Micro Enterprise Tax in Latvia Overview and Requirements

Latvia has a simplified tax system for micro enterprises, which can be a great relief for small business owners.

To qualify as a micro enterprise in Latvia, your annual turnover must be no more than 40,000 euros.

This is a relatively low threshold, making it accessible to many entrepreneurs who are just starting out.

As a micro enterprise, you'll be exempt from paying corporate income tax, which can be a significant cost savings.

However, you will still need to pay a flat tax rate of 9% on your profit.

To be eligible for the micro enterprise tax in Latvia, you must be one of the following: a sole trader, an individual enterprise, an agricultural or fishery enterprise, a natural person with registered economic activities, or a limited liability company.

To qualify as a micro enterprise, you must meet additional criteria, including having all shareholders be natural persons, and not exceeding a turnover of 100,000 euro per year.

The number of employees must not exceed five, and members of the board directors must be employees of the company. You cannot be a partner in a personal society, and the salary of each employee must not exceed 720 euro per month.

Here are the specific requirements in a summary:

If you meet these requirements, you can submit a special application to the State Revenue Service to become a tax payer.

Complying with the micro-enterprise tax in Latvia is crucial to avoid increased tax rates. If the income of a micro-enterprise employee exceeds 720,- eur per month, a 20 % tax rate is applied on the exceeding amount.

Not only does income exceed the limit, but also the number of employees. If a micro-enterprise has more than five employees, 2 % is added to the tax rate of 9 % for each additional employee.

Failing to comply with the turnover limit also has consequences. If the turnover is exceeded, a tax rate of 20 % is imposed on the share by which it is exceeded.

Firms that choose to pay the duty cannot reimburse personal taxes or intellectual property fees at the same time.

A worker is not eligible to claim the non-taxable minimum and individual tax exclusions for the time they worked for the taxpayer.

A natural person hired by such a taxpayer can only be employed by one such firm at a time.

If staff is already hired by some other small-sized company, the State Budget Facility will not verify them as a contractor in the enterprise.

80% of these taxes go to required National social security commitments, which can have a significant impact on pensions and entitlements.

If the income of a micro-enterprise employee exceeds the sum stated in the Law, an increased tax rate is applied. This can lead to significant financial consequences, so it's essential to stay on top of your employee's income.

A tax rate of 20% will be imposed on the share of the employee's income exceeding 720,- eur per month. This is a substantial increase from the standard tax rate.

If the number of employees is exceeded and there are more than five employees in the micro-enterprise, then 2% for each additional employee are added to the tax rate of 9%. This means that even a small increase in staff can have a major impact on your tax bill.

However, if the turnover is exceeded, a tax rate of 20% is imposed on the share by which it is exceeded. This can be a major blow to a micro-enterprise's finances.

The micro-enterprise tax has to be paid four times per year for the turnover of each quarter. This means that you'll need to submit a tax declaration every quarter, which can be a bit of a challenge.

The Latvian Parliament has made significant changes to the Micro-enterprise Tax Law, affecting micro-enterprises with turnover exceeding 7000 EUR.

Micro-enterprises with turnover up to 7000 EUR are subject to a 12% tax rate, while those with turnover exceeding that limit are taxed at 15%. This change took effect on 1 January 2017.

Starting from 2018, all micro-enterprises will be subject to a 15% tax rate, eliminating the previous tax bracket for micro-enterprises.

The new law has been met with dismay among Latvian micro-enterprise owners, who are struggling to understand the changes introduced just days before the new fiscal year.

The Parliament now has until 1 June 2017 to devise a new tax mechanism to replace the existing micro-enterprise regime and establish a more straightforward tax system for such enterprises.

The changes to the Micro-enterprise Tax Law were made in response to concerns about loopholes in the tax system, which some micro-enterprises were abusing under the old law.

The President initially criticized the Parliament for failing to establish a preferential tax rate for small business owners, but the new law has been implemented despite this criticism.