Latvia Crypto Tax

Latvia has a steadily growing, innovative economy, within which crypto entrepreneurs can start new businesses, aware that it would be easy to follow the national taxation system and it would not hold back the enterprise development process as the Latvian tax system ranks 2nd in the 2022 International Tax Competitiveness Index.

The tasks of the State Revenue Service of the Republic of Latvia include registration of taxpayers, collection of taxes, and also elaboration and approval of tax calculation methodologies and bookkeeping regulations for taxation purposes. The authority coordinates and exchanges information with international tax authorities as stated in international and EU agreements and regulations.

Examples of such new sets of EU rules include the amendments to the EU’s Directive on Administrative Cooperation, which broaden cooperation in tax matters. The European Commission has introduced a new reporting framework for all crypto asset service providers operating in the EU, forcing the crypto businesses to report transactions of clients residing in the EU. In this way, EU officials will be able to follow crypto trades and the proceeds gained from them, which should pave the way for better detection of tax evasion and fraud.

DAC is also in line with Crypto-Asset Reporting Framework, CARF, announced by the OECD for automating crypto-tax reporting and information sharing between automatic tax authorities globally. In addition, DAC also aligns with the landmark Markets in Crypto-Assets regulations whose very purpose is legal clarity, including taxation, for crypto businesses.

For this and other reasons, Latvian crypto-entrepreneurs should provide that all crypto-transactions will be duly reflected according to general standards of accounting in the accounting records of the company. For accounting purposes, cryptocurrencies are neither viewed as financial instruments nor even financial assets, but they are to be recorded as a certain type of stock in current assets. This puts cryptocurrencies in the same basket as commodities, which can be used as a means of exchange, so long as the transacting parties agree.

Currently, Latvia has over 60 international bilateral agreements on the elimination of double taxation. Thus, Latvian crypto entrepreneurs with an international presence may be confident that they will have all the means to protect their income from being taxed in two separate countries and possibly for reduction of tax rates. The agreements usually specify which country has a right to tax a taxpayer within the national taxation framework.

Corporate Income Tax

The most catching feature of the Latvian tax regime is the fact that all undistributed corporate profits are exempt from Corporate Income Tax. This subsidy extends to tax resident companies in Latvia and permanent establishments registered in Latvia of non-resident companies. The respective exemption comprises active and passive income and capital gains realised from the sale of almost all types of assets, including shares and securities. Taxation of corporate profits occurs only upon actual and/or deemed distribution of dividends.

The standard rate of Corporate Income Tax is 20% in Latvia; however, the division of a taxable base by a 0.8 coefficient before application of the statutory rate results in a 25% effective rate. Resident companies are taxed on the distributed profit of income sourced in Latvia and abroad, while permanent establishments of non-residents are taxed only on the distributed profit of income sourced in Latvia. Generally speaking, a company is a resident of Latvia if it is incorporated in Latvia. Crypto companies should follow general rules of taxation because the law on corporate income tax does not provide for regulations related to crypto.

Taxes paid abroad on income included in the tax base are allowed as a foreign tax credit against the Corporate Income Tax levied on dividends for the current year. The unused tax credit can be carried forward but it cannot exceed the Latvian tax attributable to the income taxed abroad, and it needs to be authorized by the relevant foreign tax authority.

Crypto companies may take the donation relief against their profits, provided that these are donated to non-profit organisations in Latvia or an EU/EEA country, or a country with which Latvia has a double taxation agreement. The donating company may claim relief on one’s total donations by excluding donations from the tax base at up to 5% of profit after taxes for the past year. The other way relief may be taken is in the form of an exclusion of donations from the tax base up to 2% of total gross wages on which National Social Insurance Contributions were paid in the previous year. The third way the relief may be taken is by the reduction of Corporate Income Tax levy on the dividend by 85% of the amount donated.

Micro-Business Tax

According to the Micro-business Tax Act, newly created and matured enterprises that meet specific criteria may obtain the status of micro-business and register under the Micro-Business Tax. The special tax seeks to encourage small business development and compliance with tax laws through less bureaucracy and expenses with regard to the constitution and functioning of the enterprise.

The taxation period for a micro-business taxpayer is a calendar year, and the Micro-Business Tax is levied on the turnover of the taxation period of the micro-business. According to the relevant rules, the amount of tax shall be calculated by multiplying the turnover of the taxation period of the micro-business by an appropriate tax rate depending on the turnover.

The Micro-Business Tax already encompasses obligatory State Social Insurance Contributions for the owner of the micro-business and Personal Income Tax for the owner of the micro-business, considering part of the micro-business income obtained from economic activity. The status of a micro-taxpayer can be applied for upon application for the registration of a Sole Proprietorship or Individual Undertaking, and this might work for new crypto traders and crypto miners in Latvia.

Withholding Tax

In Latvia, the general rate of Withholding Tax is 20%, and it is generally applied to management and consultancy fees and payments to businesses registered in blacklisted territories. Generally, a 3% rate is levied on the proceeds from sale of real estate in Latvia or proceeds from sale of shares in a real estate company. 5% rate is also levied on income from renting or leasing real estate located in Latvia.

