Latvia - Income Tax

Latvia - Income Tax

Taxation of international executives

1000

Related content

Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

Annual income return has to be filed between 1 March and 1 June of the following taxation year.

What is the tax year-end?

Tax year-end is the same as calendar year-end i.e. 31 December.

What are the compliance requirements for tax returns in Latvia?

Residents

If Latvian residents work under an employment contract with a Latvian company and the work is performed in the territory of Latvia, the employer withholds income tax at a flat rate from the employee’s income and pays the tax to the Latvian State budget on a monthly basis. At the year-end tax for other types of income is calculated and paid.

Latvian residents are required to report their worldwide income in Latvia. Worldwide income includes Latvian and foreign employment income and personal income, such as income from investments, rent, capital gains, business activity, non-taxable income and other types of income.

Annual tax returns have to be filed only to report the income about which the Tax Authority does not have information about in its databases – generally about income for which income tax is not payable by the income payer, for instance, about non-taxable income for the sale of personal property, foreign income etc. In order to obtain data about the information included in the Tax Authority’s databases, it can be looked up at the Electronic Declaration System (login with bank's ID data possible) of the Tax Authority or an income statement can be applied for electronically.

Income tax has to be paid within 15 days after filing the tax return. If the tax due is more than EUR 640, it can be paid in three instalments – by 16 June, 16 July and 16 August.

If in the taxation year the individual has gained taxable income in Latvia from which all Personal income tax has been withheld and paid, no tax return has to be filed.

There are specific provisions concerning the joint taxation of married taxpayers.

Non-residents

Latvian non-residents do not have to file annual tax returns unless they have gained taxable income in Latvia. If that is the case, the same filing and tax payment provisions as for a Latvian resident apply.

Tax rates

What are the current personal income tax rates in Latvia?

There is a flat Personal income tax rate of 23 percent.

There are special rates to particular types of income:

  • 10 percent on capital income such as dividends, interest, income from private pension funds and life insurance agreements with accumulation of funds
  • 15 percent on capital gains (shares, real estate, intellectual property).

Non-residents are taxed at the same rates as residents.

Tax rates applicable to employees

Standard personal income tax rate of 23 percent is applicable.

Tax rates applicable to independent (self-employed) professionals

Standard personal income tax rate of 23 percent is applicable.

Residence rules

For the purposes of taxation, how is an individual defined as a resident of Latvia?

An individual is regarded a Latvian resident if:

  • the individual’s declared place of residence is in Latvia or
  • the individual resides in Latvia for 183 days or more in any 12-month period which starts or ends in the taxation year or
  • the individual is a Latvian citizen employed abroad by the government of the Republic of Latvia.

In order to recognize the individual as a Latvian resident, at least one of the conditions mentioned above has to be met. When a foreign individual receives a residency permit in Latvia, he/she becomes a Latvian resident from the moment the residency permit is issued.

Double tax treaty provisions are also considered when defining an individual a resident of Latvia.

Is there, a de minimus number of days rule when it comes to residency start and end dates? For example, taxpayers can’t come back to the host country for more than 10 days after their assignments end and they repatriate.

An individual is considered a Latvian resident from the first day of arrival in Latvia after he/she has spent more than 183 days in Latvia in any 12-month period, so visits after assignment may extend residency.

In order to determine the 183-day period, the OECD Presence test is used when the days of arrival and departure, weekends, vacations spent in Latvia etc. are counted. An exception is the case when the individual cannot leave the country due to own illness.

What if the assignee enters the country before his/her assignment begins?

The same rules as mentioned above apply i.e. the assignee is considered a Latvian resident from the first day of arrival once 183 days have passed.

Termination of residence

Are there any tax compliance requirements when leaving Latvia?

The foreign taxpayer has to file a departure tax return before leaving Latvia if all the below criteria are met:

  • the individual is employed by a foreign employer in Latvia or an employer that does not have a permanent establishment in Latvia
  • the individual has stopped receiving income from this employer
  • he/she leaves the country and does not anticipate returning before the end of the taxation year.

