Taxation of international executives
When are tax returns due? That is, what is the tax return due date?
Annual income tax return has to be filed between 1 March and 1 June of the year following the taxation year. If income exceeds EUR62,800 annual income tax return has to be filed between 1 April and 1 July of the year following the 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 from the employee’s income applying progressive tax rates 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 if:
It is possible to obtain data about the information included in the Tax Authority’s databases in the taxpayer’s Electronic Declaration System account (login with a Latvian bank’s ID data).
Income tax has to be paid within 15 days after filing the tax return. If the tax due is more than EUR640, it can be paid in three instalments – by 16 June, 16 July and 16 August.
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?
Latvia imposes progressive tax rates on personal income and on income derived by self-employed individual’s commercial activities, at the following rates:
20 percent and 23 percent tax rates are applicable by the employer only if salary tax book is filed with the employer. If no salary tax book is filed, the employer applies 23 percent tax rate and the tax must be adjusted in annual tax return.
There are special rates applied to particular types of income:
Non-residents are taxed at the same rates as residents.
For the purposes of taxation, how is an individual defined as a resident of Latvia?
An individual is regarded a Latvian resident if:
1) the individual’s declared place of residence is in Latvia or
2) the individual resides in Latvia for 183 days or more in any 12-month period which starts or ends in the taxation year, or
3) 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, they become 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/jurisdiction 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 they have 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/jurisdiction due to own illness.
What if the assignee enters the country/jurisdiction before their assignment begins?
The same rules as mentioned above apply i.e. the assignee is considered a Latvian resident from the first day of arrival after 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, they have to file a tax return within 30 days after they have stopped receiving such income.
What if the assignee comes back for a trip after residency has terminated?
This depends on the particular circumstances. According to the OECD Presence test used in Latvia it could prolong the period of Latvian residence since vacation and workdays 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.
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/jurisdiction after they leave the country/jurisdiction and repatriates?
After departure tax return is filed – no.
Generally, the income received for the work performed in Latvia, but paid 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.
Do the taxation authorities in Latvia adopt the economic employer approach 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?
A similar approach has been adopted – personnel lease.
Is there a de minimus number of days before the local taxation authorities will apply the economic employer?
Not applicable.
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) or for the benefit of the Latvian employer.
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.
Intra-group statutory directors
Will a non-resident of Latvia who, as part of their employment within a group company, is also appointed as a statutory director (i.e. member of the Board of Directors in a group company situated in Latvia trigger a personal tax liability in Latvia, even though no separate director's fee/remuneration is paid for their duties as a board member?
Yes.
a) Will the taxation be triggered irrespective of whether or not the board member is physically present at the board meetings in Latvia?
Yes.
b) Will the answer be different if the cost directly or indirectly is charged to/allocated to the company situated in Latvia (i.e. as a general management fee where the duties rendered as a board member is included)?
Yes.
c) In the case that a tax liability is triggered, how will the taxable income be determined?
Double tax treaty will need to be considered.
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 can be deducted from the annual taxable income if those do not exceed 10 percent from the individual’s gross employment income but not more than EUR4,000 in the taxation year. Such payments can also be made by the employer for the benefit of the employee, the same limitations apply.
1) The term of the life insurance agreement (with accumulation of funds) is not shorter than 10 years;
2) The term of the life, health and accident insurance agreement (without accumulation of funds) is not shorter than 1 year;
3) 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 their beneficiary.
If expenses are incurred during business trip, costs are fully non-taxable if there are justifying documents in place such as tickets and cash receipts.
If 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/jurisdictions in the Latvian tax legislation. If the limit is exceeded, then the excess amount is subject to payroll taxes.
Compensations up to EUR57 per month are tax exempt.
The proceeds are subject to tax (some exceptions apply).
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 they have 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?
Rental income is regarded as the individual’s business income and taxed at the progressive income tax rate. It is possible to apply 10 percent tax rate to rental income if business activity is not registered and the individual does not wish to deduct justified expenses from the income (a separate application should be submitted with the Latvian tax authorities in such case).
Residency status | Taxable at: | ||
Grant | Vest | Exercise | |
Resident | N | Y | Y |
Non-resident | N | Y | Y |
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:
Gifts up to EUR1,425 per year from an individual (not a family member) are non-taxable. Several gifts up to EUR1,425 per year can be received from different individuals.
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?
The proceeds are tax exempt, if the real estate:
What are the general deductions from income allowed in Latvia?
From 1 January 2018 there is a differentiated non-taxable minimum, which is calculated for each individual individually. Latvian tax authorities twice a year (until 1 January and until 1 August) recalculates the forecasted non-taxable minimum. The non-taxable minimum can be applied in the calculation of wages if employee has submitted salary tax book. Individuals are entitled to non-taxable minimum if their taxable income do not exceed EUR14,400 per year.
The allowance for dependents is EUR250 per month for each dependent.
The above-mentioned rules do not apply to Latvian non-residents, except citizens of another EU or EEA country/jurisdiction who have earned more than 75 percent of their worldwide income in Latvia.
Social security contributions are deductible for income tax purposes at 20 percent rate.
Expenses for education and medical costs up to a limit of EUR600 per year per each family member are considered as eligible.
Payments to private pension funds and life insurance (with accumulation) up to 10 percent from annual gross income, but not more than EUR4,000 per year, are considered as eligible as well.
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.
