Personal Income Tax
The law “On Personal Income Tax”, adopted in 1993, sets out taxation of individuals' personal income.
Expatriates are liable for Latvian taxes depending on their tax residency. Latvian residents are taxable for their worldwide income. Non-Latvian residents are liable for their income derived in Latvia.
Pursuant to the domestic legislation, an individual will be regarded as a resident of Latvia, if:
- the permanent place of residence of that person is Latvia;
- the person resides in Latvia for 183 days or longer in any given 12-month period commencing or finishing during the taxation year;
- the person is a citizen of the Republic of Latvia employed abroad by the Latvian government.
As a general rule, persons who do not match to the above-mentioned categories are considered to be non-residents of Latvia for tax purposes.
An individual, who has not been considered to be a resident during the year prior to that when taxation is due, is considered to be a resident from the date they entered Latvia during the taxation year.
An individual, who is not considered to be a resident during a post-taxation year, is not considered to have been a resident for that period of the taxation year after the date that they left Latvia, provided that during that period the person had closer ties with another country than with Latvia.
Closer ties with another country may be demonstrated by ownership of property in that country, contributions to that country’s social security system, or the fact that the expatriate’s family is residing abroad.
An actual presence test is used to ascertain how many days an individual has been in Latvia. When the test is applied, the following days are included in the calculation as full days: days of partial presence (less than 24 hours), days of entry and departure, Saturdays and Sundays, public holidays, days of annual leave, and periods of illness, except when the illness has prevented the departure of the person.
On the other hand, certain periods are not included when determining residency. These are periods of less than 24 hours spent in transit in the course of a trip between two points outside Latvia.
Taxation of Latvian residents
Minimal wage is 360 Euro. Latvian residents are liable to personal income tax that is withheld at source and remitted to the tax authorities at a flat rate of 24%.
The taxable income of residents is computed as below:
Less: personal allowance
Less: allowance for dependants
Less: (on a monthly basis) social security tax of 10,5%
Less: (on an annual basis) deductible expenses incurred in the course of obtaining intellectual property rights
Less: (on an annual basis) deductible expenses for health care and education ( EUR 213,43) per person and (EUR 213,43) per dependant.
Less: (annually) – donations to qualifying organizations
Less: contributions to private pension funds and insurance premium
(10% of gross income)
Equals: taxable income
Times: tax rate of 24%
Gross income less social tax and personal income tax
Equals: income after taxes
Annual income tax declarations must be submitted by June 1 of the following year.
Certain individual income is exempt from income tax in Latvia. A brief summary of exempt items is specified below:
- income from agricultural production and the provision of rural tourism services, if it does not exceed 2845 Euro a year;
- lottery wins.
- income obtained as a result of inheritance, except author’s fees (royalty) which is paid to the inheritors of the copyright;
- allowance (alimony);
- income from sale of personal property excluding income from sale of object created or obtained for selling and income from capital and capital gain;
- income from sale of immovable property that is owned by seller more than 60 months and is declared domicile of him at least 12 months prior concluding the purchase agreement;
- compensation paid by an employer to an individual (final consumer), provided the individual purchases a certain amount of goods from that company;
- insurance monies received – except compensation payments for life, health or accident insurance if premiums were paid by employers – upon expiration or breach of agreements;
- gifts from individuals in amount up to 1425 Euro per taxation year or with no limit if it is received from relative;
- income derived from Latvian state or municipality treasury bills;
- certain business travel expenses;
- a number of government benefits;
- dividends paid by Latvian or EU, EEZ member state companies;
- income from deposits in banks registered in Latvia or EU, EEZ member states;
- income from the sale of personal property, which has been held for a period more than 12 months starting from the day the property is registered in the Land Register
- sale of investment certificates.
Taxation of self employed persons
Until 1st January 2008 there were differences in taxation between an individual who are engaged in a business activity and taxation of companies. It was a discrimination of two different types of taxpayers who were both doing the same activity but were taxed at the different levels – an individual at 25% rate but company at 15% rate. Since 1st January 2008 the law provides that an individual who is engaged in a business activity may choose to pay a fixed income tax if the income does not exceed 14229 Euro per annum. The rate of such tax depends from the amount of income gained by this taxpayer (approximately 5% from income). However, if the income exceeds 14229 Euro an individual shall pay 722,45 Euro plus 7% from sum that exceeds 14229 Euro to tax authorities. .
