Corporate income tax
In the new Latvian Corporate Income Tax Act (hereinafer – the Act) a conceptually new regime for payment of the corporate income tax was established. The act intends to postpone payment of the tax until the profit is distributed or in other way redirected to the expenses that do not ensure further development of the taxpayer, i.e. taxation is transferred from the moment of the derivation of profit to the moment of the distribution of profit. Thus the tax shall be paid notwithstanding the amount of income gained within the year only in a case that the taxpayer distributes profit in dividends or comparable expenses, carries out tasks unrelated to economic activity, increased interest payments, provides loans to related persons, etc.
The tax is paid only by inland companies (including partnerships), institutions funded by the state or municipality’s budget, the income of whose economic activity are not intended for the budget, permanent establishments and foreign corporate companies and other foreign persons that generate income in Latvia.
The tax is paid also by individual (family) companies (including farms and fisherman’s households) that draw up annual report according to the Act on the Annual Financial Statements and Consolidated Financial Statements.
However, the tax is not paid by physical entities (individuals), societies and endowments, religious organizations, trade unions, political parties, as well as private pension funds, investment funds, alternative investment funds, etc.
The Act maintains the special tonnage tax payment routine.
Article 4 of the Act defines base taxable by enterprise income tax, made up of distributed profit, and conditionally distributed profit.
As a distributed profit are considered the following:
1) calculated dividends, including extraordinary dividends;
2) expenses equalized to dividends;
3) conditional dividends (calculated according to the Article 7 of the Act).
Dividends received from other corporate companies are not liable to a tax, thus the standards of the Act provide for a possibility to lower the dividends included in the taxable base of the taxation period, in an amount that the taxpayer, within the relevant period, has received dividends from another taxpayer. In addition, the taxpayer is entitled to attribute the margin which originates if the sum of received dividends is higher than the sum of dividends calculated within the taxation period that is included in the liable base, for the next taxation periods.
Considering that separate subjects distribute profit, the expenses of which, are not defined as dividends for the participant, a wider list of dividends has been included in the Act, meaning, expenses equalized to dividends in relation to profit of cooperative partnership, individual (family) company and farms or fisherman’s household profit, part of partnership’s profit disbursement, and permanent establishment of a non-resident.
The conditionally distributed profit included in the taxable base (i.e. is taxed), is made up of:
1) expenses not related to economic activity, calculated according to Article 8 of the Act;
2) insecure debtors’ debts, calculated according to Article 9 of the Act;
3) increased interest payments, calculated according to Article 10 of the Act;
4) loan to the related person, calculated according to Article 11 of the Act;
5) income that the taxpayer would have received or expenses that the taxpayer would not have incurred if the commercial and financial relationship would had been formed or established according to the provisions that would be valid between two independent persons and if among these related persons (one of which is the taxpayer), the value of the transactions concluded would be consistent to the market price (value), the methods for calculation of which, are established by the Cabinet of Ministers.
6) goods that the non-resident allocates to their employees or members of the board (council), notwithstanding weather the beneficiary is a resident or a non-resident, if they are attributed to operation of a permanent establishment in Latvia;
7) liquidation quota.
The taxable base includes (i.e. the tax is paid) expenses unrelated to ensuring economic activity and other expenses listed in Iten 2 of second Part of Article 4 of the Act. The taxable base does not include (i.e. is not taxed) representational expenses and expenses for events for sustainability of personnel, not exceeding five percent of pre-taxation year’s gross wage of which the national social insurance contributions have been paid, if these expenses are accounted, divided from other expenses.
The tax is not payable on undistributed profits.
The tax on calculated dividends are imposed at the level of a company, applying a 20 percent tax rate, i.e. dividends received by physical entities (individuals) shall not be imposed with personal income tax. The rest profit that is diverted for covering such expenses that do not ensure a further development of the company, shall also be imposed with a 20 percent rate.
