Consignment Notes

Consignment notes - invoices with registered SRS numbers have been cancelled as of 1 January 2010.

Personal Income Tax

• Increased General Tax Rate

The general tax rate has been increased from 23% to 26%. The tax rate on self-employed persons (on income from economic activity) has been increased from 15% to 26%.

• Licence Fee Implemented

Self-employed persons who conform to certain legal requirements and who carry out certain types of economic activity (e.g. crafts, clothing/footwear production, photography, housekeeping, etc) shall have an option to pay a licence fee that includes both personal income tax and state social security compulsory contributions. Depending on the type of the economic activity, the licence fee shall vary from LVL 30 to LVL 120 per month.

• Extended PIT (personal income tax) taxable income base - capital gains

As of 2010, capital gains and capital income will be PIT taxable, including the following:

- Income from sale of financial instruments (shares, etc), real estate and business and intellectual property objects shall be liable to 15% personal income tax. Taxable income shall be defined as the difference between the sales income and the purchase value. The income day shall be the day when the tax payer receives the money.

- Dividends, incoming interest, income from contributions to private pension funds and income from life insurance contracts with accumulation of funds shall be liable to 10% personal income tax rate. The day of acquiring the income from dividends (except for dividends from public joint stock companies) shall be the day when the dividends are calculated. The day of acquiring income from interest shall be the day when the person acquires the right of unlimited dealing with this income in accordance with the law or a contract and it becomes accessible to the person in the manner described therein.

The law prescribes also several exceptions and transitional provisions to these norms.

• Extended PIT taxable income base - benefit from private use of passenger cars owned by employers

A procedure has been established for the calculation of payroll taxable benefit from private use of passenger cars by employees (company's owners, members of the board or council or their family members).

The benefit from private use of passenger cars, regardless of mileage, shall be the following:

- LVL 40 per month for electromobiles and cars with engine capacity of up to 1 500 cm³;

- LVL 70 per month for cars with engine capacity from 1 501 cm³ to 2 500 cm³;

- LVL 100 per month for cars with engine capacity from 2 501 cm³ to 3 500 cm³ (included);

- LVL 150 per month for all other cars.

The acquired benefit must be calculated even for transferred and rented cars, if they are used within the economic activity or privately.

The aforementioned amounts are liable to personal income tax and state social security compulsory contributions. However, an employee may compensate the employer for private use of a car.

The Ministry of Finance of the Republic of Latvia recently has drawn up amendments to the laws, setting out general procedures for the accounting of vehicle expenses as deductible expenses for corporate income tax.

• Extended base of PIT taxable income - other income

As of 2010, the 10% PIT tax rate shall be applicable to both residents' and non-residents' income from alienation of own standing forest for felling and alienation of the acquired timber.

Personal income tax and state social security compulsory contributions shall also be applicable to several other income types of residents and non-residents, including income of leased personnel or similar income, regardless of who receives such income on behalf of the natural person. I.e. starting from 2010, a natural person or a legal entity of Latvia that receives an employee who is a resident of another state, in exchange for compensation, to a resident of Latvia or a representative office of a non-resident, in order to perform activities related to its economic or professional activity in Latvia or abroad, shall calculate PIT from the income from such personnel.

PIT shall also be applicable to gifts received from natural persons, except if the grantor is related to the payer by marriage or kinship of up to the 3rd degree, or if the value of the gift is up to LVL 1 000.

Corporate Income Tax

Deduction of expenses not related to economic activity

Companies should take into consideration that starting from 2010 the taxable income from expenses not related to economic activity shall be increased and the increase shall be carried out by applying to the expenses the coefficient 1.5.

Deduction of representation expenses

As of 2010, only 40% of representation expenses may be written off instead of the former 60%.

Advance payments

Tax payers shall have the opportunity to make corrections to their advance payments not only in the event of significant decrease of the net turnover or if the tax payer's activities or the income and expense structure have changed, but also in the event of reduced profit.