If the foreign taxpayer earns income in Latvia that is taxable at the year-end but stops receiving such income during the taxation year and terminates any economic relations with Latvia, he/she has to file a tax return within 30 days after he/she has stopped receiving such income.

What if the assignee comes back for a trip after residency has terminated?

This depends on the precise circumstances. According to the OECD Presence test used in Latvia it could prolong the period of Latvian residence since vacation and work days spent in Latvia are counted. Even if Latvian residency is not prolonged, if the trip relates to business, the associated earnings could give rise to a Latvian tax liability. However, there are no mechanisms to closely monitor such situations.

Communication between immigration and taxation authorities

Do the immigration authorities in Latvia provide information to the local taxation authorities regarding when a person enters or leaves Latvia?

No, however, immigration and taxation authorities have some shared databases which means that if some information is registered in the database of the Office of Citizenship and Migration, for instance, about receipt of a residency permit, the Tax Authority can see it.

Filing requirements

Will an assignee have a filing requirement in the host country after he leaves the country and repatriates?

After departure tax return is filed – no.

Generally the income received for the work performed in Latvia, but paid by the foreign employer to the assignee after leaving Latvia and filing the departure tax return, would be taxable in Latvia and a tax return would have to be filed. However, the Tax Authority does not have tools to track such information, unless it specifically decides to check the individual and engages in time-consuming information exchange with foreign tax authorities.

Economic employer approach

Do the taxation authorities in Latvia adopt the economic employer approach1 to interpreting the Income from Employment article (Article 15) of the xxx treaty? If no, are the taxation authorities in Latvia considering the adoption of this interpretation of economic employer in the future?

No. There is no information this interpretation will be adopted in the future. However, there are some local rules similar to the economic employer approach.

De minimus number of days

Is there a de minimus number of days2 before the local taxation authorities will apply the economic employer?

Not applicable.

Types of taxable compensation

What categories are subject to income tax in general situations?

The following categories of income are subject to income tax:

  • Employment income, incl. bonuses, awards, fringe benefits, benefits in kind.
  • Income from self-employment.
  • Business income.
  • Capital income.
  • Capital gains.
  • Rental income.

Employment income is taxable when received. Employment income is subject to Latvian tax to the extent it was earned during a period of Latvian residence or, in the case of income earned while non-resident, to the extent it was earned in respect of duties performed in Latvia (subject to treaty relief).

Generally, all types of remuneration and benefits received by an employee for services rendered constitute taxable income, regardless of where paid (if the amount relates to work performed outside Latvia, it would be measured if the amount which is taxed is attributable to Latvia). Typical items of an expatriate compensation package set out below are, in most circumstances, fully taxable unless otherwise indicated:

  • Reimbursements of foreign and/or home country taxes.
  • School and kindergarten tuition reimbursements.
  • Home-leave reimbursements for the employee.
  • Cost-of-living allowances.
  • Expatriation premiums for working in Latvia.
  • Housing allowances.
  • Benefits-in-kind generally form part of taxable compensation. Where a company car is provided wholly or partly for personal use, special “car taxes” are generally paid by the employer.
  • Medical insurance premiums (subject to exceptions) and medical care expenses.
  • Flights home paid by the employer
  • Provided certain conditions are met and subject to limitations, the employer’s contributions to a private pension plan or insurance premiums are not taxable.

Tax-exempt income

Are there any areas of income that are exempt from taxation in Latvia? If so, please provide a general definition of these areas.

Contributions to private pension plans

Contributions made to private pension funds by employers can be excluded from the annual taxable income if the contributions made do not exceed 10 percent from the individual’s gross employment income for the taxation year.

Accident and health insurance premiums

Insurance premiums paid by the employer are excluded from the taxable income up to a limit of EUR 427 per year provided that:

  • The term of the life insurance agreement (with accumulation of funds) is not shorter than 5 years;
  • The term of the life, health and accident insurance agreement (without accumulation of funds) is not shorter than 1 year;
  • The provisions of the life, health and accident insurance agreement state that insurance award for the insurance case is paid to the insured person or his/her beneficiary.

