In Latvia, employers are responsible for the majority of social security contributions for their employees. The current employer social insurance contribution rate is 23.59% of the employee's gross salary. These contributions cover a range of benefits, including old-age pensions, disability pensions, sickness benefits, maternity and paternity benefits, and unemployment benefits.

Solidarity Tax

If an employee's income exceeds the maximum limit that attracts regular social insurance contributions (€78,100 per year as of 2024), employers must pay the Solidarity Tax (ST). The employer's share of the ST is 23.59%, and the effective rate is 25% (the excess is refunded to employers later). Please note that the income threshold for the Solidarity Tax and the tax rates may be subject to change.

Other Employer Tax Considerations

In addition to the main social security contribution, employers also pay an unemployment insurance contribution of 0.8% of the employee's gross salary. Employers are also responsible for withholding Personal income tax (PIT) from an employee's wages and remitting it to the tax authorities. The current PIT rates in Latvia are 20% on income up to €20,004 per year, 23% on income between €20,004.01 and €78,100 per year, and 31% on income exceeding €78,100 per year.

Practical Guidelines for Employers

Employers must register with the State Revenue Service (VID) to obtain a taxpayer identification number. They are required to calculate social security contributions, solidarity tax, unemployment insurance, and PIT on each employee's gross salary. Employers must submit monthly reports to the SRS, detailing all mandatory contributions, and payments must also be remitted to the SRS on a monthly basis.

In Latvia, employees are obligated to contribute a portion of their income, currently 10.5% of their gross salary, into the social security system. This contribution funds benefits such as pensions and sickness benefits.

Solidarity Tax

The Solidarity Tax (ST) is applied to an employee's income if it exceeds the maximum yearly limit attracting regular social insurance contributions, currently set at €78,100 per year. The employee's share of this tax is 10.5%, with an effective rate of 25% (the excess is refunded to the employer later). Please note that the solidarity tax rates and the income threshold may change, so it's always advisable to confirm the latest information with the State Revenue Service of Latvia.

Personal Income Tax

Personal Income Tax (PIT) is another responsibility for employees in Latvia. The country uses a progressive PIT system, where higher income levels are taxed at higher rates. The rates are as follows:

• 20% rate on annual income up to €20,004.
• 23% rate on annual income exceeding €20,004 and up to €78,100
• 31% rate on annual income exceeding €78,100

Tax Deductions

There are several standard tax deductions available to employees to reduce their overall tax burden:

• Non-taxable Minimum: A portion of an employee's monthly income is tax-free. As of 2024, this amount is €500 per month.
• Dependents Deduction: Employees with dependents are eligible for tax reductions.
• Justified Expenses: In certain cases, employees can deduct necessary expenses related to their work, such as healthcare and education.

Latvia's standard VAT rate is 21%, which is generally applicable to all taxable supplies of services in the country unless an exemption or a reduced rate applies.

Reduced VAT Rates

Latvia has two reduced VAT rates that apply to specific services:

• 12% Reduced Rate: This rate may apply to services such as public passenger transportation, hotel accommodation services, and specific medical services.
• 5% Reduced Rate: This rate may apply to services such as certain cultural events and specific printed media.

The specific services eligible for reduced VAT rates are clearly defined in Latvian law. It's essential to consult the Latvian VAT Law or the State Revenue Service of Latvia for an exhaustive, up-to-date list.

VAT Registration

Businesses providing taxable services in Latvia may need to register for VAT if their turnover exceeds the VAT registration threshold, which is currently €40,000 per year. There are also circumstances where voluntary registration is possible.

VAT on Cross-Border Services

• Services provided to businesses in other EU countries: These services are generally subject to the reverse charge mechanism, meaning the VAT liability shifts to the recipient of the service in their respective EU country.
• Services provided to businesses outside the EU: These services might be subject to a 0% VAT rate under certain conditions.
• Services provided to private individuals: VAT is usually charged at the Latvian VAT rate regardless of the customer's location.

Special Rules for Specific Services

Certain services are subject to specific VAT rules in Latvia. For example, telecommunications, broadcasting, and electronic services are covered by the Mini One-Stop-Shop (MOSS) scheme, which simplifies VAT compliance for these services. Additionally, financial and insurance services are often exempt from VAT in Latvia.

Latvia provides significant tax advantages to businesses operating within designated Special Economic Zones (SEZs) and Free Ports. These include up to 80% reduction in Corporate Income Tax (CIT) and Real Estate Tax (RET), dependent on investment volume. Other incentives may include customs duty and excise tax exemptions.

Research and Development (R&D) Tax Credit

Businesses investing in qualifying R&D activities are eligible for a tax credit. Up to 30% of eligible R&D expenses can be offset against CIT.

Investment Tax Credits

Tax credits are available for investments in certain types of assets and business development projects. These include tax credits for investments in new manufacturing equipment and technological processes. Significant investment projects might also be eligible for CIT benefits negotiated with the government.

Accelerated Depreciation

Certain categories of assets may qualify for accelerated depreciation. This allows businesses to deduct a larger portion of the asset's cost in the early years of its useful life, benefiting cash flow.

Microenterprise Tax Regime

Small businesses with an annual turnover below €100,000 can opt for the microenterprise tax regime. This involves simplified tax calculations based on turnover and a reduced flat tax rate of 15%.

Important Notes

Eligibility criteria and the specific benefits of each tax incentive can vary. Tax incentives are subject to change.