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Latvia - Income Tax

Latvia - Income Tax

Taxation of international executives

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Tax returns and compliance

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?

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 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:

  • Latvian resident has performed business activity in Latvia;
  • Foreign income is received;
  • Income tax has not been paid by the income payer;
  • Additional income tax has to be paid in connection with progressive tax rates;
  • Additional income tax has to be paid in connection with applied non-taxable minimum.

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.

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?

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 rate on income up to EUR20,004 per year;
  • 23 percent rate on income from EUR20,004.01 to EUR62,800 per year;
  • 31.4 percent rate on income exceeding EUR62,800.

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:

  • Capital gains (including real estate) – 20 percent;
  • Dividends – 0 percent if received from income taxed with CIT, or on which PIT was applied. 20 percent in other cases;
  • Interest and similar income from capital – 20 percent;
  • Profit element of income from private pension funds and life insurance agreements with accumulation of funds – 20 percent.

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

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:

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.

Residence rules

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, and
  • they leave the country/jurisdiction 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, 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.

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/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.

Economic employer approach

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.

De minimus number of days

Is there a de minimus number of days 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) 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.

  • Reimbursements of foreign and/or home country/jurisdiction 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. 

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.

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 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. 

Accident and health insurance premiums

Insurance premiums are deducted from the taxable income up to a limit of EUR426.86 per year provided that:
 

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.

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, costs are fully non-taxable if there are justifying documents in place such as tickets and cash receipts. 

Moving expenses

If 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/jurisdictions 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 EUR57 per month are tax exempt. 

Sale of personal real estate

The proceeds are subject to tax (some exceptions apply). 

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 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. 

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 20 percent.

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).

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;
  • If received from an individual (regardless if they are a family member) and used to cover medical services (except cosmetic surgeries);
  • If received from an individual (regardless if they are a family member) and used to cover higher education and all levels of vocational education, expenditure for the acquisition of a specialty (occupation, profession, trade) in State accredited education institutions of Latvia, or in training institutions of the EU Member States and EEA States upon acquiring State accredited education programs.

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.

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?

The proceeds are tax exempt, if the real estate:

  • it is owned by the individual for at least 60 months and it has been their declared residence for at least 12 months prior the alienation of real estate;
  • it is owned by the individual for more than 60 months and the last 60 months it is the only real estate the individual owns prior the alienation of real estate;
  • the income from real estate alienation is invested in functionally similar real estate within 12 months before or after the alienation of the real estate.
  • Other very specific exceptions apply.

General deductions from income

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.

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.

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 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.

Other assumptions

  • All earned income during the assignment is attributable to duties performed in Latvia and received from local sources.
  • The employee is considered to be 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. Company car tax is paid for the respective car by the employer.
  • The employee has registered their children as dependents with the Latvian tax authority.
  • 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.
  • The employee has submitted their Salary tax book with the Tax authority.

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.

Footnotes

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.

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