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Company formation in Latvia

Advantages of a Latvian company

The company formation in Latvia creates an opportunity to trade with both European companies and the companies in the Eastern markets. Latvia as the European Union member country provides Latvian companies access to the European Union markets. Latvia’s competitive advantages: convenient geographical position and knowledge of Russian language and market, provide opportunities to penetrate the Eastern market, as well.

Latvia has introduced significant tax incentives making Latvia competitive with the other European countries. Among them the low corporate income tax – 15% should be mentioned, as well as, the participation exemption rules allowing tax exemption for the capital gains arising from the sale of shares (holding company regime). There are no withholding taxes on royalty, interest and dividend payments (except for payments made to low tax countries), thus facilitating profit repatriation.

The company formation process in Latvia is straightforward, Latvian laws are friendly and provide equal treatment of the foreign and local investments. Latvia has supportive business environment, providing access to reliable and skilled workforce, developed infrastructure in line with international standards and lower business expenses compared with many of the European countries. Furthermore, World Bank’s Doing Business Survey 2012 has ranked Latvia as the world’s 25th easiest place to do business.

The Latvian company formation sometimes provides an opportunity to minimize business administrative costs and to streamline the business processes. Combination of favorable tax regime with the holding company structures provides tax saving opportunities and tax efficient profit repatriation.

Prior to the company establishment our team will help you to discover the opportunities Latvia can provide to your business, gain the necessary information about company formation, applicable taxes and give an insight into all other requirements for doing business in Latvia.

How to use a Latvian company?

The foreign investors usually select Latvia as a place for conducting the following business activities:

  • Trading company. Latvian companies are used for the purpose of trading within EU and countries of CIS. Furthermore, the geographical position of Latvia and transport capabilities allows to use the Latvian companies as a hub for trading between the East and West. A Latvian trading company could be used for trading with the EU countries, since it is straightforward to register it as VAT payer required for intra-community supplies. The sale of goods to the European countries will be subject to zero-rated VAT, meanwhile the input VAT paid will be fully recoverable for the Latvian company. It is important to note that that there is a special VAT regime applicable to the import of the goods from the third countries, meaning that the VAT on import is self-accounted (not paid), thus providing cash flow savings.
  • Contract manufacturer. Very often foreign groups establish in Latvia entities for the purpose of contract or toll manufacturing. The reason for this is motivated workforce, low costs, and favorable tax regime for manufacturing entities – low corporate income tax rate – 15%, generous capital allowances for fixed assets and acquisition of new technological equipment and a tax incentive for the large investments.
  • Latvian holding company. Latvian holding company regime is attractive since it has participation exemption and does not impose any restrictions on ownership of shares in the operating companies. As mentioned above, in most cases capital and profit repatriation are free from withholding taxes, except for the payments to the off-shore jurisdictions. According to the recent global developments, a number of offshore jurisdictions have joined the OECD convention on sharing of the information and therefore are not considered as offshore jurisdictions anymore.
  • Shared service centers. The developed infrastructure, highly skilled workforce, and low costs allow creating effective service centers, such as logistic management, IT etc.
  • Trade with securities. The income from the sale of securities traded on the stock exchange is exempt from taxation. Therefore, a Latvian company could be established to trade with the listed securities – stocks, shares, bonds etc.
  • Micro-business. If the annual turnover of a business does not exceed EUR 100,000, a Latvian company using micro-tax regime could be opted for. This allows reducing the tax burden to 9% of the revenues (not profit), instead of paying corporate income tax and payroll taxes. Such structure usually is suitable for service companies (marketing, consulting etc.), having low costs and high-profit margin.
  • Latvian branch of the foreign company. For trading purposes, a foreign company established  offshore may create a Latvian branch and use it for purchase/sale of the goods within the EU and/or between the EU and third countries. The benefit of the of the Latvian branch is that it provides a transparency of the activities that is becoming a mandatory requirement of the banks for opening a bank account and also solves the problem of the information exchange between the tax authorities of the countries involved.
  • A representative office could be established by the foreign company to conduct marketing and other support (non-business) operations in Latvia. The establishment of a representative office in Latvia is straightforward. The representative office is not treated as the corporate income tax payer in Latvia and does not pay other taxes except for payroll taxes. The representative office is often used as a vehicle to obtain a temporary residence permit.
  • Large investment relief. A multinational group of companies can reduce its overall total tax burden by establishing a manufacturing company in Latvia, making investments eligible for tax incentives and shifting the most functions and risks from the high-tax jurisdictions to Latvia. A Latvian manufacturing company investing at least EUR 7 million in assets in qualifying industries (manufacturing, IT and telecommunications) within the 3-year period may obtain a corporate income tax credit amounting to 25% of the investment made up to (EUR 50 million) and 15% of the amount in excess. Relief is available upon completion of the project. Any unclaimed portion can be carried forward to 16 years.

