APPENDIX I: Tax Summary

(as of July 1, 1995)

I. Taxes on Income, Profits and Property

1. The Corporate Income Tax
a. Nature of the tax

The Law on the Corporate Income Tax replaced the Law on the Profit Tax effective April 1, 1995. Together with the Law on the Personal Income Tax, the laws forms a unified system of taxation on all forms of income in Latvia unless otherwise stipulated by acts of legislation. The tax applies both to residents and “permanent establishments” of non-residents. Taxable income is defined as the profit or loss as determined by Law on Annual Reports of Enterprises, adjusted according to provisions of the Law. The annual depreciation amount for fixed assets is set at twice the depreciation rate under the law (rates between 5 percent and 25 percent, with a standard rate of 20 percent) multiplied by the remaining balance: the standard depreciation rate is therefore 40 percent per year. Tax losses can be carried forward for 5 years. Thin capitalization rules limit the amount of interest payments that can be deducted in any year.

b. Tax rates

The standard tax rate is 25 percent, compared with rates of 25 percent-65 percent under the profit tax. There are withholding rates of 5 percent-25 percent on income paid to non-residents, with a rate of 10 percent applying to dividends and interest payments. Tax credits apply to charitable deductions, small enterprises, income from agricultural activity, and on tax paid in foreign countries. Small enterprises are defined as those satisfying requirements on the value of fixed assets, net turnover or the number of employees.

c. Tax exemptions

Exempt entities include enterprises that use prisoners' labor and enterprises run by associations for the handicapped, charities, and health foundations. Amendments to the Law on Foreign Investment provide for the abolition of tax reductions for enterprises with foreign capital participation.

2. The Personal Income Tax (PIT)
a. Nature of the tax

The personal income tax is assessed on salary, income from self-employment, property income, as well as on all other remuneration, bonuses, compensation for unused vacation time, disability assistance payments, and all other kinds of payments which have not been exempted from the income tax. Tax levied on salaries and wages is withheld at source. Persons whose only source of income is labor income and whose annual income does not exceed 20 times the minimum nontaxable income do not submit declarations. Other taxpayers must file an annual income declaration by April 1 of the following year for taxes owed during the previous calendar year. The following do not file declarations: persons under 16 years of age; persons who have received income for fewer than 183 days during the year; persons whose income does not exceed the yearly nontaxable income.

b. Tax rates

The basic rate is 25 percent of taxable income. A marginal tax rate of 35 percent applies to income exceeding 20 times the nontaxable minimum.

c. Exemptions and deductions

The income tax is imposed on taxpayers' income for the calendar year, except for nontaxable activities. The following are deducted from taxpayer income: (a) a general deduction for each taxpayer (LVL 25/month effective May 1, 1994) and for each dependent (LVL 15/month effective May 1, 1994); (b) the sum of social tax and state social insurance payments; (c) expenses for the education and health care of the taxpayer or family members; (d) donations to charity; and (e) benefits for handicapped or politically repressed persons.

Income tax is not assessed on: agricultural income of individual farmers if it does not exceed LVL 3,000; dividends or profits from a business operation subject to the Corporate Income Tax; interest income; grants or payments from the social insurance fund including unemployment compensation and social maintenance, except for temporary disability payments; scholarships; child support; alimony; worker's compensation and long-term disability payments; insurance compensation and payments; and income from the sale of personal property.

3. Social Security tax
a. Nature of the tax

The social security tax (social tax) is a tax on salaries, wages, fees, royalties, and other rewards for work.

b. Tax rates

The tax is payable in the following proportions by employers and employees:

  • 1. General tax rate: 37 percent for employers, and 1 percent for employees.

  • 2. Agricultural activities: one half of the general rates.

  • 3. Handicapped employees: rate paid by employers is 8 percent.

  • 4. Workers in dangerous or unhealthy working conditions: 50 percent-70 percent for employers, and 1 percent for employees.

c. Exemptions

The tax is not assessed on: pensions and social benefits; certain types of compensation determined by the Government; compensation for health problems; scholarships; wages of pupils at trade schools; allowances for accidents; donations/rewards; and royalties earned by foreigners.

