Residents of Latvia are subject to Latvian income tax on their international earnings. On their income from Latvian sources, non-residents are subject to income tax. A person is deemed to be a tax resident under national law if they have registered, or declared, their abode as being in Latvia. Tax residents also include those who have been in Latvia for 183 days or more in any 12 months and Latvian nationals who work abroad for a company with a license from the Republic of Latvia.
Rates of PIT
A progressive PIT system exists in Latvia. Unless the legislation specifies a different rate, the progressive rate is determined using the following formula depending on the amount of yearly income:
- Up to EUR 20,000 in income is subject to a rate of 20%.
- A rate of 23% is applied to any percentage of income between €20,004 and €78,100
- Over EUR 78,100 in income results in a rate of 31%
The dividend PIT is 20%. There won’t be any PIT to pay, however, if a corporation has already charged its earnings to CIT. This applies to businesses in Latvia as well as those in the EU, EEA, and other nations, except tax haven businesses and MBT payers. Except for EU/EEA enterprises, where no proof is required since it is presumed that tax (PIT or CIT) has been imposed at source by default, profits should be zero-rated for PIT if proof of PIT or CIT paid abroad has been provided. Interest and other capital gains are subject to a fixed PIT rate of 20% as well. Capital gain income is taxed at a 20% rate.
Royalties taxation system
Payments made to those who are not registered as independent contractors are considered royalties. Without using a notional expenditure rate, the royalties payer must deduct 25% or 40% PIT from the gross royalties as follows:
- 25% PIT is applied on earnings up to EUR25,000
- 40% PIT on earnings above EUR25,000
Controlled Foreign Company (CFC)
Since the beginning of the year 2013, Latvia has been operating under a controlled foreign corporation (CFC) framework. A progressive rate of PIT is applied to income from considerable involvement in a CFC that is based in a tax haven.
Relevant developments
Beginning on July 1, 2022, new non-taxable earnings types are introduced due to tax reform. As of July 1, 2022, Latvia is no longer subject to individual income tax, specifically PIT, National Social Insurance Contributions (NSIC), and Solidarity Tax (ST), on employer-paid maternity leave benefits up to a maximum of EUR 250 per child. Any unused benefits will be subject to individual earnings tax. Employer costs associated with remote work for outfitting an employer’s home office with the essential things were considered as non-taxable earnings of an individual as of 2021 to lessen the consequences of the COVID-19 problem (limited to 30 euros per month). As of July 1, 2022, there have not been any further tax breaks (outside of the existing tax holidays) connected to easing the COVID-19 situation.
Differential Personal Allowance (DPA)
The State Revenue Service (SRS), based on the employee’s earnings during the prior period, forecasts that the employer/trader must apply a differential personal allowance (DPA) between EUR 0 and EUR 350 until June 30, 2022, rising to EUR 500 on July 1, 2022. Up to a monthly income of no more than EUR 1,800, the differential personal allowance is applied proportionately. The individual is free to decide not to use the monthly differential personal allowance.
Capital gains and income from investments
Dividends from earnings after 2017 on which CIT or personal income tax (PIT) has been withheld are subject to a 0% PIT; all other dividends are subject to a 20% PIT. A 20% PIT will be applied to dividends received from tax havens and MBT payers. 20% PIT is applied uniformly to all forms of capital gains and income. Employer and employee contributions to the NSIC and ST rates are divided. The relevant standard rates are 23.59% (employer portion) and 10.5% in 2022. (employee portion). The NSIC income ceiling will rise in 2022 (from EUR 62,800 in 2021 to EUR 78,100 in 2022), and ST will be applied to any excess gross taxable income. The health insurance budget, the PIT budget, and the state pension budget each received the ST on the portion of taxable gross income that was over EUR 78,100.
