The Latvian tax system is influenced by both Latvian legislation and European Union requirements. It can be called average because each taxpayer contributes an average of 30% of their income to the budget. In addition, Latvia's diverse system of tax rates, tax breaks and allowances allows each taxpayer to choose the optimal sector for their profession and wealth management. The Republic of Latvia has the lowest effective (average) tax rate in the European Union. There are several areas of trading business with individual tax breaks – payments that are 80% to 100% lower: for example, Liepāja and Rēzekne have special economic zones, and the free ports of Riga and Ventspils can provide tax breaks.
The tax principles are laid down in the Taxes and Duties Act. Taxes are administered by the State Revenue Service (SRS) and are divided into direct and indirect taxes. Indirect taxes are taxes that are not deducted directly from income and are levied on goods and services. Direct taxes, in turn, are taxes levied on all taxable income of individuals and companies.
personal income tax, and the tax rate ranges from 20% to 31.4%, depending on the amount of income.
Personal income tax
The personal income tax is one of the steadiest sources of income adding funds to municipal budgets. Personal income tax payers are self-employed persons or undertakings that have been registered as tax payers, including agricultural and fishery farms. It is envisaged to repay the personal income tax to tax payers with eligible expenditure for education and medical services.
The personal income tax rates vary between 20% and 31.4%, depending on your income. It also must be noted that the tax is not levied on all income. Instead, a number of items are deducted from the total income before the tax is calculated:
- non-taxable minimum
- deductions for being a legal guardian of certain persons (e.g. children)
- deductions for people with disabilities
- other deductions
Social insurance contributions (social tax)
Compulsory social insurance contributions is a compulsory payment into a special budgetary account stipulated by the Law which entitles the insured person to receive the social insurance services defined by the Law. The social tax payments increase the state social insurance budget. Therefore an insured person can receive the following services: an old-age pension, disability pension, survivor's pension, sickness benefit, maternity benefit, insurance against unemployment and burial allowance.
The standard social tax rate is 35.09%, divided between the employer (24.09%) and the employee (11%). A number of deductions can be applied as well, mainly various tax cuts for state pension receivers.
Property tax
In Latvia, every property owner must pay the standard immovable property tax in the amount of 1.5% of the cadastral value of non-residential property – land and infrastructural buildings. Until January 2010, this tax in the amount of 1 % was a compulsory payment imposed only on the owners of land and commercial space. As for the residential real estate, the tax rate depends on the cadastral value of the immovable property:
- EUR 56,915 – 0.2%;
- EUR 56,915 to EUR 106,715 – 0.4%;
- more than EUR 106,715 – 0.6% of the cadastral value of the immovable property.
The tax is applied to each part of the cadastral value. It means that, for example, if a residential property has a cadastral value of EUR 110,000, the property tax imposed would be calculated as follows:
- The part smaller than EUR 56,915 would generate 0.002 * 56,519 EUR worth of tax – EUR 113.04
- The part bigger than EUR 56,915 but smaller than EUR 106,715, i.e. EUR 50,196, would generate 0.004 * 50,196 EUR worth of tax – EUR 200.78
- The part bigger than EUR 106,715, i.e. 110,000 – 106,715 = 3285, would generate 0.006 * 3285 EUR worth of tax – EUR 19.71
- The individual tax sums generated would result in 113.04 + 200.78 + 19.71 = EUR 333.53 worth of tax
Please note that the above calculations merely demonstrate the theoretical basis for calculating the tax, and any real situation may differ.
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