Latvia has a consistently growing and innovation-oriented economy where crypto entrepreneurs can launch new businesses knowing that they’ll find it easy to comply with the national taxation framework, and it won’t hinder the development of the business since the Latvian taxation system ranks 2nd in the 2022 International Tax Competitiveness Index.
The State Revenue Service of the Republic of Latvia is responsible for the registration of taxpayers, collection of taxes, as well as the development and approval of tax calculation methodologies and accounting regulations for tax purposes. The authority also coordinates and exchanges information with international tax authorities as stipulated in international and EU agreements and regulations.
One of the new sets of EU rules is the amendments to the EU’s Directive on Administrative Cooperation (DAC). The European Commission has introduced a new reporting framework for all cryptoasset service providers operating in the EU. They require crypto businesses to report transactions of clients residing in the EU in order to facilitate tracking of crypto trades and the proceeds gained, which should improve the detection of tax evasion and fraud.
DAC is harmonised with the Crypto-Asset Reporting Framework (CARF) which has been announced by OECD to automate crypto tax reporting and information-sharing among international tax authorities. Moreover, DAC is also aligned with the landmark Markets in Crypto-Assets (MiCA) regulations, the purpose of which is to provide legal clarity, including taxation, to crypto businesses.
For this and other reasons, Latvian crypto entrepreneurs should ensure that all crypto transactions are thoroughly reflected in the company’s accounting records in line with general accounting standards. For accounting purposes, cryptocurrencies aren’t considered financial instruments or financial assets, but instead, they must be recorded as stock in current assets. Overall, cryptocurrencies can be put in the same bucket as goods that can be used as a means of exchange, provided that the exchanging parties agree.
Latvia has over 60 international bilateral agreements on the elimination of double taxation. Therefore, Latvian crypto entrepreneurs with an international presence can expect to have all the necessary tools to protect their income from being taxed in two separate countries, as well as possibly reduce tax rates. The agreements generally state which country has the right to tax a taxpayer within the national taxation framework.
Corporate Income Tax
One of the most notable advantages of the Latvian tax system is the exemption of all undistributed corporate profits from Corporate Income Tax. It’s available to tax resident companies in Latvia and Latvia-registered permanent establishments of non-resident companies. The exemption covers active and passive income, and capital gains realised from the sale of most types of assets (e.g. shares and securities). Corporate profits are taxed only when they’re distributed as dividends or are supposed to be distributed as dividends.
In Latvia, the standard Corporate Income Tax rate is 20%, but the effective rate is 25% as the taxable base is divided by a 0,8 coefficient before applying the statutory rate. Resident companies are taxed on distributed profits from their income sourced in Latvia and abroad, while permanent establishments of non-residents are taxed only on distributed profits from income sourced in Latvia. A company is generally considered a resident of Latvia if it’s incorporated in Latvia. Crypto companies are obligated to follow general taxation rules, as the law on corporate income tax doesn’t stipulate any crypto-specific regulations.
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. Any unused tax credit can be carried forward, but it can’t exceed the Latvian tax attributable to the income taxed abroad and must be authorised by the relevant foreign tax authority.
Crypto companies can also benefit from the donation relief, provided that they’re made to non-profit organisations in Latvia or an EU/EEA member country or a country with which Latvia has a double taxation agreement. The donating company can take 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. Another way of taking relief is by excluding donations from the tax base at up to 2% of total gross wages on which National Social Insurance Contributions were paid in the past year. The third way of taking relief is by reducing the Corporate Income Tax levy on dividends by 85% of the donated amount.
Pursuant to the Micro-business Tax Act, newly established and maturing businesses can acquire micro-business status and register for the Micro-Business Tax, provided that certain requirements are met. The purpose of the special tax is to encourage the development of small businesses and compliance with tax rules by reducing bureaucracy and costs associated with the formation and operations of the business.
The taxation period of 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. The tax is calculated by multiplying the turnover of the taxation period of the micro-business by an appropriate tax rate depending on the turnover.
The rates are as follows:
- For a turnover of up to 25,000 EUR per year – 25%
- For a turnover exceeding 25,000 EUR per year – 40%
The Micro-Business Tax includes mandatory Social Insurance Contributions for the micro-business owner and Personal Income Tax for the micro-business owner in relation to the part of the micro-business revenue from the economic activity. A person can apply for the acquisition of the status of a micro-business taxpayer upon the application for the registration of a Sole Proprietorship or Individual Undertaking, which may work well for new crypto traders and crypto miners in Latvia.
In Latvia, the standard Withholding Tax rate is 20%, and it’s generally applied to management and consultancy fees and payments to businesses registered in blacklisted territories. A 3% rate is generally levied on proceeds from the sale of real estate in Latvia or proceeds from the sale of shares in a real estate company. A 5% rate is levied on income from renting or leasing real estate located in Latvia.
There’s no Withholding Tax on dividends distributed to non-resident companies, as they’re subject to Corporate Income Tax once distributions are made. No Withholding Tax is levied on interest paid to non-resident companies unless a recipient is registered in one of the listed low-tax territories, in which case a 20% rate applies. Also, there’s no Withholding Tax on patent royalties and certain copyright royalties paid to non-resident companies, unless they’re paid to a recipient registered in one of the listed low-tax territories and subject to a 20% rate. Fees for technical services aren’t taxed.
Capital Gains Tax
For companies, capital gains are included in the Corporate Income Tax base, which also includes capital gains realised from the sale of cryptocurrencies. For individuals, cryptocurrencies are taxed as personal assets in Latvia and therefore a 10% rate applies. Compared to other European jurisdictions, it’s a very favourable rate. When calculating taxable gains, such expenses as advertising, banking fees, internet domain fees, and transaction fees can be taken into account.
The standard VAT rate in Latvia is 21%, and it may apply to crypto-related economic activities. Since it’s a consumption tax, it must be included in the price of taxable crypto products and services and eventually paid by consumers. Liable companies must register as VAT payers before performing or receiving VAT-taxable transactions. The registration can be completed remotely via the SRS Electronic Declaration System (EDS).
While such services as crypto exchange tax are subject to tax, the exchange of cryptocurrencies into fiat money and vice versa, and the exchange of cryptocurrencies into other cryptocurrencies are VAT-exempt pursuant to the decision of the Court of Justice of the European Union (CJEU) which ruled that such cryptocurrencies as Bitcoin should be treated as fiat money for VAT purposes.
Payroll Taxes in Latvia
Latvian employers are obligated to withhold Mandatory State Social Insurance Contributions and Personal Income Tax from the salaries of their employees. The standard Mandatory State Social Insurance Contributions rate is 34.09%, where 23.59% are paid by employers, and 10.50% are paid by employees. Additionally, a Solidarity Tax is levied if income exceeds 78,100 EUR. It’s payable on a monthly basis in the same manner and at the same rates as Mandatory State Social Insurance Contributions, although the effective Solidarity Tax rate is 25%.
Latvia has a progressive Personal Income Tax system, and the progressive rate is based on the level of annual income. A 20% rate applies to income not exceeding 20,004 EUR. Income ranging between 20,004 EUR and 78,100 EUR is taxed at a 23% rate. Income exceeding 78,100 EUR is taxed at a 31% rate.
If you’re 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 tailored, value-added support in optimising your taxes in accordance with applicable legislation. Moreover, we also offer comprehensive Latvian crypto company formation, crypto licensing, financial accounting, and virtual office services. Contact us now to schedule a personalised consultation and set the stage for long-lasting success.
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