
Ilona Butane +371 6704-3836
Email: ilona.butane@lv.ey.com
Law
Liene Cakare +371 6704-3606 Email: liene.cakare@lv.ey.com
Because of the rapidly changing tax law in Latvia, readers should obtain updated information before engaging in transactions.
A. At a glance
Corporate Income Tax Rate (%) 20
Branch Tax Rate (%) 20
Withholding Tax (%) (a)
Dividends 0/20 (b)
Interest 0/20 (c)
Royalties 0/20 (d)
Management and Consulting Fees 0/20 (e)
Gains on Transfers of Real Estate or Shares of Real Estate Companies Located in Latvia 3/20 (f) Gains on Rent of Real Estate Located in Latvia 5/20 (g)
(a) These taxes apply to payments by Latvian residents or permanent establish ments to nonresidents.
(b) Withholding tax is not imposed on dividends, 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. Dividends are subject to 20% corporate income tax at the level of the resident distributing companies (for further details, see Section B).
(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 rec ognized as 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.
(e) The 20% 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).
(f) The 3% rate is a final withholding tax rate imposed on gains derived by non resident 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). Withholding tax is also imposed if a Latvian non resident company disposes of real estate by investing it in the share capital of another company (except if the respective alienations are performed within a legal reorganization). A 20% rate can be applied on profits realized from the sale of real estate or shares of a real-estate-rich entity if the taxpayer is a resident of a European Union (EU) country or a country with which Latvia has concluded a double tax treaty. For further details, see Capital gains in Section B.
(g) The 5% withholding tax rate is imposed on gains derived by nonresident companies in Latvia from the rent of Latvian real estate. A 20% rate can be applied on profits realized from rent of real estate located in Latvia if a tax payer is resident of an EU country or a country with which Latvia has con cluded a double tax treaty.
B. Taxes on corporate income and gains
Corporate income tax. Under the Corporate Income Tax Law, corporate income tax is payable at the time when profit is distrib uted. As a result, the taxable base comprises distributed profits and notional distributed profits.
Distributed profits include the following:
• Dividends, including extraordinary dividends
• Expenses that are equivalent to dividends
• Notional dividends (a notional dividend is a profit share [for example, undistributed profit of current or previous years on which corporate income tax was not paid] for which equity is increased; tax is paid at the moment of decrease of equity [including the case of a company liquidation] or at the moment when a legal entity is registered as a payer of micro-enterprise tax)
Notional distributed profits comprise the following:
• Non-operating expenses
• Doubtful receivables
• Increased interest payments
• Loans to related parties
• Adjustments for transactions with related parties below the arm’s-length value
• Liquidation quotas and other specific items
• Value of assets transferred in the course of a reorganization
• Value of assets that a Latvian resident transfers to its foreign permanent establishment if the local tax base is reduced (exit taxation)
• Value of assets that a Latvian permanent establishment trans fers to a nonresident if the local tax base is reduced (exit taxa tion)
• Outcomes of a hybrid mismatch
Resident companies are companies registered in Latvia and com panies incorporated in foreign countries that are registered in Latvia as branches or permanent establishments. All other companies are considered to be nonresident companies.
Payments made by a permanent establishment to a nonresident that owns the permanent establishment are treated as expenses that are equivalent to dividends (except expenses that are necessary for the economic activity of the permanent establishment and justified with third-party supporting documents, expenses related to the permanent establishment’s operations or general adminis trative and operational management expenses, to the extent of 10% of the eligible costs). Taxable income of nonresidents is income from business activities or related activities in Latvia. Tax is withheld from payments that residents (except natural persons) and permanent establishments make to nonresidents, if such pay ments are not subject to personal income tax (including remu neration for management and consultancy services, fees paid for the alienation of real estate located in Latvia, rental income and
dividends, interest payments, royalties and other payments to lowtax or tax-free countries or territories).
Tax rates. Resident companies are subject to tax at a rate of 20% on the gross taxable amount. The net taxable base (distributed profits and notional distributed profits) is divided by coefficient of 0.8 when determining the gross taxable base for the tax period.
