Taxes in Latvia
The Latvia's taxation system is affected by both the Latvian legislation and the requirements laid down by the European Union. It can be described as average, because every tax payer contributes to the budget 30 % of his/her income on average. Besides, the Latvia's diverse system of tax rates, tax relief and allowances enables every tax payer to choose the optimum sector for their occupation and management of funds. The Republic of Latvia has the lowest effective (average) tax rate in the European Union. There are several areas of trade business with individual tax privileges – payments that are lower by 80 % to 100 %: for example, Liepāja and Rēzekne have special economic zones, and free ports of Riga and Ventspils can grant tax relief.
The tax principles are laid down by the law "On Taxes and Fees". Taxes are administered by the State Revenue Service (SRS), and they are classified as direct and indirect taxes. Indirect taxes are taxes that are not directly deducted from income and that are levied on goods and services. In their turn, the direct taxes are taxes that are levied on all taxable income of natural persons and companies.
Corporate income tax
The object upon which the corporate income tax is imposed is the taxable income obtained by a tax payer during a taxation period. The tax base is corporate financial income adjusted according to the law. The adjustments are mainly implemented in order to ensure that the income is greater than expenses on which the tax is not levied (for example, expenses that are not directly related to economic activity) or in order to reduce the income by a specific amount in case if the law envisages tax relief.
Corporate income tax payers are the following:
- resident or domestic companies performing economic activity, organisations and institutions funded from the state budget or municipal budgets, which obtain income from economic activity;
- non-resident or foreign companies, business entities, natural and other persons;
- permanent representative offices of non-resident undertakings the income tax rate of which is 15 %.
Individual undertakings are payers of the personal income tax, and the tax rate is 26 %.
Personal income tax
The personal income tax is one of the steadiest sources of income adding funds to municipal budgets. Personal income tax payers are self-employed persons or undertakings that have been registered as tax payers, including agricultural and fishery farms. It is envisaged to repay the personal income tax to tax payers with eligible expenditure for education and medical services.
Social insurance contributions (social tax)
Compulsory social insurance contributions is a compulsory payment into a special budgetary account stipulated by the Law which entitles the insured person to receive the social insurance services defined by the Law. The social tax payments increase the state social insurance budget. Therefore an insured person can receive the following services: an old-age pension, disability pension, survivor's pension, sickness benefit, maternity benefit, insurance against unemployment and burial allowance.
In Latvia, starting from 2010 every property owner must pay the immovable property tax in the amount of 1 % of the cadastral value of living premises – apartments and private houses. Until January 2010, this tax in the amount of 1 % was a compulsory payment imposed only on the owners of land and commercial space. As it was mentioned previously, the tax rate depends on the cadastral value of the immovable property:
- LVL 40,001–75,000 – 0.2 %;
- LVL 75,001 < – 0.3 % of the cadastral value of the immovable property.
Value added tax (VAT)
The VAT is a consumption tax imposed in the whole European Union, including Latvia. The said tax is levied on goods and services purchased and sold for use or consumption. This tax included in the price of a good or service is paid by the end consumer, therefore it is considered an indirect tax. In Latvia, based on the Law “On Value Added Tax” the basic tax rate currently in effect is 22 %, but the reduced VAT rate is 10 %.
The VAT is a universal tax, because it is suitable for consumption with rare exemptions stipulated by the law, and this tax is not directly imposed on business. Due to the competition terms the European Union has put in place strict regulations on imposing the VAT.
The excise duty (called also selective consumption tax) is one of the most important taxes forming the core budget in Latvia; it is imposed on specific groups of produced or imported consumer goods and paid by natural and legal persons. The basic idea behind the excise duty is to limit the consumption of goods harmful to human health and naturally – to add funds to the budget. The duty is calculated as LVL per one item of the product or as percentage based on the product's price.
In September 2010, the law was amended stating that until 30 June 2011 the excise duty would not be imposed on natural gas used as fuel.
The transportation of goods across the border of Latvia is controlled by imposing the import duty and export duty (customs duty), as well as other payments envisaged by the customs policy of Latvia. The customs duty is usually included in the cost price of a product.
The division of customs duty rates in Latvia is the following:
- fiscal duty – for increasing the budget revenue;
- protective duty – for protection of domestic producers;
- preferential duty – for facilitating reduced rate imports;
- anti-dumping duty – for support to producers ensured by their country with an aim to export products at a low price.
Lottery and gambling tax
The lottery and gambling tax is imposed to limit the gambling in the country and obtain additional funds for the budget. This tax must be paid by business entities that have received a licence to organise and maintain lotteries and gambling according to the procedure established by the law. The gambling tax income is divided between the state and the relevant local government, 75 % and 25 % respectively.
The object upon which the gambling tax is imposed is an organiser and place of gambling, as well as gambling machines, but the lottery tax is imposed on the income from ticket sales. The gambling tax amounts to 15 % of income from organisation of totalisators and bets and is to be paid every month depending on the monthly income.
Natural resources tax
The natural resources tax has been imposed since 1991 – after the restoration of independence of Latvia. The purpose of this tax is to facilitate effective use of natural resources, restrict the environment pollution, promote implementation of new and improved environment-friendly technologies, as well as to ensure a financial basis for environmental protection measures. This tax is oriented towards tax exemptions rather than income. Both basic rates and additional rates are used simultaneously for calculation of tax to be imposed on use of natural resources over the limits.
The activities upon which the natural resources tax is imposed can be divided in the following three groups:
- use of natural resources and pollution of environment;
- putting on the market of Latvia goods and packaging materials harmful to the environment;
- other activities.
The natural resources tax has to be calculated by the tax payer itself, and the tax rate depends on each specific object.
Car and motorcycle tax
At the end of 2009, the Cabinet of Ministers adopted provisions on procedures for the collection, payment and administration of the car and motorcycle tax. The tax imposed on new cars depends on the amount of carbon dioxide emissions, the tax imposed on older cars – on their age and engine volume, but the tax imposed on motorcycles depends on their age.
Changes in calculation of this tax will promote the achievement of the European Union's objective – to reduce the amount of carbon dioxide emissions causing the greenhouse effect of the new cars to 140 grams per one kilometre on average by 2015.
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