The Parliament of the Republic of Latvia (Saeima) has approved in total 12 laws associated with the Tax reform after reviewing more than 300 proposals. The Tax reform will come into force from January 1, 2018 and will cover both - individual and corporate tax payers in Latvia.
The major changes in the Tax system in Latvia are as follows:
Corporate income tax
As new Corporate Income Tax Law will enter into force in January 1, 2018, a new concept will be introduced and will have to be applied.
Unlike the current CIT regime, the new regime is based on cash-flow taxation model, which provides that CIT is payable at the moment of profit distribution. In case of reinvestment of the profit - CIT shall not be applied.
The applicable CIT rate is increased from the current 15% to 20%. Therefore the changes mean that natural persons will no longer be required to pay personal income tax on dividends received.
Personal income tax
The most massive changes are planned for the Personal Income Tax Law. Amendments are intended to introduce a differentiated PIT rate from 2018.
Therefore the current PIT at rate 23% will be replaced with progressive tax with the following rates:
- 20% rate will be applied on income up to 20 000 EUR per year;
- 23% rate will be applied on income over 20 000 EUR per year;
- 31,4% rate will be applied to income over 55 000 EUR per year.
The current regulation states that dividends derived by private individual are subject to PIT at 10% rate. However dividends will be PIT exempt in case CIT is paid for such dividends. With the new regime it is established that PIT on capital income, including capital gain, is set at 20%.
The social tax rate will increase by 1% (0.5% for each - employee and employer) totaling 35.09%. Therefore an employer will have to pay 24.09%, but employee - 11%.
Value added tax
The reform includes changes to aspects of the VAT regime including a reduction in the VAT registration threshold of EUR 50 000 to EUR 40 000.
The list of sectors with the reverse VAT payment procedure will be expanded. The VAT reverse charge will be applied to a broader range of supplies, including game consoles, household appliances, construction materials and metal products.
Amendments to the micro-enterprise tax payment regime is provided for maintaining a unified tax rate of 15% for turnover for all micro-enterprises.
Maximum turnover is planned to be reduced from the current EUR 100,000 to EUR 40,000. Changes also state that from January 1, 2019 onward, the employees of micro company will be allowed to work in only one such company.
With the amendments to the Excise Tax Law is intended to compensate losses from the tax reform’s realization.
The reform will affect fuel, cigarettes and alcohol excise tax rates. Fuel excise tax rates will be from 7.8% to 24% (depending on fuel type). The alcohol excise tax rates will be from 15% to 24%, and for the cigarettes excise tax rate will be 5.5%.
On taxes and duties
The amendments to the Law on Taxes and Duties state that credit institutions will have to provide Tax authority of Latvia with information about their clients, namely individual tax payers, on an annual basis where debit or credit turnover exceeds EUR 15,000 in the previous year.
Also amendments provide an obligation to perform mandatory payments from royalties. Recipients of royalties will have to perform 5% payments from royalties to insure their pension.
Minimum wage in Latvia will be increased to EUR 430 instead of EUR 380.
Taking into account all the above mentioned, there is important work to do in future when implementing the changes into the system.