Latvia

There are two types of business companies in Latvia: private or public companies, respectively, limited liability companies (abbreviated to SIA, referred to hereinafter as Company) or joint stock companies (abbreviated to AS). These are business undertakings with the rights of a legal person.

1. LEGAL ASPECTS

• A company is a business undertaking enjoying the rights of a legal person.
  The authorised capital of a company consists of the investments made by its shareholders. The minimum authorised capital is EUR 2,800.
• A company is liable for its obligations with its entire property, including the property allocated to the company (contributed to its authorised capital) by its shareholders. Shareholders are not liable for the obligations of the company; and vice versa, the company is not liable for the obligations of its shareholders.
• Founders/shareholders of a company can be natural persons and legal persons – residents and non-residents of Latvia. The number of founders/shareholders of the company is not limited.
• Only natural persons – residents and non-residents of Latvia – can be company directors. The number of directors is not limited.
• The registered office of a company must be in the territory of Latvia.
• A company may carry on commercial activity both in the territory of Latvia and abroad. A company may carry on any type of activity that is not prohibited by law.
• A company must have at least one director, the director may be a resident of any country.
• A company has the status of a tax resident as of the date when it is founded.
• A convenient geographical location between Europe and the CIS Countries.
• Certain business activities require licences. In particular, this applies to the activities of credit institutions, broker companies, investment management companies as well as payment service providers and electronic money issuers (PSP & ELMI). Once a licence has been obtained in Latvia. financial and investment companies can carry on their business anywhere in the territory of the European Union.

2. ACTIVITY

A wide range of activities is available for a company, including:

• Shareholding in resident and non-resident companies
• Purchase, sale and use of intellectual property rights
• Acquisition of shares of real estate companies or ownership of real estate
• The right to carry on any commercial or industrial activity.

3. TAXES

3.1 Corporate income tax

Retained profits are not subject to corporate income tax (CIT), i.e. the actual tax rate is 0%.

♦ 20% of the calculated base subject to CIT; i.e. on distributed profits and on contingent distributed profits

♦ N.B. Prior to applying the CIT 20% rate, the taxable base is to be divided by 0.8. As a consequence, the effective CIT rate is 25%.

Taxable CIT base =

Distributed profits (dividends, extraordinary dividends, etc.)

+

Contingent distributed profits (expenses not related to business activity, savings, loans to related persons etc.)

N.B. Dividends paid out to natural persons – residents and non-residents of Latvia – are no longer subject to personal income tax (PIT).

Non-business expenses are included in the CIT base and are subject to a 20% rate (the effective CIT rate is 25%).

The existing list of expenses not directly related to business activity has been updated.

N.B. Where commercial companies are making losses, they actually CIT.

Long-term staff development expenses and representation costs do not constitute a taxable base for CIT purposes, provided they do not exceed 5% of the salary fund (gross amount) of the previous year.

Payments to non-residents – legal persons subject to CIT at the time of pay-out:

• Remuneration for management and consultation services: CIT 20%
• Remuneration for disposal of immovable property in Latvia: CIT 3%
• Remuneration for use (rental) of property in Latvia: not subject to CIT
• Income received from shares held in a private company: not subject to CIT
  N.B. Starting from 1 January 2018, private companies in Latvia are subject to CIT (non-transparent entities)
• Payments to legal persons registered in tax-free or low-tax countries or territories: CIT 20%
  N.B. In 2018, the CIT rate on interest paid by a credit institution will increase from 5% to 20%

3.2 European Union

As a result of joining the EU in 2004, Latvia has harmonised its national legislation in line with European law, including the following EU directives: Parent-Subsidiary and Merger Directives, Interest and Royalty Directive*, Savings Directive, Directive on the Common System of Value Added Tax, and Anti-Money Laundering Directive.

EU regulations have the force of law in Latvia.

3.3 Value Added Tax

VAT legislation is based on EU directives, mainly on Council Directive 2006/112/EC on the Common System of Value Added Tax.

In case of necessity to carry on a business activity requiring European VAT registration in the territory of the EU a company may register as a VAT payer within 10 working days.

As of 1 July 2012, standard VAT rate in Latvia has been reduced to 21%. This tax rate is levied on transactions within the territory of Latvia. Transactions with other EU countries are subject to VAT 0% as a rule. The reporting period is a month or a quarter of the year.

The threshold for compulsory registration, when the amount of transactions subject to VAT is in excess of EUR 40,000 in a 12 month period, applies to transactions within the country only. For transactions with other EU member states it is necessary to register before starting the activity.

