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Far-reaching tax reform in Latvia

Extensive changes to personal income tax and corporate taxes.

On 28 July 2017, the Latvian Parliament passed an extensive legislative package with significant changes to the tax system. The changes will come into effect on 1 January 2018; however, to some extent transition periods will last several years.

Strategic objectives are to improve competitiveness, to cut inequality between citizens, to fight the shadow economy, and to increase revenues.

The reform will have an impact not only on the personal sphere, but also on the economy.

Income taxes are modified from a “flat tax” with a uniform tax rate to a three-stage progressive income tax. Incomes of up to EUR 20 000 attract a tax rate of 20 %, while from EUR 20 001 to EUR 55 000 the tax rate is 23 % and above that the tax rate is 31.4 %. Additionally, the minimum wage and the tax exemption limit are raised.

With regard to social contributions, both employees’ and employers’ share of social tax are slightly up.

Regarding corporate tax law, one change is prominent: corporate profits reinvested in the company are now tax-free. Thus, Latvia is adopting an approach already applied in Estonia for several years. This is expected to promote investment, e. g. in the technology field. Dividends and other distributions are taxed at a rate of 20 %.

The attractive legal form of micro-businesses is reformed insofar as only companies with a maximum annual turnover of EUR 40 000 can be micro-businesses. Prior to the reform, up to EUR 100 000 was the legally permissible threshold.

Additional expenses in the social sector will be financed by higher excise taxes, amongst others. This will result in higher taxes on fuel, alcohol and cigarettes.

Source: I. a. regulation no. 245 dated 30 May 2017, No. OP. 2017/105.3