Company formation and accounting in Latvia
Last updated: 2017-12-23

Meaning of "direct taxes".

Government levies direct taxes directly on a person that is actual payer of these taxes.
For comparison, an intermediary (for example, a shop) transfers indirect taxes to government, but an intermediary is not actual payer, an intermediary only collects taxes from actual payers.
In case of direct taxes, taxable object belongs to actual payer or taxable object is directly related with actual tax payer. And a taxpayer has no rights to divide the tax burden with other persons (unlike, for example, VAT).
Usually direct taxes (unlike, indirect) are based on the principle of ability to pay (the one who has more assets and earns more, must pay more taxes).

Direct taxes were implemented earlier than indirect taxes.

Main legislation.

Payers of direct taxes.

Natural and legal persons that receive income, profit, or own>
If a company is registered in Latvia, then the company must pay corporate income tax on whole profit (including profit, received from activities, conducted outside of Latvia).

Individuals - Latvian residents also must pay income tax on all taxable income received both in Latvia and outside Latvia.

If a natural person - non-resident of Latvia has received taxable income in Latvia, then such individual also must pay the tax in Latvia.

In determining the obligation to pay a tax and determining the tax rate, must take into account tax treaties, which the Republic of Latvia has concluded with other countries.

Taxable object.

Direct taxes are levied on income and property, for example:
  • Real estate (land, buildings, houses) and other property.
  • Capital (for example, dividends, profit from sale of a real estate).
  • Earnings (wages / salaries, received gift and inheritance).
  • Production (extraction), consumption of natural resources.

Transactions themselves (doing of transactions) are not subject to direct taxes. Direct taxes are levied on the results of transactions (for example, profit).

Types of direct taxes.

The direct taxes are the personal income tax, corporate income tax (tax on profit), mandatory social insurance contributions, tax on natural resources, the lottery and gambling tax and the real estate tax.

The direct taxes may also divided to:
  • Direct property taxes. Taxes are levied on certain objects of property. For example, the real estate tax, the tax on vehicles, the tax on certain natural resources and the tax on lotteries and gambling.
  • Direct personal taxes. The tax is levied on income of natural and legal persons. For example, personal and corporate income tax, mandatory social security payments, the micro - enterprise tax.

Rates of some of direct taxes.

  • Corporate income tax. Until Year, 2018 general rate is 15%. Starting from Year, 2018 general rate is 25%, but company can working paying zero tax.
  • Personal income tax (applicable to salaries and most of income of economic activities). For Year, 2017 rate is 23%. Starting from Year, 2018 three rates: 20%, 23% and 31.4%.
  • Personal income tax (the tax on capital gain). For Year, 2017 rate is 15%. The tax is levied for example on income of a sale of a real estate sale.
    Starting from Year, 2018 tax rate is 20%.
  • Personal income tax (the tax on income from capital, if such income is not capital gain). Until Year, 2018 - 10%. The tax is levied, for example, on dividends.
    Starting from Year, 2018 taxation of dividends changes. If Latvian company pays dividends, then the company must pay only company income tax 25% from dividends. In other cases personal income tax rate is 20%.
  • The micro - enterprise tax. During Year, 2017 - from 12% to 15%. Starting from Year, 2018 - 15%.

Aims of direct taxes.

  • To increase income of a government.
  • To maintain economic and financial balance (stability), charging tax on recipients of income and owners of property, and improving economic situation of the majority of residents (citizens) of a country.
    Reduction of economic inequalities. "The rich" are paying higher amount of taxes and taxes, paid by "the rich" are used for support of "the poor". AS an example is the proportional rate of personal income tax (the higher income, the higher rate).
    Unfortunately, the above mentioned aim is not always achieved. And in Latvia the proportional rate of income tax is not implemented.
  • Reduction of unemployment.
  • To ensure the economic development of a country. Attraction of investors.
  • To ensure price stability. For example, by increasing the rate of personal income tax, consumption and demand for goods and services should reduce. Therefore prices should decrease.
  • Protection and restoration (renewal) of natural resources.

The most common tax reports.

  • Individuals conducting business activities once a year (from 1 March to 1 June) must submit the personal income tax declaration.
  • An employer each month submits the report about employees. The report must contain the amount of personal income tax (tax on salaries), the amount of the state social insurance payments and other information.
  • If natural person receives taxable income from capital gain (for example, from sale of a real estate), then the natural person must submit special declaration. Deadline - 15 days after the end of the month, quarter or year (depending on the amount of capital gain).
  • Payers of the corporate income tax, once a year must submit special declaration. In most cases deadline is 30th April.
  • Payers of the micro-enterprise tax must submit appropriate declaration once per 3 months.

Double taxation, and direct taxes.

Due to the legislation of different countries, there may be a situation that the same entity (or person) must pay direct taxes for the same tax object in more than one country.
For example, a company registered in one country, but the company is doing economic activities and receives income in another country. In such case there may be situation that the company must pay corporate income tax in a country of registration (because of registration) and also in country, where the company is doing economic activities and receiving income (because of getting profit from the country).
To avoid such situation and to develop economic relationships, countries conclude an agreement on the avoidance of double taxation. In the agreements parties set the conditions to determine the country in which a company must pay certain taxes.
Also, a company or individual may has rights to reduce the amount of payable tax by amount the same (similar) tax, paid in another country.

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