Individual - Significant developments

Last reviewed - 05 July 2021

Tax reform effective from 1 January 2021

As of 1 January 2021, significant changes have been introduced to the taxation of individuals, concerning Personal Income Tax (PIT), the National Social Insurance Contributions (NSIC), and the Solidarity Tax (ST). Several beneficial tax regimes, such as micro-business tax, self-employed income tax, royalty fee payers, and licence fees regime have been either changed significantly or removed entirely.

In efforts to decrease the administrative burden for managing the personal taxation matters of individuals, the Latvian tax authority is underway in implementing automated solutions for tax refunds via the Electronic Declaration System.

In order to mitigate the effects of the COVID-19 crisis, employer expenses (capped at 30 euros [EUR] on a monthly basis) related to remote work for equipping an employer’s home office with the necessary items are treated as non-taxable income of an individual as of 2021. Other tax reliefs (except for the available tax holidays) related to mitigation of the COVID-19 crisis have not been introduced for individual taxation as of 1 January 2021.

The main principles of taxation in 2021 can be divided into the following topics:

  • Treatment of paid employees and traders:
    • Progressive PIT rates are applied as follows:
      • A 20% PIT on income of up to EUR 20,004 a year.
      • A 23% PIT on EUR 20,004 to EUR 62,800 a year.
      • A 31% PIT on any income over and above EUR 62,800 a year.
    • The employer/trader is required to apply a differential personal allowance (DPA) between EUR 0 and EUR 300 in 2021, which the State Revenue Service (SRS) has forecast according to the employee’s income in the preceding period. As of 2021, the differential personal allowance is applied proportionally up to the income not exceeding EUR 1,800 on a monthly basis. The person may opt not to apply the differential personal allowance on a monthly basis.
  • Income from capital and capital gains:

    • A 0% PIT on dividends from income generated after 2017 on which corporate income tax (CIT) or PIT has been withheld, while a 20% PIT on other dividends. Dividends from tax havens and micro-business tax (MBT) payers will attract a 20% PIT.
    • A single PIT rate of 20% on all types of capital income and capital gains.
  • The NSIC and ST rates are split between employer and employee. In 2021, the applicable standard rates are 23.59% (employer part) and 10.5% (employee part). 
  • The NSIC income cap has remained the same as in 2021 (i.e. EUR 62,800), with any excess gross taxable income attracting ST.
  • The ST on the slice of taxable gross income exceeding EUR 62,800 has been split between the health insurance budget, the PIT budget, and the state pension budget.