From1 January 2018, major changes have been made to legislation affecting the calculation of employment income of residents and non-residents.
Monthly application of PIT by the employer
From 1 January 2018, employers are required to apply PIT rates according to monthly income thresholds, calculated by dividing the annual income thresholds by 12 as follows:
|The employee has filed a wage tax book and pays Latvian NSIC.
||The employer applies a 20% PIT on monthly gross income of up to EUR 1,667.
||The employer applies a 23% PIT on any excess over EUR 1,667 but does not apply the higher threshold or the top rate.
|The employee pays Latvian NSIC but has not filed a wage tax book.
||All income attracts a 23% PIT.
|The employee has filed a wage tax book, holds a foreign A1 certificate, and does not pay Latvian NSIC.
||The employer applies a 20% PIT to monthly gross income of up to EUR 1,667.
||The employer applies a 23% PIT on any slice of income between EUR 1,667 and EUR 5,233 and a 31.4% PIT on any excess.
|The employee has not filed a wage tax book, holds a foreign A1 certificate, and does not pay Latvian NSIC.
||The employer applies a 23% PIT to monthly gross income of up to EUR 5,233.
||The employer applies a 31.4% PIT on any excess.
The employee may opt and request the employer to apply 23% also to the income that is subject to 20% by the law.
Application of PIT by individuals annually
A person whose annual income exceeds EUR 62,800 (in 2019) is required to file the annual income tax return. Mandatory filing also applies to individuals who need to pay additional PIT as a result of misapplied allowances or tax rates. An individual may voluntarily file a tax return to request a refund of overpaid taxes.
Individuals are required to apply progressive PIT rates on their taxable income. In assessing the applicable rates, the entire taxable income, including applicable flat tax rates, should be counted.
For persons who pay Latvian NSIC and ST on their full income, applying the rate of 31.4% through the annual income tax return is a formal procedure to compensate them for the additional PIT charge at the expense of ST already paid. So the highest effective rate of PIT for persons paying ST on their full income is still 23%. Otherwise, individuals not paying NSI and ST on their entire income are affected, since they are required to pay additional tax.
Allowances and a differential personal allowance (DPA)
In 2019, the employer will be required to apply a DPA forecast by the SRS to employees that have filed their wage tax book, unless the employee has chosen not to apply a DPA. The SRS will notify employers via the Electronic Declaration System (EDS) by 1 August 2019 about the forecast DPAs applicable until end of 2019.
For PIT purposes, the employer is still permitted to deduct the employee part of NSI.
A monthly dependant allowance of EUR 230 can be claimed for each dependant in 2019.
The lawmaker has also determined that from 2018 any allowance should be applied to employees as if they were effectively reducing their income subject to a 20% PIT.
The employee may opt for and request the employer not to apply the monthly personal allowance. The request should be made through the electronic declaration system.
The PIT Act exempts any income arising on the exercise of stock options, provided the following criteria are met:
- The employee has an employment contract with the company or a related company.
- The stock option plan has a minimum three-year holding (vesting) period.
- The employer has provided the SRS with statutory information on the terms of the stock option plan within two months after the award date as required by the PIT Act.
If, at the time of exercising stock options, the individual does not have an employment contract with the entity that granted them or with a related entity (e.g. the individual is a leaver), the employer should pay NSIC out of their own pocket at the rate applicable when the employment ended.
Amendments to the PIT Act effective form 1 January 2018 stipulate a new approach to traders (i.e. PIT payable on at least 20% of their income).
The amendments provide that when calculating taxable operating income, business expenses that do not exceed 80% of the individual’s total operating revenue can be written off as operating expenses. At the same time, certain types of expenses are defined that can be fully included in business expenses without applying the statutory cap.
The taxpayer’s operating loss (a negative operating income, ignoring the 80% cap on operating expenses) can be offset in chronological order against taxable operating income in the next three tax years, subject to the 80% cap.
Capital gains arising on the disposal of capital assets are taxed at 20%. Capital assets include real estate, shares, investment fund certificates, debentures, and intellectual property.
Income arising on the disposal of real estate (with the taxpayer owning no other real estate) is not taxable if this income is invested in a functionally similar real estate within 12 months after or before the disposal. The income is considered to be earned on the next day when 12 months have passed from the date of disposal.
From 1 January 2015, Latvian tax residents (individuals) and non-residents can take an exemption on income arising on the disposal of real estate in Latvia if:
- the real estate is held for at least 60 months and registered as the seller's primary residence for at least 12 months before the sale during a period of 60 months
- the real estate is held for at least 60 months and has been the sole real estate of the taxpayer over the 60 months before the sale, or
- income arising on the disposal of the sole real estate has been reinvested during the 12-month period after the sale into another real estate of the same function.
Dividend and interest income
Dividend income, interest income, alienation of bonds, and income from life insurance contracts and private pension funds is taxed at 20%. This type of income should still be reported and charged to PIT through the annual income tax return unless such income is paid by a Latvian taxpayer who has already withheld PIT at source.
A 0% PIT applies on dividends paid by a Latvian/EU/EEA company or one from any other country if there is evidence that CIT or PIT has been withheld at source. Dividends will enjoy a special period of transition (i.e. dividends paid before 2020 out of profits arising before 2018 will still attract a 10% PIT unless received from an MBT payer).
In any case, dividends received from tax havens and MBT payers will attract a 20% PIT.
Income from substantial participation in controlled foreign entities
Income from a substantial participation in controlled foreign entities is subject to a progressive PIT rate from 2018. This applies to Latvian tax residents that directly or indirectly hold at least 25% of a foreign entity’s equity, stock, or voting power, or are in any other manner (e.g. by contract) entitled to a substantial proportion of distributed profits or in a position to influence decisions about the foreign entity’s profit distribution policy. An exception applies to a participation in such foreign entities through a public company that is listed on an EU/EEA regulated market.