Note that in the calculation of the tax, determining the taxable base, the taxable object’s value is divided at a 0.8 ratio. For example, if the dividends calculated for payment are 100, the tax shall be 25 (100 / 0.8 x .02).
Tax rate of a non-resident’s income is determined according to Article 5 of the Act. The tax, at the moment of payment, has to be withheld from such payments to non-residents:
1) reimbursement for managing and advisory services – 20 percent of reimbursement amount;
2) from a reimbursement for sale of immovable property – three percent of the reimbursement sum;
3) payments to persons located, formed or established in low-tax or tax-free states or zones – 20 percent of payment sum.
In general case, the taxation period is a calendar month. Meaning, the tax declaration has to be submitted and tax paid once a month – until the 20th date of the next month.
For separate taxpayers, the taxation period is a quarter if, according to Article 8 of the Accounting Act, they are entitled to record source documents once per quarter.
Tax relief for contributors is set out in the Act (Article 12) that can be applied by a taxpayer who donates to a public service organization, budget institution or a state corporation that carries out the state’s culture functions delegated by the Ministry of Culture. The taxpayer may choose one of these tax reliefs:
1) not to include the donated sum into taxable base of the taxable period, but no more than the amount equal to five percent of the profit of previous financial year after calculated tax;
2) not to include the donated sum into base taxable by enterprise income tax of the taxable period, but no more than the amount equal to two percent of the total employees’ gross wage payment, of which national social insurance contributions have been paid within the previous financial year;
3) decrease the calculated enterprise income tax of the dividends calculated in the taxation period of the previous financial year by 75 percent of the donated sum, but no more than 20 percent of the calculated enterprise income tax sum for the calculated dividends.
Limitation mentioned in item 1, 2 or 3, applies to the total amount of donations within the financial year.
Tax relief for taxpayers carrying out the agricultural activity (Article 14), is applied by lowering the taxable base of the financial year by 50 percent of the sum received as state aid for agriculture or European Union’s aid to agriculture and development of the country.
A taxpayer is entitled to lower the amount of dividends included in the taxable base of the taxation period for income gained from the sale of direct participation, if the period of holding these shares is at least 36 months at the moment of the sale(Article 13).
The taxpayer, the enterprise income declaration of which on 31 December 2017 shows a loss, may lower the tax calculated for dividends of the financial year (starting in 2018) by the sum calculated in 15 percent amount of the total loss sum not covered. If this sum is not completely used in 2018, the remaining sum of loss may be applied to the tax which is calculated from dividends in the next four financial years. The sum of mentioned tax decrease cannot exceed 50 percent of the tax calculated from the dividends in the relevant financial year (Paragraphs 13 and 14 of transitional provisions).
Taxpayer whose aided investments project has been accepted by the Cabinet of Ministers by 31 December 2017, in accordance with the Article 17.2 of the Corporate Income Tax Act, is entitled to continue to apply the unused enterprise income tax discount by decreasing the tax from dividends during the taxation period (Items 20-22 of transitional provisions).
The corporation is entitled to lower the tax calculated from dividends for the financial year by the sum of enterprise income tax’s discount, calculated in accordance with the Act on Application of Taxes in Free Ports and Special Economic Zones (Items 23-25 of transitional provisions).
Submission of tax declaration
The taxpayer submits a single declaration to the SRS for the period from January to June of 2018, and pays the enterprise income tax by 20 July 2018. During the rest months of 2018, the declaration is submitted and taxes paid monthly by the 20th date of next month.
If the taxpayer does not have a taxable object in the month, it is entitled not to submit the declaration (excluding declaration for the last month of the financial year).
If the taxpayer has not submitted a declaration for taxation period by 20th date, it is considered that that during the taxation period, the taxpayer’s taxation period has not made a base taxable with enterprise income tax, and declaration is submitted, but the declaration submitted after the 20th date is considered a correction of the declaration of taxation period, except declaration for the last month of financial year.
