Zvērināta advokāta Valtera Genca birojs: „Visjaunākās nodokļu izmaiņas Latvijā. Mikrouzņēmumu nodoklis Latvijā”.
Gencs Valters Law Firm: Most recent tax changes in Latvia. Micro-Enterprise Tax in Latvia
In order to stimulate development of small and medium size enterprises in Latvia, Parliament of Latvia adopted on August 9, 2010, a new law on "Micro-Enterprise Tax". The law entered into force on September 1, 2010. During the readings in Parliament of Latvia, the law experienced several changes that also are described below.
The new law provides a preferential tax for micro-enterprises, i.e. individual merchants, individual enterprises, farms, other natural persons that are registered as performers of economic activities, or limited liability companies that have chosen to adopt the micro-enterprise status and who, under the law, may make only one tax payment.
The law enables small businesses to pay flat-rate tax of 9% on their turnover. The present rate is considerably lower than it was initially envisaged and was moved forward by the government (i.e. 20%). The tax shall be paid four times a year on the turnover of each quarter.
The flat-rate tax of 9% includes the following tax payments:
State social insurance mandatory contributions, personal income tax and entrepreneur risk state fee for employees of the micro-enterprise;Enterprise income tax if the micro-enterprise conforms to the features of enterprise income tax payer; andPersonal income tax of owner of the micro-enterprise for earnings of micro-enterprise economic activity.
In order to qualify as a micro-enterprise for tax purposes, the following conditions must be satisfied:
The member of the enterprise may only be natural persons, who at the same time are members of the board;The turnover of such enterprise within a calendar year shall not exceed 128'440 USD;The total number of employees on the payroll of such enterprise does not exceed five, not including those on the leave;The income of any given employee does not exceed 910 USD per month;The employees of such enterprise have agreed to be employed by micro-enterprise in their respective labour agreement.
An enterprise that meets these conditions must submit an application to the State Revenue Service until December 15 of the pre-taxation year, and it becomes a micro-enterprise tax payer from January 1 of the following year. The law allows the micro-enterprise to revert back to usual tax regime only after the respective taxation period is over. There are no additional restrictions to re-choose the micro-enterprise tax regime later, if the above mentioned conditions are satisfied.
In case a micro-enterprise employees more than five employees or their income exceeds the limit, or turnover of the micro-enterprise exceeds the limit, additional tax is levied. For each additional employee over and above the maximum prescribed number of five employees, two additional percentage points are added to the tax rate. If the income of any employee exceeds the maximum income amount, an increased tax rate of an amount of 20% on the excess amount additionally over and above the tax rate of 9%. For micro-enterprises, whose turnover exceeds the maximum eligible turnover, a tax rate of 20% is applied on the amount over and above the threshold.
All the employees have to be employed in accordance with written labour agreement. In case the employer has not informed the employees that they are employed by a micro-enterprise, the employer is liable for damages so incurred by the employees. This is due to the fact that employees of micro-enterprise are less socially protected than others because of reduced social contributions and eventually social benefits in case of unemployment or sickness.
Finally, the most important differences from the initial draft law should be noted. As already mentioned above, the initial flat-tax rate submitted for approval of Parliament was 20%. The tax rate after discussions in the Parliament was effectively reduced to 9%. There are also restrictions removed on the rights of choice of micro-enterprise to re-choose micro-enterprise tax regime after reverting back to original tax regime. The first draft law envisaged an obligation to stay with original tax regime for five years after reverting back to original tax regime before re-choosing micro-enterprise tax regime. The last difference to be noted is employment issue with relatives and spouses. The first draft allowed employing relatives and spouses without any labour agreement. Now, according to the final text of the law, all employees have to be employed in accordance with written labour agreement and be subject to the maximum prescribed number of five.
Tax Attorney & Founding Partner
Gencs Valters Law Firm, Riga
T: +371 67 24 00 90