Along with the restoration of property rights and the creation of a system for recording property data, Latvia built its real property taxation system. These systems are known as the Land Register (LR) and Cadastre Information System (IS). In Latvia, the local government oversees administering property taxes, as it is in the majority of other nations. Real estate owners are responsible for paying the tax, which is a tax placed on the property. It is controlled by real estate tax legislation. The tax is levied on tangible items like land, structures, and infrastructures that are situated on Latvian territory and cannot be transferred without clearly causing damage to them. Even if they are not being used, registered lands and structures are included in this. Every piece of land and structure in Latvia, whether held by a person or a business, is subject to this tax.
The state-defined tax margins and the choice of each municipal (local) government are the two main determinants of 1.5% as the tax rate. According to the legislation, a residential property’s base tax rate may range from 0.2% to 3% of its cadastral value, although it may not exceed 1.5% unless the structure is in ruins or otherwise unsuitable for habitation. The appropriate local authority determines the actual tax rate for each property, but it must stay within specified bounds. The base rate is used if the local authority does not specify the tax rate. It is 0.2% for residential properties with cadastral values of 56 915 EUR or less, 0.4% for those between 56 915 EUR and 106 715 EUR, and 0.6% for those beyond 106 715 EUR. It is 1.5% for land. The government establishes the cadastral values needed to calculate the actual rates on an annual basis.
Before the acquisition is finalized, it is generally important to do tax due diligence on the target firm. There is a significant chance that the Latvian tax authority will find flaws in the target firm’s accounting during its audit and levy a hefty punishment. This is true if the accounting of the target company has been erroneous in any way.
Considerations when purchasing or selling real estate
The following routines apply to purchasing or selling real estate in Latvia:
Corporate taxation on real estate transactions
Transfers of shares often do not affect business income taxes. However, asset transactions (and sometimes share transfers as well) may give rise to a corporate income tax basis. The ordinary corporate income tax rate is applied by permanent establishment to non-resident businesses’ revenue with a source in Latvia. Non-residents receiving eligible payments may be subject to a 3.75% withholding tax (WHT) if no permanent establishment is established.
Purchasing real estate
The standard rate of real estate transfer tax is 3.75% of the purchase price, the property’s cadastral value, or the valuation for mortgage purposes, whichever is greater. The state fee is 1% of the investment value if real estate is included in a company’s share capital. Please be aware that a firm is not required to pay the state fee if it receives the title to real estate because of reorganization.
Real estate transaction
The following taxes may be applicable:
New construction sales are subject to a 21% VAT. If at least a year has elapsed after a building was placed into use and is currently operational, it is not deemed new. Additionally, Latvia offers an alternative VAT approach known as the option to tax.
If a Latvian resident firm buys shares in a real estate company or property in Latvia from a non-resident, a WHT rate of 3.75% is applied. Returning taxes is feasible.
Individuals subject to personal income tax (PIT), who sell the shares, may additionally owe a 20% capital gains tax.
Transfer Pricing (TP)
If a transaction (such as a sale or loan) involves related parties, the TP rules apply. A transfer price must have a fair market value. This implies that it must be equal to the market price that two independent firms would offer in a comparable transaction with equal or equivalent (comparable) terms. If you don’t, you risk fines in addition to tax surcharges.
Payment terms and procedures
Except for automobile parking lots, where notifications may be delivered until August 1st, the payer must get notice of the amount of tax due by February 15th of each year. The notification is not sent, but the calculated tax is still considered approved and is due on March 22 of the same year if a taxpayer has not provided an address for the residence or any other means of contact, as well as having not informed relevant authorities about not receiving the notification promptly. The annual tax may be paid in four installments, each due no later than March 31st, May 15th, August 15th, and November 15th. Any of these payments may also be paid in advance, making it feasible to make a single payment for the whole year. However, a single payment does not indicate that the payment dates will be extended; they will still be the same.