Business travelers are likely to be taxed on their employment income received for work performed in Latvia.
Liability for income tax
An individual is considered a Latvian resident if:
- the individual’s permanent place of residence (domicile) is in Latvia.
- the individual resides in Latvia for 183 days or more in any 12-month period, which starts or ends in the taxation year.
- the individual is a Latvian citizen employed abroad by the government of the Republic of Latvia.
In order to recognize the individual as a Latvian resident, at least one of the conditions mentioned above has to be met.
Double tax treaty provisions are also considered when defining an individual as resident of Latvia.
In order to determine the 183-day period, the Organization for Economic Co-operation and Development (OECD) presence test is used when the days of arrival and departure, weekends, vacations spent in Latvia etc. are counted. An exception may be made in cases where the individual cannot leave the country due to illness.
Tax trigger points
Technically, there is no minimum threshold/number of days that exempts the employee from the requirements to file tax returns and pay income tax in Latvia. To the extent that the individual qualifies for relief in terms of the employment income article of an applicable double tax treaty, there will be no Latvian tax liability.
Types of taxable income
The following categories of income are subject to income tax in Latvia:
- employment income, including bonuses, awards, fringe benefits, benefits-in-kind
- income from self-employment
- business income
- capital income
- capital gains
- rental income
Generally, all types of remuneration and benefits received by an employee from his/her employer for services rendered constitute taxable income, regardless of where it is paid (if the amount relates to work performed outside Latvia, it would be measured if the amount which is taxed is attributable to Latvia), unless specifically exempted. Typical items of an expatriate compensation package set out below are, in most circumstances, fully taxable unless otherwise indicated:
- reimbursements of foreign and/or home country taxes.
- school and kindergarten tuition reimbursements.
- home-leave reimbursements for the employee.
- cost-of-living allowances.
- expatriation premiums for working in Latvia.
- housing allowances.
- benefits-in-kind generally form part of taxable compensation. Where a company car is provided wholly or partly for personal use, special ‘car taxes’ are generally paid by the employer.
- medical insurance premiums (subject to exceptions) and medical care expenses.
- flights home paid by the employer.
- provided certain conditions are met and subject to limitations, the employer’s contributions to a private pension plan or insurance premiums are not taxable.
There is a flat personal income tax rate of 24 percent (in 2014).
There are special rates applied to particular types of income:
- 10 percent on capital income such as dividends, interest, income from private pension funds and life insurance agreements with accumulation of funds.
- 15 percent on capital gains (shares, real estate, intellectual property).
Non-residents are taxed at the same rates as residents.
Liability for social security
Employers and employees who are liable for social security in Latvia pay it with no upper limit. It is likely, however, that most extended business travelers would not be liable for Latvian social security. This could be mostly due to the following:
- they remain in their home countries’ social security system under the European Union (EU)/European Economic Area (EEA) rules.
- they remain in their home countries’ social security system under a totalization agreement with Latvia.
The standard rate of social security contributions is 34.09 percent, from which 10.50 percent is the employee’s part and 23.59 percent is the employer’s part. There are differentiated rates, unlikely to apply to expatriates, for working individuals of pension age, self-employed individuals and some other groups of socially insured individuals.
Latvia imposes an income cap for social security contributions EUR46,400 for calendar year as of 1 January 2014.
Employee compliance obligations
Tax returns are filed between 1 March and 1 June following the tax year-end. If in the taxation year the individual has gained taxable income only in Latvia from which all personal income tax has been withheld and paid, no tax return has to be filed.
Employer reporting and withholding requirements
Employment income is subject to income tax and social security contributions under the Pay-As-You-Earn (PAYE) system. If an individual is taxable on employment income, the obligation to withhold rests with either the employer or, if the employer is not operating withholding, it rests with the ‘host’ employer or the employee himself/herself. The employer has a monthly payroll reporting liability.
Double taxation treaties
In addition to Latvia’s domestic legislation that provides relief from international double taxation, Latvia has entered into double taxation treaties with more than 50 countries to prevent double taxation, and allow cooperation between Latvian and overseas tax authorities in enforcing their respective tax laws.
Permanent establishment implications
There is the potential that a permanent establishment (PE) could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has. Respective double tax treaties should be considered to clarify each situation.
The standard value-added tax (VAT) rate is 21 percent. There is also a reduced rate of 12 percent. There are several transactions which are subject to VAT at the rate of 0 percent or are VAT exempt.
All transactions between related parties must be at arm’s length, including domestic. Legislation amendments are in the final approval phase to impose specific documentation requirements. Latvia has implemented several transfer pricing rules in corporate income tax law and the law on taxes and duties.
A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of an entity in another jurisdiction, in other words, a cross-border benefit is being provided. This would also be dependent on the nature and complexity of the services performed.
Work permit/visa requirements
Foreigners who enter Latvia with or without a visa are not allowed to exercise economic activities in an employed capacity. Foreigners can be employed only in cases which are stated in Latvian legislation and if they have received a visa and a work permit.
Citizens of the EU and EEA countries may enter Latvia without a visa and stay in Latvia for up to 90 days within a 6 month period, counting from the day of entry. If the individuals wish to reside longer, a residency permit has to be received. No work permit is required.
Local data privacy requirements
Latvia has data privacy laws. Organizations have a legal duty to keep data private and secure.
There are no exchange controls in Latvia.
Non-deductible costs for assignees
Practically all the costs except for payments to private pension funds, premiums for life insurance agreements, medical and education expenses – all subject to limitations – are non-deductible.