4. Property tax
a. Nature of the tax

The property tax is paid by physical persons and legal entities on fixed assets and unfinished construction located in the Republic of Latvia. The tax on leased property is paid by the owner of the property unless otherwise provided in the lease agreement. The tax on government property is paid by the manager of the property.

b. Tax rates

The tax imposed depends on the value of property as follows. Property worth less than LVL 1,500 is not taxed. A tax of 0.5 percent is imposed on property valued at LVL 1,500 or more. A maximum rate of 4 percent is applied when the value of property exceeds LVL 2.5 million. The tax is to be paid entirely to the local governments.

If a taxpayer owns several items of property, the tax is computed for the total value of the property, and if a taxpayer's property is located in different jurisdictions, the share to be paid to the local budget is proportional to the value of taxable property in each administrative or territorial unit.

c. Exemptions
  • 1. Property of individuals, if not used for business purposes.

  • 2. Property used or meant to be used solely for agricultural purposes.

  • 3. Government property used for health care, sports, education, and cultural purposes, except for cinemas, etc.

  • 4. Roads and roadside property as well as road service facilities, bridges, and viaducts: communication lines and stretches of land beneath them; and buildings of post offices and telephone exchanges in rural areas.

  • 5. Property used for environmental protection and fire safety.

  • 6. Property of religious organizations, national culture societies, and other public organizations approved by Parliament.

  • 7. Residences and property used in municipal services.

II. Taxes on Goods and Services

I. Value-Added tax
a. Nature of the tax

This is a tax on value added, which uses the credit system and is levied on goods and services at the manufacturing/import, wholesale and retail stages. The new law is effective May 1, 1995 and replaces the old Turnover Tax Law which had, however, been administered as a VAT.

b. Tax rates

The standard tax rate is 18 percent of taxable value of supplies of goods (including imports), services and supplies for internal consumption. No tax applies to exports, international transportation, as well as for services connected with export supplies of goods.

c. Exemptions

The VAT is not charged on: educational services; school books, scientific literature, and certain Latvian language literature; public library services; scientific research; services of nursing homes, day-care centers and kindergartens; banking, financial and insurance services; betting, lotteries and other types of gambling; registered mass media; real estate sales and rent payments by individuals; movies (except video), concerts, cultural and amateur sporting events, etc.; certain approved medical services, supplies and goods; certain approved baby-foods; funerals and religious services; humanitarian aid and approved gifts; consular services; certain services provided by agricultural companies to farmers; fire-fighting services; supplies of imported goods not subject to customs duties; certain approved fixed assets; catering in penitentiaries; and certain services at agricultural educational establishments.

2. Excise taxes
a. Nature of the tax

Excise taxes are payable by individuals and enterprises that produce or import the products listed below.

b. Tax rates
article image
c. Exemptions

Excise taxes are not imposed on exports, on ethyl alcohol used for medical, pharmaceutical and scientific purposes, and certain automobiles with small engines or more than seven years old. Diesel excises, on up to 80 liters per hectare of land, paid by agricultural producers are refunded.

3. Customs duties

A new tariff law became effective December 1, 1994. A general import duty of 20 percent (15 percent for countries with most favored nation status) applies on non-agricultural final goods. The tariff on raw materials and component parts is 1 percent (0.5 percent). A rate of 55 percent applies to 6 agricultural commodities. However, some final goods are exempt from tariffs, while others are subject to a rate of 1 percent (0.5 percent). Specific tariffs apply to certain grains, seeds and cereals, flour, sugar, and certain confectionery and bakery products. Individuals may import goods up to LVL 300 (LVL 15 for food products) in value without payment of customs or VAT. Export duties are levied on gypsum and limestone, waste and scrap metals, round logs, and certain art and antiques.

III. Other Taxes

1. Land tax
a. Nature of the tax

A tax on the use of land is paid by individuals and enterprises. The tax is paid directly to the respective district, village, city, or municipal district budget.

b. Tax rates

Land tax rates in rural districts are determined by the rating of the land for agricultural uses and its location. Local governments set their own tax rates for land within their jurisdiction. Individual tax rates for different types of land may not deviate by more than 50 percent from the average tax rate. Tracts of brush land are taxed at 50 percent of the average land tax rates.

c. Exemptions and deductions


The following are exempt from the land tax:

  • 1. Land used for collective transportation routes; lines of communication and strips of land allocated to these functions; land that has been banned from commercial use; land that is used for local government institutions, as well as residences, communal dwellings, educational, cultural, health, social services, and sports facilities belonging to local governments.

  • 2. Individual farms up to the first five years if the starting conditions are unsatisfactory.