There is no Withholding Tax on dividends paid to non-resident companies, as they would fall under Corporate Income Tax upon distribution. No withholding tax is levied on interest payment to a non-resident company, except when a recipient is listed in one of the enumerated low-tax territories, at a 20% rate. There’s also no Withholding Tax levied on patent royalties and on royalty payable regarding those forms of copyright on payments to non-resident companies. But where they’re paid to a recipient registered in one of the low-tax territories listed, they become subject to a 20 percent rate. Fees for technical services are nontaxable.

Capital Gains Tax

In respect of companies, the base of Corporate Income Tax includes, inter alia, the capital gains realized upon sale from the cryptocurrencies. As far as individuals are concerned, since the cryptocurrencies represent personal assets in Latvia, the rate is 20%. Compared to other European jurisdictions, it is a very preferential rate. As regards the assessment of gains, such expenses as advertising, banking fees, internet domain fees, and transaction fees might be considered.

Value-Added Tax

The standard VAT rate in Latvia is 21%, and it can be imposed on crypto-related economic activities. Being a consumption tax, it shall be incorporated into the price of taxable crypto goods and services and ultimately be paid by the consumers. Liable companies shall be registered as a VAT payer prior to performing or receiving VAT-taxable transactions. Registration can be completed via the SRS Electronic Declaration System (EDS) remotely.

While value-added tax is due on such services as crypto exchange tax, the exchange of cryptocurrencies for fiat money and vice versa, and the exchange of cryptocurrencies for other cryptocurrencies are exempt from VAT under the decision of the CJEU, which held that such cryptocurrencies as Bitcoin should be treated as fiat money for VAT purposes.

Payroll Taxes in Latvia

Under Latvian law, employers are obliged to withhold Mandatory State Social Insurance Contributions and Personal Income Tax from their employees’ compensation of salary. The standard rate for Mandatory State Social Insurance Contributions is 34.09%, where employers pay 23.59%, while employees pay 10.50% thereof. Besides that, a Solidarity Tax is charged in cases when income exceeds 78,100 EUR. Although the actual level of Solidarity Tax is 25%, it shall be payable monthly in the same way and at the same level as compulsory state social insurance contributions.

Latvia has a progressive Personal Income Tax system. The progressive rate is linked to the level of annual income: a 20% rate is applied to income not higher than 20,004 EUR, while an income between 20,004 EUR and 78,100 EUR is taxed at 23%. The tax rate on income in excess of 78,100 EUR is set at 31%.

How to Pay Taxes on Crypto in Latvia in 2024

Taxation of crypto income in Latvia is currently one of the ‘hottest’ topics that draws much attention from investors and users in 2024. Understanding local tax rules and obligations helps in effective financial management, possibly preventing potential penalties for non-compliance with laws related to taxation. Below, one can find a general description of how it works with paying taxes on crypto income in Latvia for 2024.

Taxation basics – Cryptocurrencies in Latvia

Income from cryptocurrencies is treated, depending on the source and nature, as one of three types of income in Latvia: capital gains, business income, or other income. The tax rate and declaration depend on the situation of each taxpayer.

Capital gains tax

Gains from the sale of any cryptocurrency, which exceed the value of the original investment, are considered a capital gain and are subject to capital gains tax. In 2024, Latvia levies a capital gains tax of 20%. Taxpayers should calculate the capital gain themselves and declare it in the tax return.

Taxation of mining income

Income obtained from the mining of cryptocurrencies is, as a rule, business income and is subject to the relevant business income rates. Of course, a distinction has to be made between tax obligations arising from income tax but potentially also from social contributions.

VAT and cryptocurrencies

In 2024, there is no VAT applicable, as a general rule, in Latvia for cryptocurrency transactions. This corresponds to the usual European practice and also the decisions of the European Court of Justice.

Declaration of income from cryptocurrencies

To report cryptocurrency income, Latvian taxpayers should file a tax return, declaring all their revenues derived in the tax year. The deadline for filing a tax return in Latvia is usually 1 April of the year following the reporting period.

Important considerations

• Accountancy of the Transactions: Accurate and detailed records of all cryptocurrency transactions are highly required for the accuracy of tax returns and calculations in respect to such.
• Use of losses: Losses from the cryptocurrency deals could be used to reduce the tax base of capital gains, but the rules vary and therefore need more careful study.
• Consultation with experts: Considering the fact that tax legislation is very complex and the market of cryptocurrencies is one of the fastest-developing ones, the most reasonable recommendation given here is to get in touch with a qualified tax advisor who can assist you on time and provide advice in connection with it.

Taxation of income from cryptocurrency in Latvia requires serious record keeping, understanding of laws on taxation, and timely declaration of income. By following local regulations and advice provided, taxpayers will avoid any potential penalties and will optimize their tax liabilities.

Table of basic tax rates in Latvia for the year 2024:

Personal income tax rate, corporate tax rate, VAT rate, and the rate of capital gains tax that might be applied to cryptocurrency income.

If you are determined to develop your crypto business in Latvia, our team of dedicated and quality-focused legal consultants here at Regulated United Europe (RUE) will be delighted to provide you with customized value-added support for optimized taxes in accordance with applicable legislation. In addition, we also provide full Latvian crypto company formation, crypto licensing, financial accounting, and virtual office services. Now, for a customized consultation, reach out to us and set the foundation for enduring success.

Also, lawyers from the Regulated United Europe provide legal support for crypto projects and help with adaptation to MICA regulations.