The taxpayer whose financial year does not comply with the calendar year, draws up a financial (mid-period) statement and enterprise income tax declaration for calculation of tax:
1) in accordance with provisions of the Corporate Income Tax Act and according to the Cabinet of Ministers’ regulations from 29 September 2015, no.548 “Regulations on declaration of enterprise income tax taxation period and advance payment calculation” for the period from the start of the financial year to 31 December 2017 and submits it to the SRS by 30 April 2018;
2) in accordance with the Corporate Income Tax Act together with balance and calculation of profit or loss for the period from 1 January 2018 until the end of the financial year, is submitted to the SRS, but no later than four months after the financial year has ended.
Tax advance payments
The Act does not provide for paying the advance payment except during the transitional period from 1 January until 30 June 2018.
Taxpayer executes advance payment of enterprise income tax into the state budget until 20th date of each month for the period from 1 January to 30 June 2018 that corresponds with one-twelfth of the tax calculated for the taxation period of 2016 (without applying the discount to donators stated in Article 20.1 of the Corporate Income Tax Act).
The advance payments mentioned are taken into account when executing tax payment calculated in accordance with declaration for the taxation period from 1 January to 30 June 2018.
Amendments to the Micro-enterprise Tax Law
On the 28 July 2017, Saeima adopted the Law on Amendments on Micro-enterprise Tax Law that was published on 8 August 2017 in “Latvijas Vēstnesis” No.156 (5983), and shall enter into force on 1 January 2018.
On Micro-enterprise turnover
The set limitation of turnover for micro-enterprise taxpayers has been changed. The acceptable turnover in a calendar year cannot exceed 40 000 euros.
Law’s transitional conditions state that the micro-enterprise taxpayer is allowed in the taxation years 2018 and 2019 to not apply the 20 percent micro-enterprise tax rate for exceeding the turnover limitation up to 52 000 euros if the micro-enterprise taxpayer’s pre-taxation yearly turnover or its turnover that exceeded 40 000 euros before the pre-taxation year.
For employing an employee in a micro-enterprise
A physical entity as an employee of micro-enterprise taxpayer can only be employed in one micro-enterprise. From 1 January 2018, the State Revenue Service shall not register a micro-enterprise employee as a worker in a micro-enterprise if he is employed in another micro-enterprise.
The State Revenue Service has an obligation to inform the micro-enterprise taxpayers about employees that are also employed with another micro-enterprise taxpayer on 31 December 2017 in the Electronic Declaration System.
If the micro-enterprise taxpayer’s employees, who are employed in several micro-enterprises at the same time on the 31 December 2017, shall be employed in such a way in 2019, then while calculating the micro-enterprise tax, the micro-enterprise shall add two percentage points to their 15 percent micro-enterprise tax per every such employee, and starting 2020, shall lose their status of micro-enterprise taxpayer.
The essential amendments in the Law on Personal Income Tax
On 28 July 2017, the Saeima adopted the Law on Amendments of the Law on Personal Income Tax that shall enter into force on 1 January 2018.
Progressive personal income tax rate
1. The tax rate that has to be paid for the taxable minimum is:
- 20 % – yearly income up to 20 000 euros;
- 23 % – yearly income part that exceeds 20 000 euros, but does not exceed 55 000 euros;
- 31,4 % – yearly income part that exceeds 55 000 euros.
2. Wage’s tax rate to be paid from the monthly taxable minimum is:
- 20 % – monthly income up to 1667 euros;
- 23 % – monthly income part that exceeds 1667 euros.
3. If the taxpayer has not submitted the tax booklet to the employer, the work’s income is taxed at a rate of 23%.
4. Income from royalties for literary works, including works made, published, executed or used otherwise in the press and other mass media, within the taxation year, is taxed at a 20% tax rate.
