Company formation and accounting in Latvia
Last updated: 2018-03-18

Why is it important to determine the place of the transaction?

From the place of the transaction depends value added tax (VAT) rate and the procedure for payment of VAT.
Depending on the actual circumstances, the place of the transaction may be the main place of business (but not the actual place where the transaction is made).
The place of the transaction must determine according to 3. part of the VAT Act.

What is the main place of business?

According point 25 of article 1 of VAT law, the main place of business is the place where:
  • the management of an enterprise is located, and
  • the management makes the basic administrative decisions related with business activities.

The place of the transaction and the VAT rate in some transactions for the sale of goods.

If a seller delivers, transports goods, then the place of delivery of goods is the place where the goods are at the beginning of delivery, transportation.
To the amount of the sale of goods, you need to add VAT at corresponding rate (5%, 12%, or 21%) if the goods are delivered within Latvia.
If the goods are delivered from Latvia to another EU country and the buyer has VAT number of another EU country, then the seller does not add VAT to the price of the goods (the so-called VAT reverse charge).
If the goods are exported and the export can be proved with documents, then must apply 0% VAT rate.

If a seller does not deliver, transport goods, then the place of delivery is the location of the goods. If the sale is in Latvia, then the Latvian VAT rate applies (5%, 12% or 21%), regardless of whether the buyer has a VAT number of another EU country.

If the sent goods are assembled or installed by the supplier of the goods or a third party on behalf of the supplier, then the place of delivery of the goods is the place where the goods are mounted or installed.

In distance sales the place of delivery of the goods is the state of the European Union where ends the shipment or transportation of the goods (place of the transfer of the goods to the recipient).
A distance sale is the delivery of goods if the supplier or third party on behalf of the supplier delivers or transports the goods from one European Union country to another EU country and all the following conditions are fulfilled:
  • The recipient of the goods is a person who does not have EU VAT number (for example, a physical / private person).
  • Delivered (sold) goods are not a new vehicle and the goods are not intended for assembly or installation.
  • The amount of deliveries (sales) of goods per year in each individual EU country has reached or exceeded a certain amount (a common amount is 35,000 euros), or the supplier of goods in a certain EU country registered as VAT payer for the purposes of distance sale, or the goods are subject to excise tax.
In distance sales, the place of delivery is the place where the delivery, transportation is completed / finished (the goods are transferred to the recipient).
If the seller, by remote sale, wishes to sell excise goods, then before selling the seller must register as VAT payer in the EU country in which the buyer of the excise goods is located.
If the goods are not subject to excise tax and the sales amount in each individual EU country has reached or exceeded a certain amount, the seller must register as VAT payer in the country.
If the seller is registered as VAT payer in a particular EU country, then the sale is is subject to VAT rate of the corresponding EU country.

A seller of second-hand goods, works of art, collectibles and antiques has rights to apply special VAT regime (the so-called margin scheme).
Applying the scheme, to determine VAT taxable amount, from amount of sale must subtract purchase amount and subtract charged VAT. For example, the sale amount is 210 euros, the purchase amount is 100 euros, the difference is 110 euros, including VAT. To determine the amount of VAT:
  • 110 euros to be divided by 1.21. The result - the amount without VAT 90,91 euros.
  • 90.91 euros should be multiplied by the VAT rate (21%). The result is 19.09 euros.

Transactions on the supply of natural gas, electricity, heat energy and cooling energy.
The place of delivery (transaction) is the main place of business of the recipient of gas, if all the following conditions are met:
  • The recipient conducts economic activities (for example, a commercial enterprise).
  • The natural gas system is located in the territory of the European Union.
  • The economic activity of the recipient of the goods is the resale (purchase with the following sale) of natural gas, electricity, heat energy or cooling energy.
  • Self-consumption of this product is insignificant.
If the above conditions are not met, but the system is located within the territory of the European Union, then the place of delivery of the goods is the actual place of consumption (natural gas and the mentioned energy).

The place of the transaction and the VAT rate in some transactions for the provision of services.

If the recipient of the service conducts economic activities. If a taxpayer renders services to another taxpayer (enterprise), then according to the general rule, the place of rendering the service is the main place of business of the receiver of the service (usually, the legal address of a receiver of the service).
For example, if the place of provision of service is Latvia, then the transaction is subject to the general VAT rate (at the time of writing the article, the VAT rate is 21%).

But if, for example, an enterprise registered in Latvia provides services (most types of services) to an enterprise whose business location is Germany and the recipient of the service has VAT number of another EU country (not Latvia), then the Latvian company (service provider) does not add VAT to the price of services.
In this case, the German company in its VAT declaration calculates VAT on the amount of the purchase and in the same declaration deducts the calculated VAT if the German enterprise uses the received service for VAT taxable transactions (the so-called "VAT reverse charge" principle).

If the recipient of the service does not conduct business activities (does not have VAT number). If a taxpayer provides services to a person who does not conduct business (for example, an individual), then the place of service is the main place of business of the provider services.
For comparison with the previous example. If Latvian enterprise renders services to an individual, residing in Germany and not doing business, then the Latvian company to the service price adds VAT at the general Latvian rate (21%).

Different exceptions. The VAT law provides quite a lot of exceptions to the general rule. Exceptions are mainly related with certain types of transactions (services) and with the status of the recipient of the service.
For example, the place of provision of electronic communications, broadcasting and other electronic services is the place of residence of the recipient of services, if the recipient does not conduct economic activities.
If the provider of electronic services (for example, Latvian enterprise that sells programs using web site) sells the program to an individual who is located in another EU country, then the electronic service provider must pay VAT of the country in which the recipient of the service (the program buyer) resides. If such buyers of the program live in different countries of the European Union, then the seller must pay the VAT of each respective country.
In order not to register as VAT payer, not to submit VAT declarations and not to pay VAT in each EU country, the provider of electronically rendered services has the right to register and submit declarations in the country where the vendor's place of business is located (so-called "mini one-stop-shop" or MOSS regime).



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