The excess amount of premium payments is not considered as justified expenses and cannot be deducted from the taxable income.

Meals, lodging and transport

If expenses are incurred during business trip, the costs are fully non-taxable if there are justifying documents in place such as tickets and cash receipts.

Moving expenses

If the expenses have been incurred due to the employee’s work, they are non-taxable

Per diems

Per diems are tax exempt if the amount does not exceed the limits set for different countries in the Latvian tax legislation. If the limit is exceeded, then the excess amount is subject to payroll taxes.

Compensation for business use of private car

Compensations up to EUR 57 per month are tax exempt.

Sale of personal real estate

If the real estate has been owned by the individual for at least 60 months and has been his/her declared residence for at least 12 months prior to the sale of real estate, the proceeds are tax exempt.

Expatriate concessions

Are there any concessions made for assignees in Latvia?

There are no concessions for expatriates in Latvia.

Salary earned from working abroad

Is salary earned from working abroad taxed in Latvia? If so, how?

The taxation of salary earned from working abroad depends on an individual’s residency status and source of income.

As a rule, worldwide income of Latvian residents is taxable in Latvia.

If the individual has worked abroad he/she has to file annual income return and report in it the income earned abroad. If income tax has been paid abroad and it can be proved with a certificate on income and taxes paid, issued by the foreign tax authority, a credit or exemption method of double tax treaties can be applied.

Taxation of investment income and capital gains

Are investment income and capital gains taxed in Latvia? If so, how?

Capital gains are taxed in Latvia at 15 percent. Investment income is taxed at 10 percent.

Rental income is regarded as the individual’s business income and taxed at the standard 23 percent income tax rate. It is possible to apply 10% tax rate to rental income if business activity is not registered and the individual does not wish to deduct justified expenses from the income.

Gains from stock option exercises

Residency status Taxable at:
  Grant Vest Exercise
Resident N Y Y
Non-resident N Y Y

Capital losses

Loss carry-back or carry-forward is not possible for personal income tax purposes, except for the persons engaged in business activity.

Gifts

Gifts are non-taxable if received from spouse or close relative such as siblings, parents.

Gifts up to EUR 1425 per year from an individual (not a family member) are non-taxable. Several gifts up to EUR 1425 per year in total can be received from different individuals.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Latvia? If so, please discuss?

No.

Are there capital gains tax exceptions in Latvia? If so, please discuss?

If real estate has been owned by the individual for at least 60 months and has been his/her declared residence for at least 12 months prior to the sale of real estate, the proceeds are tax exempt.

General deductions from income

What are the general deductions from income allowed in Latvia?

The basic tax exempt amount of income is EUR 75 per month. The allowance for dependants is EUR 165 per month for each dependant. This rule does not apply to Latvian non-residents, except citizens of another EU or EEA country who have earned more than 75 percent of their worldwide income in Latvia.

Prior to calculating income tax on income, the following expenditures can be deducted from the annual taxable income:

  • The amount of social security contributions paid
  • Annual non-taxable minimum and allowance for dependants
  • Expenses for education, raising professional qualification and medical costs up to a limit of EUR 213 per year.
  • Medical expenses that can be included in justified expenses in full amount, for instance, for dentist’s services.
  • Payments to private pension funds – up to 10 percent from annual gross income.
  • Life and health insurance premiums if certain conditions for the insurance agreement are met – up to EUR 427 per year.

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Latvia?

Depending on the employer, gross-up is used in the tax year, or a bonus is paid in the following year to cover tax charges that the employer is to bear.

Calculation of estimates/pre-payments/withholding

How are estimates/pre-payments/withholdings of tax handled in Latvia? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), etc.

Payroll taxes (Personal income tax and social security contributions) are calculated by the employer on a monthly basis. Before the salary payment the employer withholds and pays to the Latvian state budget all the due tax amounts and transfers a net income to the employee. In this context they are withheld as you earn.

When are estimates/pre-payments/withholdings of tax due in Latvia? For example, monthly, annually, both, etc.