5. If the taxation year’s income of a taxpayer does not exceed 20 000 euros, the taxable income of the tax calculation is decreased by eligible income, the differentiated non-taxable minimum, and relief set in the law.
6. If the taxation year’s income of a taxpayer exceeds 20 000 euros (monthly income – 1667 euros), the income part that exceeds 20 000 euros (1667 euros) may be decreased by eligible income and relief set out in the law only in case that the taxpayer’s yearly income up to 20 000 euros (1667 euros) are not enough to cover the mentioned deductions.
7. When submitting the yearly income declaration, the personal income tax is reimbursed in cases and amount stated in the law, where a tax rate of 20% is applied.
8. If a taxpayer is a person to whom another country’s social insurance system applies, and the gained work income per month does not exceed 4538 euros, the payer of the income applies a tax rate of 31.4% to the exceeded sum.
9. A tax rate of 31.4% is applied, when submitting a yearly income declaration, and the tax paid, includes a part of solidarity tax, established according to the Law un Solidarity Tax
Non-taxable minimum and relief
10. The State Revenue Service’s forecasted monthly non-taxable income is applied at the place of income in which a wage tax booklet is handed in during a taxation year. Information about the SRS’s forecasted monthly non-taxable minimum applied to the employee, using the Electronic Declaration System, informs the employer each year by 1 January and 1 August.
11. Yearly differentiated non-taxable minimum is applied by submitting a yearly income declaration. Depending on the taxpayer’s calculated yearly differentiated non-taxable minimum’s amount, the taxpayer may be liable to personal income tax premium and an obligation to submit yearly income declaration.
12. Yearly non-taxable minimum for a pensioner has been amended:
- Year 2018 – 3000 euros;
- Year 2019 – 3240 euros;
- Starting 2020 – 3600 euros.
13. Starting 1 July 2018, the law provides for additional relief for a taxpayer for sustain an unemployed spouse, who has a dependent person:
- A child younger than 3 years;
- Three or more children under 18, or under 24, one of which is at least under seven, while the child continues to receive an education;
- Five children under 18 or under 24, while the child continues to receive an education.
14. The deductible expenses of the taxpayer or his family are allowed to be subtracted from the yearly taxable income, not exceeding 50% of the taxpayer’s income, but no more than 600 euros. If the family members’ deductible expenses are included – no more than 600 euros per family member.
15. The amendments of the law state that the deductible expenses include payments into private pension funds and insurance premium payments, according to a life insurance contract (with fund saving), each of which does not exceed 10% of the taxpayer’s taxable income, but no more than 4000 euros per year.
16. National social insurance contributions, or payments equalized to payments carried out in accordance with the European Union member states’ or European Economic zone states’ normative enactments is not deduced as a deductible expense if one of these conditions is met:
- Taxpayer’s – as an owner of an individual company (including farm or fisherman’s household) – payments of national social insurance contributions for themselves are included in the expenses of the economic activity;
- The object of those payments is not taxed in the Republic of Latvia.
17. A tax rate of 20% shall be applied to the income from capital, including an increase of capital, starting 1 January 2018.
18. The income from the transaction for the ncrease of capital, still in progress by 31 December 2017, the personal income tax rate of 15% is applied.
19. The rate applied to a non-resident, if the tax from asset sale income, is withheld at the moment of payment. The payer shall have to withhold 3% of the paid remuneration.
20. Dividends (including conventional dividends, and income similar to dividends) are not taxed with a personal income tax if they are taxed with a 20% enterprise income tax, in accordance with the new Corporate Income Tax Act, or if the enterprise income tax or personal income tax is paid abroad.
21. Dividends paid from the profit that is taxed with the corporate income tax by 31 December 2017 have to be taxed by personal income tax in 2018 and 2019 by applying a tax rate of 10%.
22. Partnership’s member income (Latvian and foreign partnerships if it is a taxpayer of foreign enterprise income tax, or of similar tax), is income eqalized to dividends.
