Tax regulations for micro-enterprises

Micro-enterprise tax in Latvia

The activities of micro-enterprises are governed by the Micro-enterprise Tax Law.

The entrepreneurship must be implemented in the following forms:

  • individual undertaking;
  • individual enterprise;
  • farm or fish farm;
  • natural person registered at the State Revenue Service (SRS) as an economic operator;
  • limited liability company

The following criteria also must be complied with:

  • shareholders (if any) are natural persons. Shareholders of a limited liability company – natural persons – also act as members of the board;
  • the turnover does not exceed LVL 70,000 (seventy thousand) in a calendar year;
  • the number of employees does not exceed 5 (five) at any time not including absent or discharged employees.

Employees are engaged in a micro-enterprise on the basis of an employment agreement. Both natural persons and legal entities must pay the micro-enterprise tax.

The micro-enterprise tax includes:

  • mandatory social insurance contributions;
  • personal income tax;
  • business-risk related state fee for employees of the micro-enterprise;
  • corporate income tax if the micro-enterprise is a corporate income taxpayer;
  • personal income tax of the micro-enterprise owner for the part of the micro-enterprise revenue gained from economic activity.

A micro-enterprise may choose whether to pay the micro-enterprise tax provided that it complies with the following limitations stated in the Micro-enterprise Tax Law:

  • If a natural person is a shareholder in several limited liability companies, he or she may pay the tax for only one of these companies;
  • The income of a micro-enterprise employee cannot exceed LVL 500 per month. (Dividends calculated from the profit of a micro-enterprise shall not be considered the employee’s income.);
  • A micro-enterprise can acquire the status of a micro-enterprise taxpayer only if it has reached a prior written agreement with all employees of the micro-enterprise regarding application of the micro-enterprise tax. Such agreement may be included as a separate provision also in the employment contract.

How to become a micro-enterprise taxpayer?

  • A person can apply for acquisition of the status of a micro-enterprise taxpayer along with registering the company in the Register of Enterprises. The person must confirm that within the reporting year corresponding to the taxation period of the micro-enterprise tax he or she will comply with the limitations envisaged by the Law, i.e., the foreseeable turnover will be up to LVL 70,000, the micro-enterprise wishes to pay the micro-enterprise tax and the number of employees will not exceed five employees, which employees will be notified of. Information on the received application will be sent to the SRS within one day after registration of the relevant subject in the Register of Enterprises.
  • A natural person commencing economic activity and registered as an economic operator by the State Revenue Service may choose whether to pay the micro-enterprise tax. Along with the registration application, such person must submit an application specifying the information given by the company upon applying at the Register of Enterprises to acquire the status of a micro-enterprise taxpayer.
  • If a person already registered in the Register of Enterprises or a natural person already registered by the SRS as an economic operator wishes to become a micro-enterprise taxpayer, a registration application regarding acquisition of the status of a micro-enterprise taxpayer must be submitted to the SRS till 15 December of the pre-taxation year.

The status of a micro-enterprise taxpayer can be revoked by submitting an application to the State Revenue Service until 15 December of the pre-taxation year.

The taxation period for a micro-enterprise taxpayer is one calendar year. Calculation of the micro-enterprise tax The turnover of a micro-enterprise in the taxation period is multiplied by the tax rate of the relevant micro-enterprise (which is 9 %).

Consequences of failing to comply with the limitations

  • If the income of a micro-enterprise employee exceeds the sum stated in the Law, an increased tax rate is applied.
  • A tax rate of 20 % will be imposed on the share of the employee’s income exceeding LVL 500 per month.
  • If the number of employees is exceeded and there are more than five employees in the micro-enterprise, then 2 % for each additional employee are added to the tax rate of 9 %.
  • However, if the turnover is exceeded, a tax rate of 20 % is imposed on the share by which it is exceeded.

The micro-enterprise tax has to be paid four times per year for the turnover of each quarter. A micro-enterprise shall submit to the SRS a micro-enterprise tax declaration every quarter till the fifteenth day of the relevant month.