Advantages and disadvantages of microenterprise tax payer.
Company formation and accounting in Latvia
Last updated: 2018-03-03

Who can become a microenterprise tax payer?

As a microenterprise tax payer you can register following business types:
  • sole trader,
  • individual company,
  • agriculture or fishing farm,
  • natural person that is doing economic activities,
  • limited liability company (SIA in Latvian).

Criteria (requirements) to register as a microenterprise tax payer.

The criteria are as follows:
  • Owners of shares (if any) must be only individuals (natural persons). An owner of shares of limited liability company - a payer of the microenterprise tax can not be another company (legal person).
    If for example natural person is owner of shares of limited liability company and the natural person also is registered as person doing economic activities, then only one business form can register as a payer of the microenterprise tax (another business form must pay general taxes).
  • Turnover during a calendar year does not exceed 40 000 euros (in some limited cases turnover of 52 000 euros per year is allowed). Before year, 2018 maximum allowed turnover was 100 000 euros.
  • Number of employees can not increase five (owner of a company also is an employee of the company).
  • Members of the board of directors of a limited liability company must be employees of the microenterprise tax payer (that means, non employee can not be a member of the board of directors).
  • A payer of the microenterprise tax can not be a companion (participant) in a partnership. For example, if limited liability company is a payer of the microenterprise tax, then the company can not be a partner of a partnership.
  • Maximum salary of an employee is 720 euros per month. As maximum number of employees is five, that means that maximum total amount of salaries per month is 3600 euros.

In what cases it is advantageous to be the microenterprise tax payer?

  • Your business has very small expenses. In general it is a service business (for example, (website) programming services, consultations, education, accounting, legal services).
  • Turnover of your business is relatively small and payable salary for employee is 720 euros (or about 720 euros) per month. It is reasonably to compare total taxes for the microenterprise tax payer and total taxes for standard tax payer (corporate and personal income tax, social contributions).
For example, yearly turnover of a company is 40 000 euros. Expenses for a year - 3100 euros. Five employees and average salary of each employee is 615 euros per month ("in pocket").
If a company is the microenterprise tax payer, then total amount of taxes per year would be 6000 euros.
If a company is payer of standard taxes, then approximate total amount of taxes from salaries (615 euros per month "in pocket") would be approximately 26820 euros per year.
From the above example, you can see that the microenterprise tax payer can afford to pay higher salaries.

As a small advantage can be considered a relatively simple procedure for calculating the tax and simplified reporting.

Disadvantages for the microenterprise tax payer and employees.

Main disadvantages are related with employees of the microenterprise tax payer.
As a disadvantage the microenterprise tax payer can be considered the fact, that the taxpayer pays less amount of social contributions. That means less social guaranties for employees of the taxpayer (for example, pension, sickness benefit).

Example for comparison. Monthly turnover of a company is 1000 euros, company has one employee and salary "in pocket" is 615 euros.
  • If a company is the microenterprise tax payer, then monthly amount of taxes is 150 euro and 80% "goes" to social contributions. So amount of social contribution for the employee is 120 euros per month.
  • If a company pays standard taxes, then amount of social contributions (during Year, 2018) is approximately 298 euros per month.

Another possible disadvantage could be attitude of Latvian business partners because of Personal income tax.
In certain cases, if Latvian company receives services from a payer of the microenterprise tax, the service receiver has risk to get obligation to pay salary taxes for amount (reward), paid to the microenterprise tax payer.
For example, Latvian company (payer of standard) taxes, concludes agreement with the microenterprise tax payer. According to the agreement microenterprise tax payer provides services to the standard tax payer. And employee of the microenterprise tax payer fulfils services at premises of the standard tax payer, uses devices, equipment (for example, computer) of the standard tax payer and must do work during certain hours. In such case the standard tax payer has obligation to pay salary taxes from amount, paid to the microenterprise tax payer.

If a employee has many dependents (for example, children) and additional income, it may be less profitable to work in a company - the microenterprise tax payer. It is because an employee of the microenterprise tax payer has no rights to apply allowances (part 3, article 13 of the Personal income tax law).
As comparison, monthly sales 750 euros, one employee and salary "in pocket" 615 euros. But in this case an employee has 5 dependants and employee has additional income, not from the microenterprise tax payer (amount of the additional income is 350 euros per month).
  • In case of the microenterprise tax payer must pay the tax 112.50 euros per month. And for the additional income (350 euros) in general must pay personal income tax 70 euro per month. So total amount of taxes is 182.50 euros per month.
  • In case of regular tax payer because of dependents there is no obligation to pay personal income tax. So total amount of taxes is approximately 242 euros and this amount is used for social contributions (means more social guarantees). The more dependents and the more additional income, the less profitable is to use (work for) the microenterprise tax payer.



Comments, questions







You might be interested in:
More about company formation and taxes in Latvia