Value-added Tax (VAT) in Latvia
According to the law “On Value-Added Tax”, adopted in March 1995, VAT has to be charged on any supply of goods or services, on the import of goods, as well as on self -consumption. Until June 30, 2012 VAT rates were 22%, 12% and 0%. Staring from July 1, 2012 VAT rate are 21%, 12%, 0%.
The supply of goods is the transfer of their ownership to another entity so entitling the latter to dispose of the transferred possession. The first sale after completion of the construction of a building is also regarded as the supply of goods.
The supply of services is a transaction based on activities carried out by an entity for a consideration. They include the activities of self-employed individuals, the transfer (sale) of any obligations, rights or intangible assets, obligations to refrain from activities or to accept any activity, as well as the lease of goods. Personal (self)-consumption is the supply of one's own goods and services to an entrepreneur, his family members, employees or other persons free of charge.
General VAT rate is 21%. The reduced VAT rate 12% applies to supplies to medicaments and medical devices, to supplies of specialized products intended for infants, to inland public transport services ( carriage of passengers and luggage in trams, trolley buses, city, district and long-distance busses, and inland and international trains, as well as inland flights), to supply of heating to inhabitants, to supply of electricity to inhabitants, to supply of natural gas to inhabitants, except for natural gas for motor vehicles.
Input and output VAT
The VAT system is based on the principle that the tax burden should be borne by the final consumer and is neutral to businesses. VAT taxpayers are entitled to deduct the tax paid on their supplies (input VAT) from the tax which they charge their customers (output VAT), if those incoming supplies ensure the entrepreneurial activity of the taxpayer.
The tax sums for the received goods or services set in the invoices may be deducted after the reception of the goods or services and the invoice or after the advance payment of the tax set in the invoice. Input VAT may be deducted on accrual bases without a payment of invoices for both goods and services.
Entities whose sales, excluding exempted sales, exceed 50000 Euro within a 12-month period are obliged, within the following 30 days, to register as VAT payers with the tax authority.
VAT payer has rights to deduct VAT which was paid before VAT registration certificate was received. There are few exceptions for deducting VAT for company recently registered as the VAT payer. It is not allowed to deduct administration expenses (office rent, telecommunication expenses, fuel, transport rent), if goods are bought more then 12 month before registration as the VAT payer or services are received 3 month before registration as the VAT payer.
Mandatory VAT registration
The law stipulates occasions when EU companies have to register as VAT payers in Latvia:
- If an EU-registered VAT payer supplies goods to a Latvian entity not registered as a VAT payer and that supply exceeds 35000 Euro within a 12 month period;
- Regardless of amount, if a recipient is non VAT registered person and the excised goods are to be supplied or goods are to be installed in Latvia;
- If the services provided are related to culture, art, education, science, sport or real estate – regardless of the amount;
- If the provided services relate to warehousing, transportation of goods or relate to movable property (such as repair, assessment, maintenance), except leasing services.
If a real estate (or any part thereof) is sold or put into operation within 10 years of the date of purchase, part of the VAT deducted at the time of purchase must be repaid to the government. The amount is calculated as 1/10 of the deducted input tax multiplied by the number of years remaining until the end of said 10 year period (from the date of purchase or placement in to operation). This repayable input tax amount is included in the value of the real estate, and a buyer shall not be entitled to deduct it as input tax.
VAT paid on goods and services purchased for the construction and repair of buildings is deductible. VAT deductions do not apply to VAT paid on the construction of facilities used for VAT-exempt businesses or community infrastructure, such as apartment buildings, sports, medical and educational facilities, if the community facilities do not relate directly to the commercial activities of the company.
Any VAT deducted shall be repaid to the state if the real estate is sold within 10 years of its purchase or if it has been used for VAT-exempt transactions.
VAT paid on goods purchased and services received in Latvia by a company which is registered as a VAT payer in any EU country, and is not actively engaged in business activities in Latvia, may be refunded.
VAT paid on goods purchased and services received in Latvia by a company from any third country which is not registered as a company in Latvia may be refunded according to the reciprocity principle.
VAT refunds may be requested in the following cases:
- the term for which VAT repayment is requested is between 3 and 12 months, and VAT paid for goods and services totals more than 400 Euro
- the term for which VAT repayment is requested is calendar year, or period less than 3 months and these are the last months of calendar year and VAT paid for goods and services are more than 50 Euro.
Documents required for VAT repayment are the application form, invoices (originals), payment documents and a statement from the appropriate tax authority that the company is registered as VAT payer in another country.
VAT paid by an individual from any third country on goods of value greater than 35.57 Euro purchased in Latvia and brought out of the EU may only be refunded by licensed companies.