Value Added Tax

As of 1 January 2010, some amendments to the VAT law shall become effective. These amendments are very important, as they define the implementation of the EU directives into Latvian laws, ensuring uniformity of the VAT procedures and definitions throughout the EU.

The most important changes are the following:

Changes regarding the place of provision of services

The principle of the place of provision of services has been changed. From now on, if services are provided to a person that carries out economic activity, the place of provision of services shall be the place of the economic activity of the recipient of these services.

Thus, in general, the place for the provision of services shall be the address of the recipient of the services and the recipient of the services shall be responsible for calculation and payment of the related VAT. If services are provided to a person that does not carry out economic activity, the place for the provision of services shall still be the place of the economic activity or the residence of the provider of services, depending on the circumstances. However, for some types of services (e.g. cultural, art, sports, science, education, entertainment and other similar services, as well as real estate and transportation services) the definition of the place of the provision of services shall remain the same as before. The amendments also provide a more exact definition of situations when services are provided to a person who is not registered in the European Union and does not perform economic activity.

Changed VAT taxation period for small companies

Provisions regarding VAT taxation periods have been updated. For tax payers with the yearly turnover of up to LVL 10 000 the taxation period shall be six months. If the yearly turnover is from LVL 10 000 to LVL 35 000, the taxation period shall be three months. If the yearly turnover is above LVL 35 000, the taxation period shall be one month. Taxation periods of six or three months may only be applied to persons that do not carry out transactions in the European Union.

Changed VAT payment deadline

The VAT payment deadline has been extended to the 20th day after the end of the taxation period.

Changes have also affected the reverse VAT calculation procedure for services - VAT is applied and must be paid at the time when services are received or when the down payment is made, regardless of when the invoice is received.

Special VAT calculation for small companies

Companies will have the opportunity to choose a new system for the payment of VAT, if at least one of the following criteria is met:

-          The value of taxable transactions during the previous year has not exceeded LVL 70 000; or

-           A recently registered VAT payer does not plan to have transactions, the value of which would exceed LVL 70 000 per taxation year.

Such VAT payment system may be applied also, if the value of the transactions exceeds LVL 70 000 and the transactions are related to production of certain agricultural goods.

If the above stated conditions apply, the tax payer may pay VAT after the payment for the delivered goods or services has been received. However, in this event the deduction of input tax shall also be carried out only after the actual payment for the delivered goods or services has been made in accordance with the VAT invoice.

Repayment of overpayment

A new, improved VAT overpayment repayment system is being implemented regarding the overpaid VAT amounts accumulating from 1 July 2010.

In accordance with the new rules, SRS will automatically transfer the overpaid VAT of each period to the next period by the end of the taxation year. If the VAT payer has a tax debt, SRS will set off the overpayment against the unpaid taxes and fees before transferring the overpaid VAT to the next period. If at the end of the year there is still an overpayment of VAT, it shall be automatically repaid within 30 days after presenting the VAT declaration for the previous year.

However, in some cases, the tax payer may be entitled to request repayment of the overpaid tax before the end of the taxation year.

New procedures have been implemented regarding the repayment of VAT paid in another EU member state, as well as the repayment of VAT to taxable persons of other EU member states.

VAT declarations

The deadline for submitting electronic declarations has been extended to the 20th day after the end of the taxation period. Paper declarations must still be submitted by the 15th date. Also the forms of the VAT declaration and its annexes have been updated.

Submission of the yearly VAT declaration is no longer mandatory for all taxable persons.

Registration of VAT payers in Latvia in relation to EU transactions

Changes have been implemented regarding the registration for VAT purposes in Latvia of persons performing EU transactions.

Tax exemptions

A new VAT exemption has been implemented for reselling goods for which the VAT payer has not deducted an input tax and which have been used in tax-exempt transactions.

Representation expenses

The irreclaimable VAT for representation expenses has been increased from 40% to 60%.

Other changes

Changes have also been made to the laws on real estate tax, excise tax and car and motorcycle tax.