Thinking beyond borders
Business travelers are likely to be taxed on their employment income received for work performed in Latvia.
An individual is considered 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.
Double tax treaty provisions are also considered when defining an individual as resident of Latvia.
In order to determine the 183-day period, the Organization for Economic Co-operation and Development (OECD) presence test is used when the days of arrival and departure, weekends, vacations spent in Latvia etc. are counted. An exception may be made in cases where the individual cannot leave the country due to illness.
Technically, there is no minimum threshold/number of days that exempts the employee from the requirements to file tax returns and pay income tax in Latvia. To the extent that the individual qualifies for relief in terms of the employment income article of an applicable double tax treaty, there will be no Latvian tax liability.
The following categories of income are subject to income tax in Latvia:
Generally, all types of remuneration and benefits received by an employee from his/her employer for services rendered constitute taxable income, regardless of where it is paid (if the amount relates to work performed outside Latvia, it would be measured if the amount which is taxed is attributable to Latvia), unless specifically exempted. Typical items of an expatriate compensation package set out below are, in most circumstances, fully taxable unless otherwise indicated:
There is a flat personal income tax rate of 23 percent (in 2015).
There are special rates applied to particular types of income:
Non-residents are taxed at the same rates as residents.
There is an income cap for social security contributions of EUR 52,400. Employment income above EUR 52,400 is subject to solidarity tax which is calculated and collected in the same way as social security contributions but the employee does not receive social benefits from this amount (pension and allowances). In effect it is uncapped contributions with capped benefits.
Employers and employees who are liable for social security contributions in Latvia pay it considering the upper income limit of EUR 48 600 (in 2015). It is likely, however, that most extended business travelers would not be liable for Latvian social security. This could be mostly due to the following:
The standard rate of social security contributions is 34.09 percent, from which 10.50 percent is the employee’s part and 23.59 percent is the employer’s part. There are differentiated rates, unlikely to apply to expatriates, for working individuals of pension age, self-employed individuals and some other groups of socially insured individuals.
Tax returns are filed between 1 March and 1 June following the tax year-end. If in the taxation year the individual has gained taxable income only in Latvia from which all personal income tax has been withheld and paid, no tax return has to be filed.
Employment income is subject to income tax and social security contributions under the Pay-As-You-Earn (PAYE) system. If an individual is taxable on employment income, the obligation to withhold rests with either the employer or, if the employer is not operating withholding, it rests with the ‘host’ employer or the employee himself/herself. The employer has a monthly payroll reporting liability.
If foreign nationals wish to reside in Latvia for more than 90 days within a 6-month period, they must obtain a visa or residence permit. Citizens of EEA, EU Member States and Switzerland do not require visas or residence permits, but must obtain a registration card from the Office of Citizenship and Migration Affairs if their stay in Latvia exceeds 90 days.
Citizens from other countries who enter Latvia with or without a visa are not allowed to exercise economic activities in an employed capacity. Citizens from other countries can be employed only in cases which are stated in Latvian legislation and if they have received a visa and a work permit.
In addition to Latvia’s domestic legislation that provides relief from international double taxation, Latvia has entered into double taxation treaties with more than 50 countries to prevent double taxation, and allow cooperation between Latvian and overseas tax authorities in enforcing their respective tax laws.
There is the potential that a permanent establishment (PE) could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has. Respective double tax treaties should be considered to clarify each situation.
The standard value-added tax (VAT) rate is 21 percent. There is also a reduced rate of 12 percent. There are several transactions which are subject to VAT at the rate of 0 percent or are VAT exempt.
All transactions between related parties must be at arm’s length, including domestic. Legislation amendments are in the final approval phase to impose specific documentation requirements. Latvia has implemented several transfer pricing rules in corporate income tax law and the law on taxes and duties.
A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of an entity in another jurisdiction, in other words, a cross-border benefit is being provided. This would also be dependent on the nature and complexity of the services performed.
Latvia has data privacy laws. Organizations have a legal duty to keep data private and secure.
There are no exchange controls in Latvia.
Practically all the costs except for payments to private pension funds, premiums for life insurance agreements, medical and education expenses – all subject to limitations – are non-deductible.