The forms of doing business in Latvia could be qualified as follows:

  • Limited liability company
  • Public limited liability (joint-stock) company
  • Partnership
  • Branch
  • Permanent establishment
  • Representative office (for non-business or preparatory activities).

Our services

We supply the complete scope of services required to open a company in Latvia and ensure additional services, including accounting and legal services, as follows:

  • Registration of a company with the Registry of Enterprises of Latvia
  • Registration of a branch of the foreign company with the Registry of Enterprises
  • Registration of a permanent establishment of the foreign company with the State Revenue Service
  • VAT registration with the State Revenue Service
  • Accounting services.

Latvian company registration process in brief

In general the process of the registering the company in Latvia is as follows (the following activities are described for a limited liability company):

  • As the first step the shareholder should provide us detailed information as follows:
    • preferred name (or several possible names) of the company;
    • information regarding shareholder (name, passport details and address of residence for individuals, legal address for a company)
    • value of the share capital, number of shares
    • information regarding the board member(s).
    • other information may be required.
  • Based on information provided by a client, we draft the documents required for the registration of a company in Latvian and English (or Russian). Some of the documents should be notary attested or signed with an electronic signature.
  • Prior to registering a company, a temporary bank account should be opened and at least 50% of share capital shall be paid in the account. Usually, the temporary bank account is opened by us based on the power of attorney.
  • When the share capital has been paid, the documents are submitted to the Enterprise Registry for review and registering the company.
  • The company is registered within 3 working days if regular stamp duty is paid (EUR 143) and within 1 working day if triple stamp duty is paid.
  • Once a company is established a temporary bank account should be transformed into permanent. The newly established company’s representative presence could be required to open a permanent bank account. Usually, it depends on a particular client and the references the client can provide to the bank. However, there is an option to open the bank account remotely based on the power of attorney.
  • After the registration of the company, it should sign the agreement with the tax authorities for access to electronic declaration system through which all tax returns must be submitted

Furthermore, we provide more detailed information regarding possible legal forms of carrying business in Latvia.

Limited liability company

Limited liability company is the most commonly used form of business in Latvia. Its share capital can be paid in cash or contributed in kind. The minimum share capital value is 2,840 EUR and at least a half of it has to be paid in cash. Until applying for registration in the Register of Enterprises (ER) at least a half of the share capital has to be paid, the remaining part must be paid within one year’s time from the date the company has been registered in ER.

The basic requirements for limited liability company are as follows:

  • The company is managed by the board which must have at least one board member. There are no restrictions regarding the residence of the board member (it could be also a non-resident). The board member may or may not be an employee of the company or it may exercise his/her power based on other arrangement with the company, e.g. power of attorney.
  • There are no restrictions regarding the residence of the shareholders and board members
  • The company could be managed and the shareholders/board meetings may happen outside Latvia
  • The procedure of company registration can be performed remotely, based on the power of attorney (however, in case of visiting Latvia the process will be substantially faster and easier
  • A minimum share capital of EUR 2 800 is required, at least half of which must be paid up prior to registration
  • Legal address of SIA (i.e. official office address) has to be in Latvia

