Tax Guide for US Expats Living and Working in Latvia
Who Is Liable For Income Taxes in Latvia
Residents are subject to Latvian personal income tax on their worldwide income. Nonresidents are subject to tax on their Latvia-source income.
Under Latvian law, an individual is considered to be a resident of Latvia if any of the following conditions are satisfied:
- The individual’s permanent place of residence is located in Latvia.
- The individual resides in Latvia for 183 days or longer in a 12-month period beginning or ending during the tax year.
- The person is a citizen of Latvia and is employed abroad by the government of Latvia.
In general, individuals who do not meet the above requirements are considered to be nonresidents of Latvia for tax purposes. In determining residency for tax purposes, the provisions in Latvia’s double tax treaties must be considered.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Income derived from employment is taxed at a rate of 25%. Fringe benefits, including employer-provided lodging and car usage, are also taxable.
Self-employment and business income. The income of individuals engaged in self-employment activities is subject to income tax at a rate of 25%.
For purposes of determining income tax on self-employment income, taxable income equals gross income minus eligible expenses.
An individual who has registered with the State Revenue Service of Latvia as a performer of economic activities can choose to pay a fixed personal income tax amount depending on his or her income level, unless he or she does not have employees and his or her gross income (before deduction of eligible expenses) from economic activities did not exceed LVL 10,000 in the year before the tax year. The rate of the fixed tax is 5%. If income from economic activities exceeds LVL 10,000, an additional 7% tax is applied to income exceeding LVL 10,000. The amount of the advance payment of fixed personal income tax is LVL 25.
Individuals performing business activities in certain specified areas (for example, florists, and beauty and haircare services) may choose to pay the fixed patent fee instead of paying personal income tax and social security contributions based on the amount of income. The option of paying a fixed patent fee is available if certain conditions specified by the law are satisfied.
The amount of the patent fee varies from LVL 30 (€43) to LVL 120 (€171), depending on the type of business activities performed and the place where these activities are carried out.
Investment income. For residents and nonresidents, the following investment income is taxed at a rate of 10%:
- Dividends
- Interest income and income related to interest
- Income from contributions in private pension funds
- Income from concluded life insurance contracts with the accumulation of funds
Directors’ fees. Board members of resident and nonresident companies are subject to personal income tax at a rate of 25% on their directors’ fees, regardless of whether the fees are paid by Latvian-registered companies or foreign companies.
Taxation of employer-provided stock options. Latvian law does not specifically address the taxation of employer-provided stock options.
Benefit from use of company’s car. The use of an employer’s car for private purposes is considered to be a benefit to the employee that is subject to personal income tax, unless the employer has paid tax on the use of its vehicles.
Capital gains. Capital gains are taxed at a rate of 15% in Latvia. Capital gains equal the difference between the disposal price of a capital asset and the acquisition price of that capital asset. In the event of the liquidation of a company, the capital gains on investments in share capital equal the difference between the liquidation quota and the investment value.
The following are considered to be capital assets:
- Shares, investments in partnerships and other financial instruments
- Investment fund certificates and other transferable securities
- Debt securities (promissory notes, certificates of deposit and short-term debt instruments issued by companies) and other money instruments
- Real estate (with certain exceptions)
- A company within the meaning of the commercial law
- Intellectual property
Capital gains derived from the sale of real estate are not taxable if the individual has owned the real estate for more than 60 months and if the address of the real estate has been the person’s declared place of residence for at least 12 months before the sale. Capital gains derived after 1 January 2010 from the sale of investment certificates, acquired on or before 31 December 2009, equal the difference between sales and acquisition price proportionate to the number of months for which certificates were owned after 1 January 2010.
Sales of other types of personal property in one-off transactions that are not part of a commercial activity are not subject to personal income tax.
Income, including sales income, from government promissory notes is not subject to personal income tax.
Deductions
Deductible expenses. Individuals may deduct the employees’ portion of social security contributions from the income reported on their tax returns. They also may deduct the employees’ portion of payments in other European Union (EU)/European Economic Area (EEA) member states that are essentially similar to social security contributions and that are determined by legislative acts of such states.
Personal deductions and allowances. Individuals may deduct the following expenses from the income reported on their tax returns:
- Contributions to private pension funds and to life insurance schemes with the accumulation of contributions. However, the deduction for the sum of both types of contributions is limited to 10% of annual taxable income.