3.9 Wage Taxes

• Personal Income Tax
  The personal income tax is withheld from employee wages and paid into the state budget by the employer. The rate varies from 20% to 31.43% (progressive personal income tax rate).
• Mandatory employee social insurance payments
  The rate is 35.09%. Of these, 11.00% are withheld from the employee’s income and 24.09% are paid by the employer; however, the entire amount is withheld and paid into the state budget by the employer.
• The minimum gross salary for a full-time job is EUR 430. According to the data compiled by the Latvian Statistics Office, the average gross salary in Riga in 2012 was LVL 550 or EUR 780.
  For a company board member who is a non-resident and is paid the minimum wage, the social tax is EUR 150.89 and personal income tax is EUR 88.02.

4. REGISTRATION

If company founders are present in Latvia in person, the following is required:

• Instruments of incorporation must be signed before a Latvian notary public;
• Where the company director is a third party (other than the founder), his/her written consent to take up the position of company director is required (it must be certified by a notary public);
• Permission to register the registered office of the company must be obtained from the owner of the premises;
• A temporary bank account must be opened to pay up the authorised capital;
• The authorised capital must be paid up;
• Documentation must be filed with the Latvian Register of Enterprises

4.1 What is required for registration?

In order to cause a company to be registered, the client has to provide the following information:

• Company name (a company cannot take the name of an existing company, nor can the name be just marginally different from a company name already registered with the Latvian Register of Enterprises).
• Information on the founder (a passport copy or instruments of incorporation if the founder is a legal person).
• Distribution of shares where there are several founders;
• Information on the company director(s) (a passport copy, a statement of the place of residence);
• Registered office (we can provide one if necessary).

Where the founder is a non-resident legal person, certified, legalised and translated (into Latvian) copies of the instruments of incorporation of the parent company (company registration certificate and a document certifying the powers of the representative (director/authorised representative) of the parent company will be required for the registration of the new company.

2. Instruments of incorporation prepared for you must be signed.

3. The authorised share capital of the company must be paid up.

If the founder(s) of the company are not present in Latvia in person, the following is required:

• A power of attorney has to be issued for the company representative in the Republic of Latvia (the power of attorney must be certified by a notary public, a member of our staff can act as the authorised representative);
• Instruments of incorporation (not requiring certification by a notary public) must be signed and the originals must be sent over to Latvia;
• Written consent of the person appointed to the position of company director must be obtained (the consent must be certified by a notary public);
• Permission to register the registered address of the company must be obtained from the owner of the premises;
• A temporary bank account must be opened to pay up the authorised capital (to be opened by the authorised representative – the attorney-in-fact);
• The authorised capital must be paid up;
• Documentation must be filed with the Latvian Register of Enterprises

4.1.1 Requirements for registering a limited company (SIA) by non-residents remotely:

1. Checking the availability of company names (2 to 3 company names, listed in the order of priority, should be provided by the client).
2. Then, following the payment of the invoice, forms and a memorandum of association are sent to the client for signature.
3. Registered office papers are then obtained.
4. Payment of mandatory stamp duties in connection with establishing a limited company EUR 150.00 (duty), EUR 30.00 (publication of notice in the official gazette), EUR 12.20 (fee for the certificate of incorporation), EUR 4.00 (fee for the submission of documentation).
5. Depositing the authorised capital in the amount of EUR 2,800 in a temporary bank account.
6. The date of payment of the authorised capital is indicated in Document 3 (division of the register of shareholders).
7. Documents 1, 2 and 3 are then sent to the client for signature. Then the documents must be certified by a notary public and the originals must be sent to us (i.e., a power of attorney authorising an attorney, an application for the position of a board member, the register of shareholders)
8. Originals of Documents 1, 2 and 3 are then forwarded for translation and certification. The originals, filed together with the translation and certification, are then submitted to the Register of Enterprises.*

* The charge for the translation and certification of these documents into Latvian is EUR 200.

4.2 Time Period Required for Registration

Preparing the instruments of incorporation of the company: 1-2 working days after receipt of all the necessary information from the client.

Certification by a notary public: 1-2 working days.

Certified translation of the documents: 1-3 working days.

Registration with the Register of Enterprises: up to 5 working days, or 3 working days (depending on the stamp duty and the composition of the founders: no less than 3).

In practice, registering a company after the client has provided all the necessary data takes up to 17 working days, if the founder (a natural person) comes to Latvia in person, and over 30 working days if a company is registered remotely and the founder is a foreign company.

VAT payer registration is a separate procedure which is completed in 10 working days.

5. BASIC REPORTING REQUIREMENTS

A company must keep accounting records on a monthly basis in line with statutory provisions.

Income tax reports and social payment reports for employees are to be submitted on a monthly basis, VAT reports are to be submitted on a monthly or quarterly basis.

A company must submit an annual financial report, accompanied by a tax return, to the State Revenue Service by 30 April (31 July for larger companies) each year. The reporting period is the calendar year, and the first reporting period can be up to 18 months.

An annual financial report must be certified by a sworn auditor if two of the following three criteria are exceeded by the end of the reporting period:

• Balance amount: EUR 400,000
• Net turnover: EUR 800,000
• Number of employees: 25