Documents to be submitted (2 and more founders, there are differences in case with 1 founder)

  • Application Form
  • Founding Agreement/Resolution of the sole shareholder
  • Articles of association
  • Bank’s reference on payment of share capital, or for investment in kind
  • Register of shareholders
  • Consent of council shareholders (in case if the council is established)
  • Consent of the board members
  • Notice of board for legal address
  • The real estate owner’s consent for the registration of the company’s legal address
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for ER stamp duty fee payment
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for publication in “Latvijas Vestnesis”

The fees and timing

  • Single stamp duty/ processing time: 142 EUR / 3 working days
  • Triple stamp duty/ processing time : 426 EUR / 1 working day
  • Stamp duty for the certification of a signature ER: 4 EUR (if the certification is submitted for 3 or more signatures in a single registration for each certification of a signature stamp duty of 3 EUR)
  • Publication in “Latvijas Vestnesis”

Based on our experience, when the shareholder is a foreign entity or individual, a simplified establishment time can make up to approximately one week.

Limited Liability Company with reduced share capital

Limited Liability Company with reduced share capital is a company whose share capital value is less than 2,800 EUR. Before applying for registration share capital has to be signed and paid, in addition, until applying for the company registration it must be paid up in cash.
The company must meet the following requirements of the Commercial Law:

  • The number of founders of the company should not exceed five individuals
  • The board of directors should consist of one or more members, and they all have to be shareholders of the company
  • Each shareholder can be only a member of a single limited liability company with reduced share capital

Every year limited liability company with reduced share capital should create a minimum reserve by making a deduction of at least 25 % of the year’s net profit. The statutory reserve, based on shareholders meeting can be used to:

  • Increase the share capital
  • Cover losses of annual report, if they are not covered by the previous annual report
  • Cover losses of previous financial year if they are not covered by the annual report

Documents to be submitted (2 and more founders, there are differences in case with 1 founder)

Documents to be submitted are similar to those required to limited liability companies. The difference is in the document which confirms the payment of share capital. In this case it can be confirmation of shareholders or bank reference.

The fees and timing

For registration of a limited liability company with reduced share capital the amount of fees are reduced.

  • Single stamp duty/ processing time: 22 EUR / 3 working days
  • Triple stamp duty/ processing time : 64 EUR / 1 working day
  • Stamp duty for the certification of a signature ER: 4 EUR (if the certification is submitted for 3 or more signatures in a single registration for each certification of a signature stamp duty of 3 EUR)
  • Publication in “Latvijas Vestnesis”: 15 EUR

Public Limited Company (Joint-stock company)

A public limited company is a public company and its shares can be public- traded.
The share capital of a public limited company cannot be less than 35,500 EUR. If the share capital is set above 35,500 EUR, then by applying for registration the entire share capital has to be signed, but the paid up share capital has to be not less than the statutory minimum share capital 35,500 EUR and not less than 25 % of the signed share capital (the rest is paid up no later than in one year’s time from the date of signing the Founding Agreement).

The public limited companies, depending on the type of their activity, have different minimum amounts of share capital (for example, the financial sector (banking, insurance, non-bank lending)).

Documents to be submitted (2 and more founders, there are differences in case with 1 founder)

  • Application Form
  • Founding Agreement
  • Articles of association
  • Bank’s reference on payment of share capital, or for investment in kind
  • Consent of council members, if necessary
  • Consent of board
  • Notice of board for legal address
  • The property owner’s agreement for registration companies legal address
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for ER state fee payment
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for publication in “Latvijas Vestnesis”

The fees and timing

  • Stamp duty/ processing time: 355 EUR / 3 working days
  • Stamp duty for the certification of a signature ER: 4 EUR (if the certification is submitted for 3 or more signatures in a single registration for each certification of a signature stamp duty of 3 EUR)
  • Publication in “Latvijas Vestnesis”: 27 EUR

Partnership

There are two forms of partnership in Latvia: general partnership and limited partnership.