- Contributions to life insurance schemes without the accumulation of contributions and to health or accident schemes. However, both types of contributions are limited to 10% of annual taxable income or LVL 300 per year, whichever is lower.
- Medical expenses.
- Acquisition costs for investment certificates of investment funds (acquired on or before 31 December 2009) if these certificates have been owned by a private individual for at least 60 months. These costs may not exceed 20% of an individual’s annual taxable income (applicable until 31 December 2014).
- Expenses for professional education (together with medical expenses up to the limit of LVL 150).
- Donations to acceptable charitable organizations and governmental institutions of up to 20% of annual taxable income.
The total deduction for the sum of contributions to private pension funds, contributions to life insurance schemes and donations is limited to 20% of annual taxable income.
The current nontaxable amount is LVL 45 per month.
A parent may deduct LVL 70 per child monthly. For other individuals living with the taxpayer, including unemployed family members and parents, the taxpayer receives an additional monthly allowance of LVL 70, provided the unemployed family members and parents are properly registered with the State Revenue Service.
Income tax paid abroad may be credited against tax payable in Latvia, up to 25% of the foreign income. The amount of the credit is limited to the amount of the tax paid on the income in Latvia.
Personal deductions for medical and educational expenses may not be claimed by nonresidents, except for nonresidents who are residents of another EU/EEA member state and have derived more than 75% of their total income from Latvia in the tax year.
Business deductions. Costs for materials, goods, fuel and energy, salaries, rent and leases, repairs and depreciation on fixed assets, and other costs may be deducted from the taxable income of a self-employed individual.
Expenses incurred to obtain intellectual property rights are deductible, subject to limits set forth in rules of the Cabinet of Ministers.
Rate. Income tax at a basic rate of 25% of taxable income applies to residents and nonresidents.
For a sample tax calculation.
Relief for losses. Self-employed individuals may carry losses forward for three years.
B. Other taxes
Property tax. Property tax is imposed on individuals, legal entities and nonresidents that possess or hold Latvian land, buildings and engineering constructions. The property tax rate is 1.5% of the cadastral value of land, buildings and constructions (however, see below the rates for houses and flats not used for commercial purposes). Agricultural land that is not cultivated (except for land that has an area not exceeding one hectare and land subject to limitations on its use for agricultural activities) is subject to 3% real estate tax. Engineering constructions that are owned by natural persons and that are not used for commercial activities, buildings included in individual residential house constructions and parts of apartment houses that are used for living (ancillary buildings) are exempt from property tax.
The following are the property tax rates for houses and flats not used for commercial purposes:
- 0.2% of the cadastral value below LVL 40,000
- 0.4% of the cadastral value exceeding LVL 40,000 but below LVL 75,000
- 0.6% of the cadastral value exceeding LVL 75,000
Estate and gift taxes. Estate and inheritance taxes are not imposed in Latvia. Gifts above LVL 1,000 received from nonrelatives are taxed as personal income. Royalties received by legal successors of deceased persons are taxable as personal income. State authorities may impose duties on the value of inheritances at rates ranging from 0.25% to 7.5%.
Microenterprise tax. On meeting certain requirements, a company may apply for the microenterprise tax payment procedure. Under this procedure, the company pays microenterprise tax at a rate of 9%. The microenterprise tax payment includes corporate income tax, state social insurance contributions, personal income tax and the state corporate risk duty for the employees of a microenterprise.
C. Social security
Employers and employees make social security contributions on monthly salaries at general rates of 24.09% and 11%, respectively. Foreign employees, who do not have a permanent place of residence in Latvia, but who remain in Latvia for more than 183 days in any 12-month period and who are employed by a non-EU company, pay quarterly social security contributions at a rate of 32.22%.
If a company from an EU/EEA member state employs citizens of Latvia, it must register with the State Revenue Service in Latvia for the purpose of social security contributions or the employee
can register as a social security contribution payer. Regulation (EC) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems applies to nationals of a member state, stateless persons and refugees residing in an EU member state who are or have been subject to the legislation of one or more of the EU member states, as well as to the members of their families and to their survivors.
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We have been preparing US income tax returns for US Citizens and permanent residents living in Latvia for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Latvia and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Latvia.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email