Local governments may exempt or reduce the tax for the following land users: those suffering material losses due to a natural accident; retired and handicapped persons; newly founded families; poor families; families with many children; land users on whose land the scope of commercial activity is limited by law; religious and charitable organizations; land used for social purposes; and government organizations.

2. Natural resource tax
a. Nature of the tax

The objective of the natural resource tax is to encourage the efficient use of natural resources and to accumulate the means for funding environmental protection measures. The tax consists of three parts: a tax on the use of natural resources; a tax on pollution; and punitive fines for excessive use of natural resources and pollution.

b. Tax rates

The types of environmental pollution and the list of natural resources which are taxable as well as the respective limits of pollution and utilization of resources are determined by the Environmental Protection Committee.

3. State duties

These are duties levied on the delivery of various official documents and acts, including emigration permits, notarial services, and recognition of inheritance rights.

APPENDIX II: Exchange and Trade Systems

l. Exchange arrangements

The currency of Latvia is the lats (LVL). On July 20, 1992, the Latvian ruble replaced the Russian ruble as legal tender in Latvia, and in March 1993, the lats began to be issued as permanent currency at the conversion rate of one lats per 200 Latvian rubles. At this conversion rate, the exchange rate of the lats for the U.S. dollar was LVL 0.75 per US$1. Conversion of all accounts and prices into lats was made mandatory as of June 28, 1993. The lats became the sole legal tender effective October 18, 1993. The use of other currencies has, however, remained legal.

The exchange rate has been pegged to the SDR since February 1994 at a rate of SDR 1–LVL 0.7997. The Bank of Latvia reviews domestic and international exchange markets on a daily basis and announces buying and selling rates for the lats against a number of currencies. The Bank stands ready to transact with commercial banks at these rates. The exchange rates for the lats against convertible currencies other than the U.S. dollar are quoted on the basis of the cross rates between the U.S. dollar and the currencies concerned in the international market. A margin of 2 percent is applied in the quotations of the buying and selling rates for the above currencies. Banks and other authorized exchange dealers also trade in these currencies, and their buying and selling rates may deviate from the quoted rates. Since November 1, 1993, the Bank of Latvia also quotes daily the midpoint of the buying and selling rates of the lats against convertible currencies. These rates are used for various accounting purposes, including customs duties, taxation, and other valuations; they are valid through the next day and are communicated to all commercial banks. On June 30, 1995, the official exchange rate of the lats was LVL 0.512 per US$1.

The Bank of Latvia also quotes weekly the accounting rates of the lats vis-à-vis the currencies of Estonia, Lithuania, Russia, and other countries of the former Soviet Union which participate in the system of correspondent accounts. These rates are determined as cross rates based on rates against the U.S. dollar or Deutsche mark.

Government decisions adopted by the Cabinet of Ministers and approved by Parliament have ultimate authority over foreign exchange and trade matters, but authority to issue regulations governing foreign exchange transactions has been delegated to the Bank of Latvia. All foreign exchange transactions must be effected through authorized banks and enterprises licensed by the Bank of Latvia. There are no regulations governing international trade in gold, but a license is required to deal in gold in the domestic market. Foreign exchange is transacted freely in Latvia.

Export proceeds are not subject to repatriation or surrender requirements, nor are there any exchange control regulations governing capital transactions. No exchange controls or restrictions are imposed on payments for or proceeds from invisibles.

Resident natural persons and enterprises are allowed to hold foreign currencies in cash or in domestic or foreign bank accounts and to use these funds for domestic payments. Non-resident natural persons and enterprises are permitted to hold bank accounts in Latvia denominated in either foreign or domestic currency. Foreign direct and portfolio investment in Latvia by non-residents are governed by the Law on Foreign Investment which was revised last in March 1995. There are no restrictions on the repatriation of investments or profits thereon.

Latvia has accepted the obligation of Article VIII, Sections 2, 3, and 4 of the Fund Agreement, as of June 10, 1994.

2. Trade system and trade reform

a. Exports and imports practices

Latvia has an open trade system supported by a low uniform import tariff regime. However, agricultural tariffs are high, with an average product ion-weighted tariff rate of more than 50 percent. Table 30 provides a summary of the main features of the trade system. Under Latvia's Free Trade Agreement with the European Union, it is estimated that the production-weighed average agricultural tariff applying to EU imports would be reduced to 38 percent by the year 2000.