If the employee is on the company’s payroll, tax withholding is due every month. For individuals certain types of income have to be reported and the respective income tax paid quarterly or annually.

Relief for foreign taxes

Is there any relief for foreign taxes in Latvia?

Latvia has a broad network of bilateral tax treaties. Latvian domestic tax regulations also provide methods to avoid double taxation of income taxed outside Latvia.

If the individual is a resident of Latvia for tax treaty purposes, relief in respect of income taxable in the other state is generally given by using foreign tax credit rather than by exemption. A mandatory requirement for tax credit or exemption is a certificate issued by the foreign tax authority on income tax paid.

Practice shows that the Tax Authority allows a foreign tax credit also for countries with which Latvia does not have a double tax treaty, provided that the foreign tax payment is justified with a certificate about the income earned and income tax paid in the foreign country.

General tax credits

What are the general tax credits that may be claimed in Latvia? Please list below.

Latvia allows crediting foreign tax against Latvian tax liability arising on the same income or gains.

Sample tax calculation

This calculation3 assumes a married taxpayer resident in Latvia with two children whose three-year assignment begins 1 January 2011 and ends 31 December 2013. The taxpayer’s base salary is USD 100,000 and the calculation covers three years.

  2011

USD
2012

USD
2013

USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = LVL0.50.

Other assumptions

  • All earned income during the assignment is attributable to duties performed in Latvia and received from local sources.
  • The employee is considered a Latvian resident throughout the assignment.
  • Bonuses are paid out at the end of the taxation year along with December’s salary.
  • The company car is used for business and private purposes.
  • Education allowance covers only those studies that are required for work.
  • Foreign interest income becomes available to the employee at the end of December of each year.
  • Tax treaties and totalization agreements are ignored for the purposes of this calculation.

Calculation of taxable income

Year ended 2011

LVL
2012

LVL
2013

LVL
Days in Latvia 365 366 366
Earned income subject to income tax      
Salary 50,000 50,000 50,000
Bonus 10,000 10,000 10,000
Cost-of-living allowance 5,000 5,000 5,000
Net housing allowance 6,000 6,000 6,000
Company car 0 0 0
Moving expense reimbursement 0 0 0
Home leave 0 2,500 0
Education allowance 0 0 0
Total earned income 72,800 73,500 71,000
Other income 3,000 3,000 3,000
Total income 75,800 76,500 74,000
Total taxable income subject to payroll taxes 72,800 73,500 71,000

From 2011 taxes for car (Company car tax and Vehicle usage tax) are paid by the employer, therefore the car benefit is not included in the calculation.

Moving expenses are non-taxable in Latvia.

“Other income” includes foreign interest income which is subject to 10 percent tax, not to the standard 24 percent (in years prior to 2015 when PIT rate is 23 perectn). Personal income tax, therefore it is not included in payroll calculation.

Calculation of tax liability

  2011

LVL
2012

LVL
2013

LVL
Taxable income as above 72,800 73,500 71,000
Less:      
Social security contributions 8,008 8,085 7,810
Local allowances (annual):      
Non-taxable minimum 540 540 900
Allowance for dependents 1,680 1,680 1,920
Foreign tax credits 0 0 0
Latvian tax thereon 15,643 15,799 14,489
Tax on interest income 300 300 300

There is a flat Personal income tax rate in Latvia. In 2011 the rate was 25 percent, from 2013 – 24 percent. From 1 January 2015 the tax rate is 23 percent.

The rate for Social security contributions in 2011 was 35.09 percent (11 percent the employee’s part, 24.09 percent the employer’s part), from 2014 onwards – 34.09 percent (10.50 percent the employee’s part, 23.59 percent the employer’s part). The calculation above shows the employee’s part only.

Tax of 10 percent on foreign interest income is payable at the year-end when foreign income is reported through annual income return.

1Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.

2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach

3Sample tax calculation generated by KPMG Baltics SIA, a Latvian member firm of KPMG International.

© 2017 KPMG Baltics SIA, a Latvian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG International has created a state of the art digital platform that enhances your experience, optimized to discover new and related content.