Company formation and accounting in Latvia
Last updated: 2017-12-21
Value added tax (VAT) is a consumption tax.
A seller of goods or a service provider includes VAT in the price of goods or services.
VAT is indirect tax.
Taxable object - goods and services (tax added to the price of goods or services). Actually, only the final consumer pays VAT (sellers / service providers only charge VAT). In Latvia, there is no sales tax or goods and services tax (only VAT instead of the taxes).

Standard rate of VAT is 21%. Reduced rate - 12%.
Main law is the Value Added Tax Law.
In all the countries of the European Union VAT related legislation must comply with the European Council Directives. Therefore VAT legislation similar in all EU countries, usually only tax rates are different.

If the buyer of goods or recipient of the service is registered in the register of of VAT payers and the goods and services are used for VAT taxable transactions, then the buyer / service receiver has the right to deduct VAT for the purchased goods / received services.
As a result, the buyer / receiver of services reduces the amount of tax for payment to the state budget and only the final buyer / service receiver actually pays the tax.

For example, the company has bought goods for the price of EUR 1,000 + VAT 21% (210 euros) and sold the goods for the price of 1200 euros + VAT 21% (252 euros).
As a result to the state budget the company must pay VAT in amount of 42 euro (252 euro minus 210 euros), or 21% from 200 euros (extra charge).
So the company actually pays (charges) VAT only on the added value (that is why the tax is called, - the value added tax).

In Latvia VAT taxable transactions are:
  • sale of goods for remuneration;
  • provision of services for remuneration;
  • purchase of goods within the European Union;
  • purchase of a new vehicle in the territory of the European Union by a person that is not VAT payer;
  • irregular supply of a new vehicle within the European Union;
  • import of goods.

In legislation there are defined goods and services (eg, certain medical and postal financial services, cultural services) which are not subject to VAT.
The company, which sells VAT exempt goods or provides VAT exempt services, does not have the right to deduct VAT for the goods and services that are used for VAT exempt transactions.

The basic procedure of VAT application in Latvia is following:
  • The seller of the goods / service provider sells goods / provides services to the buyer / receiver of services. The seller issues the VAT invoice.
  • The buyer pays the seller the amount indicated in the invoice (including VAT).
  • Seller pays (transfers) the received VAT to the state budget.
  • The state budget returns to the buyer the VAT overpayment (eg, the amount of VAT that the buyer has paid to the seller).

In Latvia, there is also the "reverse" (special) procedure of application and payment of VAT.
The main purpose of this procedure is to prevent VAT evasion and VAT fraud.

"Reverse" procedure applies in the case if a seller and a buyer are registered VAT payers, and this procedure only applies to the following transactions:
  • to supply of timber and to services, related with related;
  • to supply of scrap metal and services, related with scrap metal;
  • to construction (building) services;
  • to supply of mobile phones, tablets, laptops and integrated circuit devices;
  • to supply of crops (cereals) and industrial crops.
The "reverse" procedure is following:
  • The seller issues an invoice to a buyer and in the invoice writes the price of the goods / services without VAT.
  • The buyer pays to the seller the amount indicated in the invoice (price without VAT).
  • A buyer in its tax return charges VAT on the amount of the invoice (VAT for payment to the budget).
  • If a buyer uses goods / services for VAT taxable transactions, then the buyer has the right in the same VAT return (report) to reduce the charged VAT (as result buyer pays no VAT on such transaction). If purchased goods or received services are not used for VAT taxable transactions, then a buyer has no right to reduce charged VAT (as result the buyer must pay VAT for such transaction).
This same VAT payment procedure applies in case a Latvian company purchases goods or receives services from persons (companies) that are registered as VAT payers in another EU country, provided that the Latvian company uses the goods / services for VAT taxable transactions.

Special regime for import.

In general, if company imports goods, the company must pay VAT. But a company have rights to get permission to apply special regime for import - not to pay VAT during import. Applying special regime for import, company calculates VAT for imported goods and shows calculated amount in VAT declaration. As a result, VAT for imported goods must pay only after sale of goods.

To get the permission, must submit special application to the State revenue service. And a company (taxpayer) must comply with following requirements (part 4 of article 85 of VAT law):
  • a taxpayer has registered commercial activities in Latvia (for example, a company is registered in the Register of enterprises);
  • a taxpayer has access to the Electronic declaration system;
  • at the moment of submission of the application, a taxpayer either has no tax debts, or a taxpayer pays debts during 5 working days after submission of the application;
  • an employee with "signature rights" (for example, a member of the board of directors) is not convicted for criminal offenses in national economy;
  • during previous 12 months a taxpayer in time submitted tax reports and submitted information, requested by the State revenue service.

Need to note: if a taxpayer received rights to apply the special regime and did not show calculated VAT (for import) in the declaration, then the taxpayer must pay 10% from amount that must be showed in VAT declaration.

Special regime related with electronically provided services (MOSS).

Information about MOSS - the mini one stop regime contains in article 140.1 of the VAT law.
If a taxpayer renders electronically provided services to persons that are not taxpayers (are individuals) and service receiver is located in another country of the European Union, then a service provider has two options:
  • To register as VAT payer in each country where are located service receivers (individuals). In such case must submit VAT declaration in each country.
  • To submit application to Latvian State revenue service to get permission to apply MOSS regime in Latvia. In such case only in Latvia must submit special (additional) VAT declaration and in the declaration must show information (amounts) about electronically provided services to all EU countries. Calculated VAT must pay only to Latvian government (special bank account).

Registration of VAT payers.

The State revenue service (SRS) registers VAT payers.
If you register (establish) a new company, then the application for registration as a VAT payer you can submit to the Register of Enterprises together with other documents. Enterprises forwards your application to the SRS.
The SRS also requires to provide a document which entitles the company to use a legal address. Such document can be, for example, the a lease agreement.
The SRS within 5 working days reviews your application and makes a decision on registration.
Recently, quite often, the SRS requires additional information and documents, which confirm materially - technical and financial capabilities of the company to do the declared economic activity (the SRS requires, for example, (preliminary) agreement with partners). An employee of the SRS wants to make sure that the company is ready and able to conduct real and legal business activities and to pay taxes.

Tax reports.

Persons that are registered as VAT payers must submit VAT returns.
Taxation period depends on the type of transactions and sum of VAT taxable transactions during a calendar year.

Company must submit VAT return each month if any of the following conditions is true:
  • The amount of VAT taxable transactions (sum of issued invoices for the sale of goods and provided services) during a calendar year exceeds 50 000 euros (starting from Year, 2018 - 40 000 euro).
  • A VAT payer sells goods to a person that has a VAT number in another EU country and there is evidence that the goods are sent (transported) from Latvia to another EU country.
  • VAT payer supplies goods within the EU, taking part in the following transaction:
    Latvian VAT payer has bought goods in the EU from VAT payer of another EU country (for example, Germany) with an aim to sell the goods to another / third EU country (eg Poland) to VAT payer. Latvian VAT payer delivers goods from Germany to Poland and sells the goods to Polish VAT payer.
    Previously, such a transaction was called a tripartite deal.
  • A VAT payer provides services and the place of supply of the services is another EU country. Usually, if a VAT payer provides services to a person who engages in business activities registered in another EU country.
A company must submit VAT returns once every 3 months, if activities do not correspond to the above mentioned conditions.

But the VAT return must submit each month if during taxation year a company is first registered as VAT payer. Such obligation is in force during 6 months after registration as VAT payer, even if activities of a company do not correspond to the above mentioned conditions.

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