On December 20, 2016, the Saeima (Latvian Parliament) approved new amendments to Latvian Micro-Enterprise tax law. While the modifications to the law represented a compromise solution, the overall tax rate went up.
History of Latvian Micro-Enterprise Tax Law
The Latvian Micro-Enterprise Tax Law first entered into force on September 1, 2010. It primary purpose was to establish a lower tax rate for very small businesses, which were defined as businesses with turnover not exceeded 100,000 euros per calendar year. If a business qualified as a small business, under the Latvian Micro-Enterprise Tax Law, it would pay only a 9% tax rate. This rate was included in everything – corporate income tax, social tax and personal income tax.
Changes to Latvian Micro-Enterprise Tax Law
The December 20 changes came after an intense dispute over the best approach to the small business tax. In fact, on November 23, 2016, the Saeima first approved amendments to the law that would lower the income tax to a mere 5%, but the small business owners would have been forced to withhold social insurance contributions from each employee.
In the end, the November 23 amendments were discarded. The December 20 version of the law simply increased the micro-enterprise tax rate to 15% and eliminated the November 23 social insurance contribution withholding requirement due to the fact that it would have been excessively burdensome for small businesses.
It is important to point out, however, that the new changes to the Latvian Micro-Enterprise Tax Law carved-out a limited one-year exception for businesses with a turnover of only 7,000 euros per year; these businesses will only pay a 12% tax rate. This reduced tax rate will only be in effect through December 31, 2017
Furthermore, the Saeima also repealed the November 23 amendment that would have terminated the Latvian Micro-Enterprise Tax Law on December 31, 2018. Instead, the Saeima asked the Latvian Cabinet of Ministers to submit the draft new tax law for small businesses.
Latvia Remains One of the Lowest Tax Jurisdictions in the European Union
Even with the recent changes to Latvian Micro-Enterprise Tax Law, Latvia remains a jurisdiction with one of the lowest tax burdens in the European Union. This fact is often not appreciated by the West European tax professionals, often due to their cultural prejudice against doing business in Eastern Europe. This omission in Latvia may be a serious mistake on their part, depending on the client’s situation.
Sherayzen Law Office follows the development of tax laws in Latvia and believes that there are situations where these laws can offer significant advantages to the firm’s clients for tax planning purposes.