Capital gains. Capital gains derived by resident companies are included in the taxable amount. The Latvian legislative acts provide an exception; the amount of distributed profit can be reduced by the portion of income derived from the alienation of shares if the holding period is at least 36 months (not applicable to the transfer of shares of an entity whose real estate proportion in the total amount of assets exceeds 50%). Withholding tax is not applied on capital gains derived by Latvian nonresidents without a permanent establishment in Latvia (except capital gains from real estate). For nonresident companies without a permanent establishment in Latvia, a final withholding tax at a rate of 3% 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. A taxpayer who is a resident of an EU country or a country with which Latvia has concluded a double tax treaty may choose to tax gains realized due to the sale of real estate located in Latvia or the sale of shares of a real-estate-rich company under the stan dard taxation regime. In this case, 20% tax applies to the profits gained from the sale of real estate.
Administration. The tax period is a calendar month. Tax returns must be filed by the 20th day of the following month. However, the income tax must be paid by the 23rd day of the following month.
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 dividends from the income earned abroad. Resident companies are allowed to decrease the dividend amount included in their taxable base by dividends that are received from a dividend payer who is a corporate income tax payer in its country of residence or by dividends received from which tax was withheld. This does not apply to dividends received from low-tax or tax-free jurisdictions or territories.
A resident company is entitled to reduce the amount of dividends included in the taxable base during the tax period to the extent that the resident company received the income from a foreign perma nent establishment during the tax period, if the foreign permanent establishment pays tax on the income received or withholding tax is withheld abroad from the income received. This is not applica ble to cases in which the permanent establishment is located or registered in the state or territory that has been recognized as a low-tax or no-tax state or territory in accordance with Cabinet Regulations.
C. Determination of taxable income
General. The net taxable base consists of distributed profits and notional distributed profits divided by a coefficient of 0.8 (see Corporate income tax and Tax rates in Section B).
Thin capitalization. For corporate income tax purposes, companies must include in the taxable base the following amounts:
• The amount of interest payments in proportion to the excess of the average liability over an amount equal to four times share holders’ equity at the beginning of the tax year less any revalu ation reserve
• If interest payments exceed EUR3 million in the accounting year, the amount of interest payments in excess of 30% of the profit stated in the income or loss statement prior to the calculation of the corporate income tax, increased by interest payments and calculated depreciation
The thin-capitalization rules do not apply to interest on loans obtained from the following:
• Credit institutions that are residents of Latvia, another EU/ European Economic Area (EEA) country or a country with which Latvia has concluded a double tax treaty that has entered into force
• 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
• Publicly traded Latvia, EU or EEA state debt securities
• Governmental financing, foreign trade lending or guarantee organizations, which are residents of a country with which Latvia has concluded a double tax treaty that has entered into force or are stated in the respective double tax treaty
The first calculation described above for calculating the limitation on the interest payments does not apply if the loans are obtained from financial institutions that are resident in Latvia, another EU/ EEA country or a country with which Latvia has concluded a double tax treaty that has entered into force and if such financial institutions provide crediting or financial leasing services and are under the supervision of credit institutions or the financial moni toring agency.
The thin-capitalization rules’ debt-equity ratio should not be applied for interest costs in the 2021 and 2022 financial years (special regulation as a result of the COVID-19 pandemic).
D. 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
Nature of tax Rate (%)
Supplies of medical products, infant products and tourist accommodation services 12
Fresh fruits, berries and vegetables, books and subscriptions 5 Exports 0
Social security contributions, paid by Employer 23.59 Employee 10.5
Property tax; rates applied to the cadastral value Standard rate; applicable to land, engineering structures and buildings, except for residential buildings 1.5
Increased property tax rate; applicable to buildings in poor conditions and uncultivated agriculture land 3 Rates 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
E. Miscellaneous matters
Foreign-exchange controls. The official currency of Latvia is the euro (EUR). No significant foreign-exchange controls are im posed 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, profitsplit and transactional net margin methods, may be used to assess whether the prices applied in controlled transactions are consis tent with the arm’s-length principle.