23. Income equalized to dividends, received from individual company (farm or fisherman’s household) is not taxed with personal income tax if corporate income tax is paid in accordance with the Law on the Enterprise Income Tax.
24. Deadline for submission of declaration on income from capital, is changed, depending on the income received within the quarter:
- If it exceeds 1000 euros, the declaration is submitted once every quarter by 15th date of the next month;
- If it does not exceed 1000 euros, the declaration is submitted by January 15, following year.
Physical entity’s economic activity
25. A limitation for expenses of economic activity of 80% from the total income of the economic activity, is implemented.
26. The following expenses of economic activity are to be incorporated in full amount:
- Wage and employer’s obligatory payments of national social security, including solidarity tax;
- Real estate tax;
- Depreciation of fixed assets;
- Compensation to tenants for emptying the living accommodations, and annulment of rent contract in accordance with overhaul of living accommodations or rebuilding the accommodations for managing economic activity.
27. Expense limitation amount is not applied to the first two years of economic activity and for the year in which the economic activity has been terminated or the liquidation process has ended.
28. Definite methods for calculation of depreciation of fixed assets are set out.
29. The law provides decreased royalties from 1 January 2018 to a person who, in accordance to the normative enactments, has been established as a person with 1st or 2nd group of disability.
30. Draw of lots and gambling winnings that exceed 3000 euros, except the instant lottery “Simtgades loterija”, goods and services lottery winnings, are taxed with personal income tax.
The essential amendments in the Law on National Social Insurance Contributions
Law on Amendments of the Law on National Social Insurance Contribution has been adopted on 27 July 2017 that has been published on 8 August 2017 in the official publication “Latvijas Vēstnesis” No.156 (5983), and enters into force on 1 January 2018.
Rate of national social insurance contributions (hereinafter – contributions) has been amended
If the employee is insured against all social insurance types, the contribution rate is 35.09 percent, 24.09 percent of which are paid by the employer, and 11 percent – by the employee.
An obligation to self-employed persons who are not recipients of royalties, to make contributions for insurance of pension
A self-employed person, just like up to now, if their income per month reach or exceed the amount of minimum wage have to pay contributions from contribution object which are freely chosen income that is not below the minimum wage.
If the income per month for a self-employed person reach or exceed minimum wage, in addition to contributions that are set out in the current procedure, it has to pay a contribution once per quarter in the amount of at least 5 percent of the difference between the freely chosen object of contributions, and the actual income.
If the income per month for a self-employed person does not reach the minimum wage, it has to pay contributions into insurance of pension in the amount of at least 5 percent. Payment for insurance of pension does not have to be done if the income of self-employed does not reach 50 euros during the financial year.
Contributions for receivers of royalties
The provision that allowed the receiver of royalties not to pay contributions from the royalties as a self-employed person, if it is both an employee and receives royalties, has been excluded from the law. Thus, the receiver of royalties, if their income per month reaches or exceeds the minimum wage, have to pay contributions as a self-employed person from the object of contributions that are freely chosen income that exceed the minimum wage.
The law has been supplemented, stating what is the payer of royalties (copyrights and related rights remuneration).
Payer of royalties (copyrights and related rights remuneration), excluding collecting society, has an obligation to pay contributions from their funds in amount of 5 percent of the royalties (copyrights and related rights remuneration) to its receiver’s national pension insurance, as well as submitting a report to the SRS for the contributions made for insurance of pension from royalties (copyrights and related rights remunerations).
Type of social insurance – health insurance
The Cabinet of Ministers has to develop and submit a bill to the Saeima on funding of health care, stating cohesion between the payments done and receiving health care services.
Together with the mentioned law for funding health care coming into force, a new type of social insurance shall come into force – health insurance.
A part of contributions, corresponding to one percent of the contribution rate, is due to funding health care service.
Article has been drawn up based on information prepared by the Tax Administration of the SRS