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 calculation assumes a married taxpayer resident in Latvia with two children whose 3-year assignment begins 1 January 2018 and ends 31 December 2020. The taxpayer’s base salary is 100,000 US dollars (USD) and the calculation covers 3 years.
|
2018 |
2019 |
2020 |
|
USD |
USD |
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: USD1,0000 = EUR0.90.
Calculation of Taxable Income
Year ended |
2018 |
2019 |
2020 |
Days in Latvia |
365 |
365 |
366 |
|
EUR |
EUR |
EUR |
Earned income subject to income tax |
|||
Salary |
90,000 |
90,000 |
90,000 |
Bonus |
18,000 |
18,000 |
18,000 |
Cost-of-living allowance |
9,000 |
9,000 |
9,000 |
Net housing allowance |
10,800 |
10,800 |
10,800 |
Company car |
0 |
0 |
0 |
Moving expense reimbursement |
0 |
0 |
0 |
Home leave |
0 |
4,500 |
0 |
Education allowance |
0 |
0 |
0 |
Total earned income |
127,800 |
132,300 |
127,800 |
Other income |
5,400 |
5,400 |
5,400 |
Total income |
133,200 |
137,700 |
133,200 |
Total taxable income subject to payroll taxes |
127,800 |
132,300 |
127,800 |
According to Latvian rules, if the Latvian Company car tax is paid (by the employer) for the particular car, the benefit (car usage for private purposes) is not considered to be subject to tax (in such case the car may be used for business and for private purposes without any limitations).
“Other income” includes foreign interest income which is not subject to payroll taxes.
Calculation of Tax Liability
|
2018, EUR |
2019, EUR |
2020, EUR |
Total earned income as above |
127,800 |
132,300 |
127,800 |
Local allowances (annual): |
|
|
|
Non-taxable minimum* |
0 |
0 |
0 |
Allowance for dependents** |
4,800 |
5520 |
6,000 |
Less: |
|
|
|
Social security contributions (employee’s part)*** |
14,058 |
14,553 |
14,058 |
Personal income tax (PIT): |
|
|
|
20% PIT rate |
4001 |
4,001 |
4,001 |
23% PIT rate**** |
8049 |
9843 |
9,843 |
31.4% PIT rate |
22,859 |
21,823 |
20,410 |
Total income tax on income: |
34,909 |
35,667 |
34,254 |
Reliefs: |
|
|
|
For Social/ solidarity tax |
2812 |
2911 |
2,812 |
For Dependents |
960 |
1104 |
1200 |
For non-taxable minimum |
0 |
0 |
0 |
For higher tax relief as solidarity taxpayer |
7644 |
7298 |
6825 |
Income tax to pay |
38,781 |
38,950 |
37,067 |
Tax on interest income |
1200 |
1200 |
1200 |
* From 2018 there is a differentiated non-taxable minimum, which is calculated for each individual individually. In 2018 if individual’s monthly earned income exceeds EUR1,000 (EUR12,000 per year), the individual is not entitled to a non-taxable minimum. In 2019 the individual is not entitled to a non-taxable minimum if the earned monthly income exceeds EUR1,100 (EUR13,200 per year). And in 2020 the individual is not entitled to a non-taxable minimum if the earned monthly income exceeds EUR1,200 (EUR14,400 per year).** Allowance for dependents in year 2018 was EUR200 per month per each dependent. In year 2019 it was EUR230, in year 2020 it is EUR250.
***The rate for Social security contributions from 2018 onwards – 35.09 percent (11 percent the employee’s part, 24.09 percent the employer’s part). The calculation above shows the employee’s part only.
****From 2018 there is a progressive personal income tax rate (20, 23 and 31.4 percent). 20 percent and 23 percent tax rates are applicable by the employer only if salary tax book is filed with the employer. As the employer has not filed salary tax book and is paying social security contributions in Latvia, the employer is subject to tax rate of 23 percent. .****The income cap for Social security contributions in year 2018 was EUR55,000 (in year 2019 and 2020 EUR62,800) per year. Employment income in year 2018 above EUR55,000 (in year 2019 and 2020 EUR62,800) is subject to Solidarity tax. The Solidarity tax is paid on monthly a basis in the same manner and at the same rates as for social security contributions (the total rate is 35.09 percent in year 2018, 2019 and 2020). 8.4 percent of the Solidarity tax paid is transferred into the taxpayer’s personal income tax account in order to cover the higher personal income tax rate when the annual income tax return is filed.
Tax of 20 percent in 2018,2019 and 2020 on foreign interest income is payable at the year-end when foreign income is reported through annual income return.
1. Certain 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/jurisdiction 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/jurisdiction employer but the employee’s salary and costs are recharged to the host entity, then the host country/jurisdiction 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/jurisdiction.
2. For example, an employee can be physically present in the country/jurisdiction for up to 60 days before the tax authorities will apply the ‘economic employer’ approach
3. Sample tax calculation generated by KPMG Baltics SIA, a Latvian member firm of KPMG International.
Disclaimer:
All information contained in this publication is summarized by KPMG Baltics AS, a Latvian limited liability company and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The information contained in this publication is based on law “On personal income tax”, the Web site of Ministry of Finance Republic of Latvia, law “On State social insurance”, the Web site of State Social Insurance Agency.
© 2021 KPMG Baltics AS, a Latvian joint stock companyand a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.