Tax incentives in Latvia
Latvia offers a number of tax incentives to promote business development. These include:
- Special economic zones
- Donations relief
- Deferred tax payments
- Tax reduction for research and development
- Large investments tax deduction
Special economic zones
There are four special economic zones in Latvia, three of them being ice-free ports in major cities, from which one is located in the capital city of Riga. The Special economic zones of Latvia are:
- Riga Freeport
- Ventspils Freeport
- Liepāja Freeport
- Rezekne SEZ
The benefits of each of them (not counting the non-related benefits, such as Rezekne being a major railroad hub) are pretty similar, although they may differ somewhat depending on the business sector and other circumstances:
- Up to 100% of real estate tax reduction (from the initial 1.5%)
- Up to 80% of corporate income tax reduction (from the initial 15%)
- Up to 80% reduction on withholding tax for dividends, managements fees and fees for using IP (intellectual property)
In the summer of 2016 the Latvian government approved the creation of another SEZ - the Latgale Special Economic Zone. Latgale is the eastern part of Latvia, and the new SEZ will be based around the city of Daugavpils - Latvia's second largest city and a major railway hub, especially prominent as a gateway to the Russian market. It is estimated that the new zone will effectively start functioning in 2018.
The donations to certain state-funded institutions allows Latvian businesses to reduce their corporate income tax up to 85% of the sum donated. Apart from the state-funded organizations registered in Latvia, this also applies to donating to public benefit organizations, as defined by the Public Benefit Organizations law (Sabiedriskā labuma organizāciju likums). In this case, the tax relief cannot exceed 20% of the sum donated. All of these rules also apply for donating to organization with similar legal statuses registered in the European Union or the European Economic Area.
In order to prevent fraud and tax avoidance, the donating organization cannot impose any kind of obligations upon the receiver in exchange for the donation. In other words, the receiver cannot be legally bound to compensate such a donation or provide any other remuneration for the donation.
Deferred tax payments
On of the goals of the Latvian economic policy is to modernize industrial production and keep it efficient, which is why Latvian businesses have the right to defer tax payments for profits arising from the replacing of machinery. If a business buys a new piece of machinery instead of an old one (both should be functionally similar for the operation to be considered a replacement) and sells the old one in the span of 12 months before or after the replacement, the profit form this is not taxed in the given tax period. The tax payment is deferred until this new machinery is sold, or, alternatively, the payment is further deferred if the new asset is also replaced.
Tax reduction for research and development
There is a possibility to apply accelerated amortisation of R&D related costs (for tax purposes, costs are multiplied by three). This relief is aimed at encouraging R&D and will apply to employment related costs and R&D service agreements signed with specific scientific institutions. These organization must also be registered in either of the following:
- European Union
- European Economic Area
- A county with which Latvia has a double-tax treaty
The Intellectual property that results from the R&D activity remain as the taxpayer's property for at least three years. To qualify for R&D costs relief, the taxpayer must have its own project documentation that meets certain rules.
Large investments tax deduction
If a business invests more than 10 000 000 EUR in certain industries, it has the right to apply for a corporate income tax relief. The investment must be made in new, unused fixed assets, such as industrial buildings and machinery, as well as it must be made for the business purposes. There are two relief brackets for large investments:
- over 10 million EUR - 25% of corporate income tax relief
- over 50 million EUR - 15% of corporate income tax relief
To qualify as a business-related investment, it must aid the receiver in modernising, expanding or otherwise facilitating its production. It can also be used for changing the industry, i.e. shifting from producing another product or service to providing a different one.