A new tariff law became effective on December 1, 1994. It replaced most specific tariffs with ad valorem rates, and established basic tariff rates of 20 percent (15 percent for countries with most favored nation (MFN) status) for nonagricultural final goods. Excluding agricultural goods, in 1994, 67 percent of Latvia's imports were assessed MFN duties. Duties on an additional 23 percent of Latvia's imports were assessed based on free trade agreements, and only 10 percent of Latvia's imports were assessed basic tariff rates.

A high ad valorem tariff rate of 55 percent applies to six agricultural commodities. However, most raw material and spare parts are assessed an import tariff duty of 1 percent (0.5 percent of the countries with which MFN relations are maintained). A number of final goods are also exempt from import tariff, and certain goods such as fruits and nuts, coffee and tea, were subject to reduced tariffs of 1 percent (0.5 percent of the countries with which MFN relations are maintained). Specific tariff rates are levied on seed and animal feed, certain grains, flour, bread, sugar, certain confectionery products, including chocolate, alcohol, cigarettes and cars.

The Ministry of Foreign Affairs has recently proposed introducing changes in the tariff law to ensure a uniform customs valuation procedure which is in accordance to WTO agreements. Currently, custom values are determined on the basis of a list of reference prices provided by the EU on a quarterly basis. Custom values for certain agricultural goods are established on the basis of the value of identical or similar goods in world markets or local wholesale prices if world market prices are not available.

There are virtually no licensing requirements for imports except imports of sugar, grains, cereals, tobacco and tobacco products, and alcoholic beverages. For national health and safety reasons, there are licensing requirements for pyrotechnic products, arms and ammunition, fighting vehicles and prepared explosives.

Physical persons entering Latvia are entitled to import, without any customs payments, goods intended for other than commercial purposes, provided their import is not forbidden by law and their customs value does not exceed LVL 300. A total customs value of foodstuff not exceeding LVL 15 per person is exempted from taxes. A person over 18 is exempt from taxes on alcoholic drinks up to one liter, or one measure unit in original packing not exceeding three liters, and not more than 200 cigarettes, or 20 cigars or 200 grams of tobacco. The importation of certain goods, such as firearms, is prohibited.

There are no export quotas in Latvia. Export duties are levied on waste and scrap metals, certain categories of round logs, and some mineral products, work of art, antiques and certain printed books.

b. Trade and payments arrangements

At end-June 1995, Latvia maintained Intergovernmental Trade and Cooperation Agreements providing for most-favored-nation status with Armenia, Australia, Azerbaijan, Belarus, Canada, People's Republic of China, Cuba, the Czech Republic, Hungary, Iceland, India, Kazakhstan, the Kyrgyz Republic, Moldova, Poland, Romania, the Russian Federation, Tajikistan Turkmenistan, Ukraine, United States, and Uzbekistan. Agreements with Argentina, Cyprus, Georgia, Iran and Turkey are in preparation.

Latvia has free trade agreements with Norway, Switzerland, Estonia and Lithuania, and the European Union. Free trade agreements with EFTA, Bulgaria, the Czech Republic, Hungary, Poland, the Slovak Republic, Slovenia, and Ukraine are under consideration. A free trade agreement with Iceland is expected to be signed soon.

Working groups have been set up to undertake negotiations to settle outstanding balances of inoperative bilateral payments agreements which Latvia maintained with Armenia, Azerbaijan, Kazakhstan, Moldova, the Russian Federation, Tajikistan, Ukraine, and Uzbekistan. Outstanding balances from similar accounts with Estonia, Lithuania, Georgia, and the Kyrgyz Republic have been cleared.

In June 1995, Latvia signed an Association Agreement with the EU. The agreement stipulates the gradual implementation of free movement of goods, services, capital and workforce between Latvia and the EU member countries. It envisages a gradual reduction in tariffs and eventual removal of nontariff barriers, and the harmonization of Latvian laws with EU standards. The Free Trade Agreement with the EU, which was initiated on June 20, 1994 and became effective on January 1, 1995, operates within the framework of the Association Agreement and covers substantially all trade in goods with the EU. According to this agreement, free trade areas will be gradually established within a maximum of 4 years starting from January 1, 1995. In particular, for the majority of industrial products tariff reductions to zero have been achieved from January 1, 1995. A 50 percent reduction of all tariffs of certain products is expected within two years after entry into force of the Agreement. Tariffs for these products are expected to be eliminated four years after the entry into force of the Agreement. A 50 percent reduction of tariffs for most non-agricultural goods is expected to take place by end-1996; elimination of tariffs is expected in 1997. Tariff reductions for agricultural products are expected to be implemented during 1995-2000 with annual equal reductions which are higher than 1 percent, or alternatively, eliminated in one step in the year 2000.