Following 5 years and in cases when the individual has not chosen to pay the fixed income tax the tax rate for individuals who are engaged in a business activity is set at 25%.
There are few exemptions for this taxation system. For example, if individual is economically dependent from the person to whom services are provided, received remuneration will be considered as salary still 24% income tax will be payable, however, the person from who the individual is economically dependent will pay the tax to tax authorities.
Taxation of non-residents
Personal income tax paid abroad may be credited against tax payable in Latvia, but not more than 25% of the income taxed abroad. To credit foreign paid tax, statements from foreign tax authorities must be submitted to the Latvian tax authorities. Allowances and deductions are not permitted for non-residents.
Expatriates who have received remuneration abroad and stayed in Latvia for more than 183 days within any 12 month period starting or ending within a year, or who have received Latvian residence permit, must fill a Latvian individual income tax declaration, except where tax treaty exemptions are applicable.
Below are some guidelines on how to become fully taxable in Latvia and obtain personal tax exemptions in home countries.
Individuals may become non-taxable in Norway if they stay abroad for 1 year and submit proof of foreign tax paid, or if they stay outside Norway for 4 years.
If Swedish residents stay out of Sweden for more than 6 months, and are not in Sweden for more than 36 days, their income may be exempt from tax in Sweden.
Only individuals having their residence or their habitual place of abode within Austria are taxable on their world-wide income. Residence will be assumed to be at the place where the tax subject is staying if circumstances lead to the opinion that they will continue to keep and use this home. The habitual place of abode is assumed to be in Austria, if a person is not staying in Austria just temporarily (a stay of less than 6 months).
Taxation of capital gains
Capital gain is difference between sales price of capital asset and value of acquisition, as well as difference between liquidation quota and value of investment.
The value of acquisition depends on how the capital asset is acquired.
Income from capital gain is taxed at a rate 15%.
As regarding to income gained by non-resident from sale of capital assets (other than financial instruments) based in Latvia, the income is taxed at a rate of 2% if the payer of income withholds the tax at the place of income payment.
Capital gains are summed in the taxation period if within the taxation period several capital assets are sold. If the calculated capital gain or its total amount is negative, it is ignored for tax purposes. However, if the capital gains of the taxation year from the sale of one capital asset is negative, but from the other – positive, the resulting losses may be covered by the positive capital gain.
Income from capital other than capital gain is taxed at a rate 10%.
Income from capital other than capital gain by Latvian law includes dividends from company shares and stocks and income from other rights (not deriving from debt obligations) to participate in distribution of profit and income from private partnerships, interest income and similar income, also income related to interest income, income from investment in private pension funds and incomes from life insurance agreements with savings;
In general, the day, when income is deemed to be received, is the day, when a person receives money or other things.
If the income from capital gain is to be received during several taxation periods, it is deemed that income is gained in that taxation period, when the income is actually received.
If the income from capital gain is to be received in more than 3 taxation periods (as from the year of sale agreement), it is deemed that income is gained in the first 3 taxation periods.
In case of shares swap (without any other consideration), the day of income is the day, when the swapped shares are sold.
As regards to the income from capital the day of income is the day, when the income is calculated. Day of dividend income and respectively the day of dividend income disbursement is the day, when the dividends are calculated. However, if dividends are calculated for the publicly listed companies, the day of dividend income is the day, when dividends are paid.
As from January 1, 2010 income from payment into private pension funds are taxable income. The tax rate is 10% as this income is classified as income from capital other than capital gain.
The day of income from investment into private pension funds is the day when the payment is received.
Payments to EU/EEZ based pension funds and insurance companies; not exceeding 10 % of annual taxable income (counted jointly with health insurance payments) is exempt income.
Foreign tax credits
Personal income tax paid on investment instruments within EU or territories with which EU has agreements regarding saving income, is creditable without limitation in Latvia.
Currently, Latvia has Conventions for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital in effect with Albania, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bulgaria, Canada, China, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Kazakhstan, Kyrgyzstan, Korea, Lithuania, Luxemburg, Macedonia, Malta, Moldova, the Kingdom of Morocco, the Netherlands, Norway, Poland, Portugal, Romania, Serbia, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Tadzhikistan, Turkey, United kingdom, Ukraine, United States of America and Uzbekistan.
Personal income tax paid in the above-mentioned countries by Latvian residents may be offset against individual income tax payable in Latvia and vice versa, or in the case of Lithuania, exemptions may be applicable.