A number of significant changes in Latvian tax legislation came into effect on January 1, including a 3% increase in VAT rate and 2% decrease in personal income tax rate. Amendments were made also to the Law on Company Income Tax trying to encourage the business environment in Latvia.

1. Changes in Value Added Tax rates

Starting from 1 January 2009 VAT rates are 21%, 10% and 0%.

General VAT rate is 21%.

The application scope of the reduced VAT rate of 10% has been limited and applies only to pharmaceuticals, infant products, water supply, electricity, gas and heating for inhabitants, public transport services within Latvia. In addition, until 31 December 2009 the reduced rate of 10% shall be applied also to periodicals.

2. Changes in Law on Personal income tax

Changes in rates

The personal income tax rate from January 1, 2009 has been reduced from 25% to 23%.

No withholding tax on dividends to individuals - residents of EU and EEA

Starting from 1 January, 2009 the dividends distributed by Latvian companies to the private individuals - residents of the EU or the EEA are further exempted from tax in Latvia, unless the payer of such dividends is not payer of corporate income tax or is a company subject to special tax regimes. Previously 10% withholding tax was applied to all dividends distributed by Latvian companies to non-resident private individuals. Accordingly the taxation on dividends is now similar for the private individuals, as well as legal entities - residents of the EU and EEA.

Income from agricultural production

Starting from 1 January, 2009 income from agricultural production which is personal income tax-exempt income in Latvia increased from LVL 3000 to LVL 4000 per year.

3. Changes in Law on Corporate income tax

Depreciation for tax purposes - increased tax base for new technological manufacturing equipment and patents and trademarks

-        Taxpayers may calculate tax depreciation from higher initial value of new technological manufacturing equipment bought in 2009-2013. Starting from year 2009 coefficient increased to 1.5.

-        Starting from year 2009 taxpayers may also calculate tax depreciation from a higher initial value of patents and trademarks registered after 1 January 2009.  Initial value before the calculation of depreciation shall be multiplied by the coefficient 1.5.

Losses carried forward - increased the period of coverage

Tax losses may be carried forward up to eight years. Till year 2009 tax losses could be carried forward only for five years. According the Transition rules of the changes in Law on Company Income tax, the taxable income for the year 2009 may be covered by tax losses for the years 2002-2008.

New rule on disposal of fixed assets

Starting from year 2009 taxable income may be reduced by gains from disposal of fixed assets, if the assets are substituted with similar ones within 12 months.

New rule on retained profit

Starting from year 2009 amounts of retained profit are treated as loan equivalents, it means that taxable profit may be reduced by notional interest calculated on the retained profit. The reason of these changes is to encourage the shareholders to invest the company's profit in the development of the company, by increasing the equity, instead of distributing the dividends.

4. Decreased rates of Withholding Taxes

Interest payments

Starting from July 1, 2009, the withholding tax rate on interest payments to related parties decreased from 10% to 5%. 5% tax applies if the recipient is a resident of another EU country and owns more than 25% of the company paying interest.

Royalty payments

Starting from July 1, 2009, the withholding tax rate on payments for copyrights or rights to exercise the copyrights on literary or artistic works, including films, video films, and sound recordings to related parties decreased from 10% to 5%. 5% tax applies if the recipient is a resident of another EU country and owns more than 25% of the company paying interest.

5. Mandatory State Social Insurance Contributions -upper limit is cancelled