Multilateral accession negotiations for WTO were initiated at end-March 1995. In the context of these negotiations, no discussions to bind tariffs (agricultural and industrial) took place. The issue is expected to be discussed in the context of bilateral negotiations for market access.


Nevertheless, the redirection of exports away from the former Soviet Union toward the West continued. Whereas exports to CIS countries declined by 32 percent in real terms in 1994, exports to all other countries increased by 34 percent.


For some population groups (very young, army service, etc.) the benefit is only 70 percent of the minimum wage.


A consistent series for wages is only available for the state sector although the Central Statistical Bureau has recently started publishing wage data for the whole economy as well.


The producer price index measures the ex-factory price of domestically produced manufactured goods; services, consumption taxes, and imports are excluded.


For an extensive discussion of the initial undervaluation of the real exchange rate in Latvia, and the “Balassa-Samuelson effect”, see Anthony Richards and Gunnar Tersman, “Growth, nontradables, and price convergence in the Baltics”, IMF Working Paper 95/45, April 1995.


The standard VAT rate was increased from 12 percent to 18 percent in November 1993. The VAT rate on food was increased from 6 percent to 10 percent at that time, and from 10 percent to 18 percent in June 1994.


The Government's credit line at the Bank of Latvia in 1995 is based on a November 1994 agreement that allows credit up to a daily maximum of LVL 15 million. However, the monthly-average and end-month credit was scheduled to fall to zero by the end of 1995.


For details of government employment in other countries, see Aart Kray and Caroline Van Rijckeghem, “Employment and wages in the public sector—A cross-country study”, IMF Working Paper 95/70, July 1995.


On June 1, the Bank of Latvia raised its refinance rate by 1 ½ percentage points to 26 ½ percent per annum.


Starting from October 1995, all central bank credit to banks will be collateralized.


The lombard rate is a penal rate, set at 5 percentage points above the refinance rate, or 31.5 percent per annum at the end of June, 1995. Lombard credits cannot be drawn for more than 7 consecutive days or for more than 14 days during a month.


Major steps have been taken to create an organized securities market in Latvia, including the adoption of a legal framework to regulate the operations of the securities market, the Riga Stock Exchange (RSE) and the Central Depository. The RSE started operations in July 1995, but trading is still thin.


The minimum capital requirement is currently LVL 100,000 (around US$200,000), but will be raised to LVL 1 million in March 1996 and to LVL 2 million in March 1998.


Dresdner Bank has a representative office in Riga.


Of the 54 licensed banks at the end of March 1995 (deadline for the audited 1994 reports). 43 submitted their reports on time (and three banks later). Of the banks which failed to submit audited reports, six have ceased operations, including Baltija and two other large banks (Centra and Deposit).


In February 1995, the Ministry of Interior ordered armed intervention in Lainbanka, charging its management with abuse of authority and fraudulent behavior. The case received ample press coverage.


However, net errors and omissions may conceal large offsetting errors and omissions for individual entries in the balance of payments.


The overall balance is defined as the change in the net foreign assets of the banking system, including the use of Fund credit, net.


Including income and transfers balance.


There are considerable shortcomings in recording unrequited transfer flows, including the recording of foreign aid and the value of transfers of foreign technical assistance. Furthermore, information is not available on (possibly significant) private transfers from persons of Latvian descent living abroad.


The large share of FDI originated in Denmark reflects the fact that the joint venture holding company Tilts—with shares held by companies in the United Kingdom and Finland and by the International Finance Corporation—was registered in Denmark.


Latvia left the ruble area on July 20, 1992, when the Latvian ruble replaced the Russian ruble as sole legal tender in Latvia and was allowed to float.


Nominal and real effective exchange rates were calculated using trade weights and CPIs. For countries outside the Baltics, Russia and other countries of the FSU, seven of Latvia's largest trade partners (75 percent of total trade) were included: Denmark, Finland, Germany, The Netherlands, Sweden, the United Kingdom and United States. For the CIS and the Baltics, five countries (95 percent of total trade) were included; Belarus, Estonia, Lithuania, the Russian Federation and Ukraine. Given Latvia's large trade in services, and valuation problems with respect to trade flows, results reported should be interpreted with caution.

Latvia: Recent Economic Developments
Author: International Monetary Fund