For transactions carried out on or after 1 January 2018, the fol lowing transfer-pricing documentation must be prepared and submitted to the tax authorities within 12 months after the end of the respective financial year:
• The Base Erosion and Profit Shifting (BEPS) Master File must be prepared and submitted if the annual amount of relatedparty cross-border transactions exceeds EUR5 million and the taxpayer’s net turnover exceeds EUR50 million or if the annual amount of related-party cross-border transactions exceeds EUR15 million.
• The BEPS Local File must be prepared and submitted if the amount of related-party cross-border transactions exceeds EUR5 million.
For transactions carried out on or after 1 January 2018, the fol lowing transfer-pricing documentation must be prepared within 12 months after the end of the respective financial year and sub mitted to the tax authorities within 1 month after request:
• The BEPS Master File must be prepared and filed after request if the annual amount of related-party cross-border transactions does not exceed EUR15 million and the taxpayer’s net turnover
does not exceed EUR50 million, but the annual amount of related-party cross-border transactions exceeds EUR5 million.
• The BEPS Local File must be prepared and filed after request if the amount of related-party cross-border transactions exceeds EUR250,000, but does not exceed EUR5 million. The Local File must include all transactions that exceed EUR20,000 in the particular financial year.
The Country-by-Country Report notification applies to all resi dent entities that are part of a qualifying group (the threshold is EUR750 million). The Country-by-Country Report for the finan cial year should be filed at the end of the respective financial year.
Transfer-pricing disclosures regarding the total amount of trans actions with related parties during the financial year must be included in the 12th month’s corporate income tax return, which is due on the 20th day of the following month.
The generally accepted practice for transfer-pricing issues is based on the Organisation for Economic 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’slength 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.
F. 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 with holding 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 Mainland 5/10 (a) 10 7
Croatia 5/15 (a) 10 10
Cyprus 0/10 (u) 0/10 (u) 0/5 (v)
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
Dividends Interest Royalties % % %
5/10 (a) 10 5/10 (b)
Greece 5/10 (a) 10 5/10 (b)
Hong Kong SAR 0/10 (z) 0/10 (w) 0/3 (x)
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)
Japan 10 10 0
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)
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)
North Macedonia 5 5 5/10 (l)
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 15 0/10 (w) 0/5 (y)
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
Vietnam 5/10 (aa) 10 7.5/10 (bb)
Non-treaty
jurisdictions 0/20 (e) 0/20 (e) 0/20 (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 part nership) 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 gov ernment, the central bank or any financial institution controlled by the gov ernment 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, cine matographic 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, cin ematographic 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, copy rights 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 fol lowing:
• 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 inter est in all other cases.
(u) The 0% rate applies if the beneficial owner of the dividends or interest is a company (other than a partnership). The 10% rate applies to dividends or interest in all other cases.
(v) The 0% rate applies if the beneficial owner of the royalties is a company (other than a partnership). The 5% rate applies to royalties in all other cases.
(w) The 0% rate applies if the interest is paid by a company that is a resident of a contracting state to a company (other than a partnership) that is a resident of the other contracting state and is the beneficial owner of the interest. The 10% rate applies to interest in all other cases.
(x) The 0% rate applies to royalties for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience, if the royalties are paid by a company that is a resident of a contracting state to a company (other than a partnership) that is a resident of the other contracting state and is the beneficial owner of the royalties. The 3% rate applies to royalties in all other cases.
(y) The 0% rate applies if the royalties are paid by a company that is a resident of a contracting state to a company (other than a partnership) that is a resident of the other contracting state and is the beneficial owner of the royalties. The 5% rate applies to royalties in all other cases.
(z) The 0% rate applies if the beneficial owner of the dividends is a company (other than a partnership). Dividends arising in the Hong Kong Special Administrative Region (SAR) are exempt from tax in the Hong Kong SAR if they are paid the following:
• The government of the Hong Kong SAR
• The Hong Kong Monetary Authority
• The Exchange Fund
• An institution wholly or mainly owned by the government of the Hong Kong SAR (as may be agreed from time to time between the competent authorities)
The 10% rate applies to dividends in all other cases.
(aa) The 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 70% of the capital of the payer of the dividends.
(bb) The 7.5% rate applies to royalties for technical services. The 10% rate applies to other royalties.