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Latvian Parliament Adopts Tax Reform

by Ulrika Lomas,, Brussels

03 August 2017

Latvia's parliament, the Saeima, has approved tax reform legislation under which corporate income will not be taxed until profits are distributed.

Under changes due to be introduced on January 1, 2018, the rate of tax on distributed profits will be 20 percent. No tax will be payable on profits that are reinvested in the company.

The changes mean that natural persons will no longer be required to pay personal income tax on dividends received. However, a transition period of two years has been set for distributing previously accumulated profits, to which a 10 percent personal income tax will be applied.

Under the existing regime, corporate income is taxed at a flat rate of 15 percent.

The legislation also includes changes to several other aspects of Latvia's tax regime.

A progressive system of personal income taxation will be introduced to replace the existing 23 percent flat tax on employment and business income. As a result of these changes, income up to EUR20,000 (USD23,680) will be taxed at 20 percent; income between EUR20,000 and EUR55,000 will be taxed 23 percent; and income in excess of EUR55,000 will be taxed at 31.4 percent. Income from capital gains will be taxed at 20 percent, instead of 10 or 15 percent as is currently the case.

The tax reform increases the social contribution rate for both employers and employees by 0.5 percent from 2018. Currently, the overall social contribution rate is 34.09 percent, with employers contributing 23.59 percent and employees 10.5 percent.

In addition, a five percent social contribution will have to be made on royalty payments from next year, with the contribution paid into the recipient's pension insurance fund.

Companies operating under micro-enterprise tax regime will pay a flat rate of 15 percent of turnover (currently 12 percent) as a result of the tax reforms, although the maximum turnover threshold will be reduced to EUR40,000 per year from the current EUR100,000.

The reforms also include changes to aspects of the value-added tax regime including a reduction in the VAT registration threshold of EUR10,000 to EUR40,000. Additionally, the VAT reverse charge will be applied to a broader range of supplies, including gaming consoles and home appliances, and construction materials and metal products.

TAGS: tax | business | value added tax (VAT) | insurance | employees | corporation tax | Latvia | tax thresholds | legislation | tax rates | dividends | tax reform | construction | individual income tax | services

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