When paying a non-resident, tax refunds must be applied in the following ways:
Corporation income tax withheld
If a legal person is paid by a non-resident who does not have a permanent presence in Latvia, corporate income tax is applied at the tax rate specified in the law on corporate income tax. Corporate income tax must not be deducted from payments made to a non-resident-natural person (except in cases, when the personal income tax cannot be withheld from the income of the natural person earned in Latvia).
Taking personal income tax into account
Payments made to natural people in Latvia who are not residents and do not have a permanent establishment in Latvia are subject to personal income tax at the rates outlined in the Personal Income Tax Law. According to the Law on Duties and Fees, the rules of international agreements must be followed if they provide a different method of tax computation or payment than the tax laws of the Republic of Latvia. These requirements must be authorized by the Saeima (the Latvian Parliament). The right to utilize tax refunds in conformity with tax conventions belongs to the taxpayer. There are now 61 nations with which Latvia has signed effective tax accords.
Getting discounts while using the terms of international agreements
A taxpayer from the Republic of Latvia must complete a residency certificate – application for application of tax refunds – and submit it to the State Revenue Service. The State Revenue Service examines the submitted rebate certificate, confirms it by completing Part VI of the rebate certificate, gives the payer copies of the authorized rebate certificate, or offers a written justification for its denial. The payer will have the right to withhold taxes in line with the tax agreement after receiving the certificate of the authorized rebate, beginning on the day that the request to apply tax rebates was made.
Tax advantages in Latvia
The following are a few of the tax breaks offered in Latvia:
contributions to nonprofit organizations
Donations to Latvian public benefit organizations, or organizations with a similar mission in a nation that is a member of the EU, EEA, or both, are eligible for tax exemption. One of the three options listed below may be used by the contributor to get relief from their total donations:
- Exclude contributions from the tax base up to 5% of the previous year’s post-tax earnings
- Exempt up to 2% of NSIC’s gross salaries from taxation
- Reduce dividend CIT by 85% of the amount donated, up to 30%
If a corporation chooses method 3 (the total amount of the gift), method 1 or method 2 does not exceed the aforementioned restrictions, donations to organizations that serve the public good are not regarded as non-business costs.
Large investment relief (LIR)
After 2017, no new LIRs are awarded. For LIR applications submitted before 2018, LIR may still be claimed by decreasing CIT on declared dividends following transition regulations.
Special economic zones (SEZ) and free ports
CIT and RET exemption is available to businesses operating in free ports and SEZs. These territories consist of the SEZs of Rezekne, Latgale, and Liepaja as well as the free ports of Ventspils and Riga. Companies that meet the requirements may request CIT relief for up to 80% of the CIT assessed on dividends. Relief from RET is 80%. Additionally, a municipality with the authority to establish regulations may limit the proportion of RET reduction to 10% of the tax levy (without applying any other rebates). By 1 November, municipalities must publish their legally enforceable regulations for the next tax year. Each free port and SEZ municipality will thus be allowed to choose which RET rebate to apply in the next year based on its projected budget. The amount of eligible investments a firm has made in the free port or SEZ region determines the total CIT and RET relief it is eligible to seek. The overall amount of tax relief provided varies from 35% to 55% of the amount invested, depending on the size of the firm.
Reduced foreign taxes
According to national law and applicable tax treaties, residents are entitled to exemption from double taxation. Based on documentation proof of income made and income tax paid that has been authorized by the foreign tax authorities, foreign tax paid on income included in the tax base is often recognized as a credit against PIT. The tax credit cannot be more than the Latvian tax due on the foreign-earned income. The national statute states that PIT does not apply to employment income that is earned and taxed in another EU/EEA member state or in a nation with which Latvia has an active double taxation agreement (DTT). Foreign employment income that is not taxed is subject to Latvian PIT at varying rates.