Investment in equity
There are rules effective January 1, 2002 determining that it is possible to invest property in equity of other company without restriction to deduct paid VAT.
The State Enterprise register has granted us a license to provide evaluation opinions of value of shares and stock for purposes of investment in kind in equity of a company.
Importing fixed assets
In case of import of fixed assets (except cars), not intended for leasing companies, VAT factually shall not be paid, namely, it is shown as VAT payable and deductible. A new limitation is imposed, requiring in instances when asset value exceeds 71143,59 Euro to report within next 5 years to tax authorities on use of assets for VAT exempt activities, if any exempt supplies are VAT made, proportion of how much VAT may be deducted shall be calculated. The proportion is calculated as all taxable supplies without VAT (including transactions with 0% VAT rate) divided by all transaction exempt from VAT. If proportion (including exempt transactions) is changed within a year, adjustment of the VAT deductible shall be made.
If systematically and continually price is charged to buyer below commercially substantiated level, at the end of a taxation year additional VAT shall be charged on the omitted difference, except discounts.
Intra – community acquisitions
If a Latvian-registered VAT payer receives goods from an EU-registered VAT payer, they have to show VAT as payable and deductible in their VAT declaration, based on the invoice received. If a Latvian non-VAT-registered entity receives goods from an EU-registered VAT payer, and the total value of the goods received exceeds 10000 Euro, the Latvian entity have to register as a VAT payer in Latvia.
Changes to the VAT law, effective May 1, 2004, introduce the concept of VAT fiscal representatives. If the responsibility for VAT payment lies with a fiscal representative, it is mandatory that the Latvian VAT registration number, name and registered address of the VAT representative are mentioned in VAT invoices. In addition, VAT invoices must include the following items:
- Date and number of invoice
- Supplier’s and recipient’s names, addresses and VAT numbers
- Date of supply
- Type of goods or services and quantity supplied
- Prices and applicable discounts
- VAT rate and amount plus cost of goods without VAT
- If 0% rate is applied or responsibility of tax payment is on the recipient of the goods or services – reference to a respective article of VAT law on which zero rate is based, the same is true for fiscal representatives.
Non-EU persons (for example, US companies) may register via fiscal representation in any EU country based on local rules as VAT payer. Use of the registration number in Latvia will be accepted for VAT zero export on triangle transactions as described below.
There is a seller, a broker and a buyer in triangle transaction. All the persons mentioned before shall be VAT registered in different EU countries. Goods ought to be supplied upon instructions of the broker to the buyer. Invoices issued by the brokers will be subject to VAT 0%, if recipient of goods is VAT registered person.
Zero-rated supplies and exemptions
Pursuant to the law, the following groups of supplies and services are subject to the 0% VAT rate:
- export of goods if documents show that the goods have been transported outside the EU
- services which are related to export of goods outside the EU
- services which are defined as “not supplied within Latvia”
- goods and services related to the maintenance and service of international transportation
- certain tourism services
- on the basis of reciprocity, services and goods related to diplomatic and consular officers enjoying immunity
- certain services, if the recipient is a non-resident, such as assignment, transfer or grant of intellectual property rights; services related to advertising and public relations; legal, accounting, audit, consulting, interpretation, expert, engineering, market research, and management services, services of patent offices; data processing; exchange of know-how, supply of information; supply of staff, except education and training services; leasing except real estate and vehicles; telecommunication services; broker agency services
A number of goods and services are exempt from VAT, e.g. certain services with an educational value or cultural function, the sale of shares and not-newly constructed real estate, lotteries as well as land.
The 0% VAT rate for intra-community supplies is applied if the recipient of goods is an EU entity which is registered with its home country’s VAT register and transport documents demonstrate that the goods were actually delivered. The 0% rate is also applied to intermediaries who re-sell goods to end consumers within EU countries. Reports on such intra-EU supplies must be submitted to tax authorities quarterly.
VAT owed to the government must be paid on a monthly basis by the 15th day of the following month or, with the agreement of tax authorities, by the 25th day of the following month for companies with multiple branches. Monthly VAT returns are also required to be filed. The annual VAT declaration is due no later than by May 1 of the following year.
Penalties for breach of the VAT law are 100% in amount of 100% the tax not paid. Penalty applies also to increase of claims for VAT refund and amounts which refer to the next VAT period (month), for example, VAT deduction is made before a term.
Valters Gencs, founding partner and attorney at law of the Gencs Valters Law Firm in Riga.
Practising in fields of Value-added tax (VAT) in Latvia, Estonia, Lithuania.
T: +371 67 24 00 90
F: +371 67 24 00 91