General partnership is a partnership, which is aimed to perform commercial activities by using a joint company and a public agreement provided that a liability towards creditors is limited, united in two or more persons (members). The persons (members) could be legal persons or individuals, as well as, an already existing partnership.

A limited partnership is a partnership, which is aimed to perform commercial activities by using joint company united in two or more persons (members), where the liability of at least one member towards creditors is limited, according to the amount of his investment while other person’s liability is not limited. The persons (members) could be legal persons or individuals, as well as an already existing partnership.

The partnership is registered in the Registry of Enterprises of Latvia by its legal address. General partnership name shall conclude Latvian word Pilnsabiedrība (General Partnership) or abbreviation PS. A limited partnership shall conclude Latvian word Komandītsabiedrība (Limited Partnership) or abbreviation KS. General and limited partnership do not have requirements on equity capital.

Documents to be submitted

  • Application Form (Form 3)
  • Notarized signature that confirms partnership member’s rights to represent the partnership (in case of individual)
  • Notice of board for legal address
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for ER state fee payment
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for publication in “Latvijas Vestnesis”

The fees and timing

  • Stamp duty/ processing time: 143 EUR / 3 working days
  • Stamp duty for the certification of a signature ER: 18 EUR
  • Publication in “Latvijas Vestnesis”: 27 EUR

Branch registration

According to the Commercial Law a branch is an organizationally independent part of a company which is geographically or otherwise distinct from the main company, and the business on behalf of the main company is being conducted systematically.

Documents to be submitted

Latvian branch

  • Application Form
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for a publication in “Latvijas Vestnesis”
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for ER state fee payment
  • The real estate owner’s agreement for registration companies legal address

Foreign branch

For a foreign branch all submitted commercial documents must be accompanied by a notarized translation into Latvian.

  • Application
  • Registration certificate of the country of the head-office or a notarized copy (if in accordance with the law the business has to be written in the register)
  • Authorization to found a branch (if the authorization is necessary by the foreign law)
  • Foreign business articles of association, founding agreement or similar document’s notarized copies
  • Personal power of attorney to represent the foreign company with a branch in all related activities, including the extent of this authorization
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for ER state fee payment
  • Proof of payment (a receipt, its copy, confirmed bank’s online banking payment or completed notice) for publication in “Latvijas Vestnesis”
  • The real estate owner’s agreement for registration of the company’s legal address

The fees and timing

  • Stamp duty/ processing time: 29 EUR / 3 working days
  • Triple stamp duty/ processing time : 86 EUR / 1 working day
  • Publication in “Latvijas Vestnesis”: 19 EUR

Taxation

Corporate income tax

Corporate income tax is payable at a rate of 15%. A company (limited liability company or joint-stock company) or a branch/permanent establishment calculate the taxable amount similarly based on the tax payer’s profit or loss result specified in the annual report. The taxable amount then is adjusted by non-deductible or allowable items, including inter alia expenses not related to company’s business etc.

Corporate income tax law provides quite generous allowances for depreciation of the fixed assets, these depreciation rates may be as high as 70% which are assessed from the residual value of respective fixed asset category.

The losses suffered could be carried forward and offset against future profit for an unlimited period of time.

Value added tax

Unlike in other countries, the registration of a company/branch for VAT purposes is very straightforward. The regular VAT rate is 21%, reduced rate – 12%.

Zero-rated VAT applies to the export transactions.

Supplies of goods and services being made outside Latvia are not taxable in Latvia (not subject to Latvian VAT), however, the input VAT incurred to ensure such supplies are recoverable, provided that such supplies would have been subject to Latvian VAT, if they were provided in Latvia. This means that a Latvian company may purchase and sell the goods outside the EU and fully recover VAT paid in Latvia (e.g. for office).

Payroll taxes

  • Personal income tax — 23%
  • Social security tax — 34,09%
  • Non-taxable minimum — 75 EUR
  • Minimum wage — 360 EUR

Holding company taxes

The inbound dividends received by the Latvian holding company are not taxed in Latvia, except for dividends received from the low-tax jurisdictions (included in so-called “black list”).

