Latvia is one of the countries in the EU that provides particular conditions of state support for start-ups. For example, start-up companies are eligible for substantial support from the state, which would be a reduction in payroll taxes or co-financing the costs on highly skilled employees. Foreigners can also apply for start-up visa in Latvia and pursue their innovative business activities in the European Union.
With rapidly growing economy, Latvia is on the path of being one of the most attractive EU countries for business and innovative start-ups.
Already from 2017, in accordance with the Law on Aid for the Activities of Start-up Companies (hereinafter - the "Law") if the start-up company has high growth potential (that may be development, innovative product, improvement of scalable business models etc.) it can apply for particular incentives from the state.
The start-up company shall be in form of Limited Liability Company (SIA in Latvian) or Joint-Stock Company (AS in Latvian).
Pursuant to the Law, these companies (if they fit the criteria pursuant to the Law) may apply for:
- payroll tax reliefs for start-up companies.
- program for attracting highly skilled and qualified employees.
PAYROLL TAX RELIEF:
In Latvia an employee's salary shall be subject to two taxes:
1. Mandatory state social insurance contributions (Social Tax).
In 2020, Social Tax was 35.09% (of which 11% deducted from employee's gross salary and 24.09% therefore paid by the employer separately). However, from 2021 and onward Latvian government has proposed ammendments, where the state social insurance contribution would be reduced to 34.09% (of which 10% is deducted from gross salary and 23.59% is paid by the employer).
2. Personal income tax (Income Tax)
Latvia is one of the countries with progressive PIT system unless the law provides for a different rate, PIT rate is based on the level of annual income.
- Rate of 20% applies to income up to EUR 20,004/year
- Rate of 23% applies to any portion of income between EUR 20,004 and EUR 62,800/year
- Rate of 31% applies to any income over EUR 62,800/year
PIT on dividends is 20%. But, if a company has changed its profits to CIT, there will no be PIT to pay (applies for Latvian companies/EU companies/EEA companies and others, excluding tax havens and MBT payers). To zero-rate dividends for PIT, there shall be evidence presented of PIT or CIT paid abroad.
Any other income from capital and interest also would attract a fixed PIT of 20%.
Rate on income from capital gains in Latvia is 20%.
Regarding cryptocurrency, Latvian PIT Act defines it as "a capital asset subject to the general capital gains tax rules with the requirement to match capital gain with the capital loss from cryptocurrency to establish annual total gain/loss from trading in cryptocurrency".
To receive state support, a start-up company may have the right to reduce taxes on salaries of its employees:
1. Up to the amout of fixed payment of the Social Tax (estimated from the amount of two minimum wages in Latvia, 500/month in 2021. Thus, in 2021 fixed payment per month would be social tax (for now 35.09% *2*500 EUR)
2. 0% Income Tax.
But, in accordance with the Law, start-up company as an employer is obliged to make additional contributions to the employee's state pension insurance or to the employee's private voluntary pension scheme in at least of 10% of the difference between gross income accrued for the employee and object of fixed payment.
HIGH SKILLED EMPLOYEES:
Start-up company in Latvia has a right to apply for a particular support program to attract skilled professionas and therefore receive a refund from the state in the amount of 45% of company's expenses on salaries paid to employees and taxes paid from salaries.
To obtain state support on this matter, there shall be only particular aims pursued:
1. Specific research activities.
2. Technological problem solving or development of improved products and technologies (IT)
Highly qualified employee shal posess the criteria:
- relevant higher education (master's degree or equivalent higher education in natural science, IT, mathematics, engineering and technology, design, manufacturing, processing).
- at least 3 years of professional experiance in the field of potential employment.
The list of benefits shall not be limited to state support,
0% Corporate Income Tax. Since 2018, there is a 0% CIT on reinvested profit of enterprises, which means that CIT would be paid only when dividends are distributed.
Start-up visa. If you are a foreigner and a founder of start-up, you can apply for special residence permit category: start-up visa. This visa would give you the right to move to Latvia with your family and reside there.
Blue card. Skilled professionals of a start-up that are foreigners are given the right to obtain a residence permit with a right to work in the EU - European Blue Card. Blue card is given for persons who have obtained a higher education under an education program of at least 3 years in a relevant field of ecpertise or have a relevant professional experience of at least 5 years. Latvia also provides benefits for IT professionals (e.g. reduction of taxes paid from the minimum wage)