Taxation of international executives
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?
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.
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.
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:
Non-residents are taxed at the same rates as residents.
Standard personal income tax rate of 23 percent is applicable.
Standard personal income tax rate of 23 percent is applicable.
For the purposes of taxation, how is an individual defined as a resident of Latvia?
An individual is regarded a Latvian resident if:
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.
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:
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.
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.
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.
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.
Is there a de minimus number of days2 before the local taxation authorities will apply the economic employer?
What categories are subject to income tax in general situations?
The following categories of income are subject to income tax:
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:
Are there any areas of income that are exempt from taxation in Latvia? If so, please provide a general definition of these areas.
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.
Insurance premiums paid by the employer are excluded from the taxable income up to a limit of EUR 427 per year provided that:
The excess amount of premium payments is not considered as justified expenses and cannot be deducted from the taxable income.
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.
If the expenses have been incurred due to the employee’s work, they are non-taxable
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.
Compensations up to EUR 57 per month are tax exempt.
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.
Are there any concessions made for assignees in Latvia?
There are no concessions for expatriates in Latvia.
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.
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.
|Residency status||Taxable at:|
Loss carry-back or carry-forward is not possible for personal income tax purposes, except for the persons engaged in business activity.
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.
Are there additional capital gains tax (CGT) issues in Latvia? If so, please discuss?
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.
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:
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.
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.
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.
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.
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.
|Moving expense reimbursement||20,000||0||20,000|
|Interest income from non-local sources||6,000||6,000||6,000|
Exchange rate used for calculation: USD1.00 = LVL0.50.
Calculation of taxable income
|Days in Latvia||365||366||366|
|Earned income subject to income tax|
|Net housing allowance||6,000||6,000||6,000|
|Moving expense reimbursement||0||0||0|
|Total earned income||72,800||73,500||71,000|
|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
|Taxable income as above||72,800||73,500||71,000|
|Social security contributions||8,008||8,085||7,810|
|Local allowances (annual):|
|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.
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