There is no withholding tax on outbound dividends paid to local or foreign companies (again, except offshore companies). The dividends payable to the individuals are subject to 10% dividend tax.

The interest on loans and royalties for the use of intangibles are also exempt from withholding taxes.

Capital gains arising in the hands of a Latvian company from the sale of shares in other companies are also exempt from the tax.

Microbusiness tax

One of the advantages of registration of the company in Latvia is the possibility of obtaining the micro-enterprise status. Microenterprise gives a possibility to pay one general tax, which includes both corporate income tax and social tax and personal income tax.

From 1 January 2015 the rate of Microenterprise Tax for turnover to 7,000 EUR will be 9%.It is planned, that the rate of Microenterprise Tax for turnover from 7,000.01 to 100,000 EUR will be:

  • in 2015 – 11%
  • in 2016 – 13%
  • from 2017 – 15%

In order to become Microbusiness Tax payer, company shall comply with certain criteria:

  • turnover up to EUR 100,000
  • participants are individuals
  • number of employees up to 5
  • salary up to EUR 720.

General information about Latvia

Geography

The Republic of Latvia is located on the eastern coast of the Baltic Sea at the crossroad of northern and eastern Europe. Latvia has land border with Estonia (339 km) in north, Russia (217 km) in east, Belarus (141 km) in southeast, Lithuania (453 km) in the south and maritime border with Sweden on West. Latvia’s total coast lane is 531 km. In Latvia is three large ports – Liepaja, Riga and Ventspils which are ice-free also in winter and seven smaller ports distributed along all coast border – Skulte, Mersrags, Salacgriva, Pavilosta, Roja, Lielupe and Engure These smaller ports are of regional importance which operates around 80% of transit cargo through Latvia mainly from which is timber export and sea product import. Riga’s and Ventspils ports operate as tax-free zones, Liepaja is part of the special economic zone (SEZ).

All these ports are linked with railroad and highway networks leading to any further desired direction. Latvia’s climate is maritime continental. Country territory covers 64 589 km2 and is populated by 2.024 million.

The capital of Latvia is Riga located in the center of the country at the coast of Riga gulf.

Governing Political system:

Republic, parliamentary democracy

Capital:

Riga

Head of State:

President Mr. Raimonds Vējonis

Head of Government:

Prime minister Mr. Māris Kučinskis

Membership

  • World Trade Organization since 1998
  • NATO since 2004
  • EU since 2004.

Currency

As of 1 January 2014 Latvia has joined Eurozone and adapted euro (EUR) as its national currency.

Language

Latvia has one official language – Latvian. However, most of the Latvian inhabitants know other languages such as English, Russian and German. In Latvia approximate structure of inhabitant language knowledge is as follows:

  • 85% of Latvians speak Russian
  • 70% of people under 40 speak English
  • German, French and Scandinavian languages are also widely spoken

Business infrastructure

There are a number of infrastructure advantages a Latvian company may benefit from:

  • Three ice-free ports (and 7 small ones)
  • Airport connection to more than 80 destinations, the airport is easily accessible from Riga
  • Railway connections from West to East and North to South
  • Available telecommunications in whole Latvia’s territory, as well as, all the utility supplies required.

Government and Politics

Latvia is an independent democratic republic. The sovereign power of Latvia belongs to people who are represented by a unicameral parliament (Saeima) with 100 members elected for a four-year period. The Saeima elects the President for a term of four years.

The Cabinet of Ministers is the highest executive body of the country. The Cabinet of Ministers is formed by people who are invited by the President.

Incentives for investors

A Latvian company may benefit from a number of tax advantages among other being as follows:

  • opportunities to use Special Economic Zones,
  • holding company regime
  • loss carry forward,
  • corporate income tax relief for large investment projects and
  • beneficial depreciation ratio for new technological equipment.