On 4 and 11 July 2017, the Cabinet of Ministers approved several draft laws introducing significant changes to the Latvian tax system as from 1 January 2018. Note that the draft laws were adopted by the Parliament on 27 and 28 July 2017 in an expedited procedure. Elsewhere we have introduced amendments to CIT regulation. This tax news will report on the main alterations to personal Income tax (PIT).
Latvia to have a progressive tax system
Starting from 2018, Latvia will introduce a progressive personal income tax system. That is, income below EUR 20,000 a year will be subject to a 20% PIT rate. Income from EUR 20,000 to EUR 55,000 a year will be subject to the present rate of 23%. On the other hand, the share of income exceeding EUR 55,000 a year will be subject to a PIT rate of 31.4%.
In 2018, the differentiated non-taxable minimum remains in force. The intention is that as from 2018 everyone whose income (ie, not only salary, but also other taxable income) does not exceed the minimum salary of EUR 430 a month will enjoy a non-taxable minimum of EUR 200. This will gradually rise to EUR 250 in 2020. In turn, gross monthly income above EUR 1,000 will not enjoy the non-taxable minimum (in 2020 – above EUR 1,200). The State Revenue Service (SRS) will set the differentiated non-taxable minimum and notify companies who apply this minimum each month.
The minimum monthly salary will, as noted above, be set at EUR 430.
Changes to PIT benefits
In 2018, PIT benefits for dependants will rise to EUR 200 (in 2020 – up to EUR 250).
Likewise, PIT benefit will increase for deductible expenses, education, medical costs, donations and other items up to EUR 600 a year but not exceeding 50% of gross taxable income and in the same amount is applicable for each dependant person. In addition, payments to private pension funds and life insurance will be restricted to EUR 4,000 a year or 10% of gross salary. With regard to benefits for life insurance premiums, the mandatory term of an insurance contract will be extended to 10 years.
PIT rates to change on income from capital
Starting from 2018, the PIT rate on income from capital will be set at 20% irrespective of the type of income. The rate of 10% will still apply to income from forest disposals and lease of one’s own property without registration with the SRS as a business activity.
It will be established that PIT is not paid on dividends if CIT has been already paid for them; on the other hand, if a company pays dividends from retained profit to individuals, then exemption from PIT will apply for the first two years, and thereafter PIT of 20% will be payable starting from the third year.
Next year, only one threshold will be set for filing capital increase returns: if income from capital does not exceed EUR 1,000, then the return should be filed annually, otherwise – quarterly.
State social insurance (SSC) contributions to increase
To allow a partial increase in healthcare funding, the government has decided to increase SSC by 1 percentage point up to 35.09%, of which half the increase (0.5%) will be imposed on employers and the other half (0.5%) on employees.
Solidarity tax remains
Although the Ministry of Finance initially announced that solidarity tax (ST) will be revoked as from 2018 to be replaced by progressive PIT, this promise has not been kept because ST will still be applicable in 2018, though in significantly changed form.
That is, the principle remains that ST is paid in the same manner as SSC, or 35.09% starting from 2018. Still, in comparison to the present situation where the entire ST is paid to the state budget and should actually be regarded as PIT, as from 2018 only 10.5% of the tax will be transferred to the state budget as PIT. The remaining ST will be divided as follows:
- 4% will be transferred to the ST payer’s 3rd pension level;
- 6% will be transferred to the ST payer’s 2nd pension level;
- 1% will be transferred to the health insurance budget;
- 13.59% will be transferred to the general social budget for pension insurance or the ST payer’s 1st pension level.
Changes for business and royalty payees
Starting from 2018, business operators are expected to pay 5% of the balance between the amount subject to SSC and actual income for pension insurance. If actual income does not exceed EUR 430 a month, then the transfer of 5% will be forwarded to the payer’s 1st pension level.
Business operators will have restricted rights to deduct business costs up to 80% of business income, except salary costs and some other minor types of costs which could be deducted fully.
Royalty payments for literal works will be subject to 20% PIT upon payment and after filling tax return progressive PIT rates will be applied..
On the other hand, with regard to royalty payments, royalty payers will have to use their own funds to pay 5% of the royalty to the state treasury. If this amount reaches the minimum sum within a month to cover contributions for pension insurance, then that amount will be transferred to the royalty payee’s 1st and 2nd pension levels respectively. Even so, if 5% of the royalty does not exceed approx EUR 105 a month, then the amount is transferred to the royalty payee’s 1st pension level.
As from 2018, PIT will be applied to winnings of gambling and lotteries that exceed EUR 3,000 a year, except prizes from product and service lotteries. The winning or prize payer will have to deduct PIT.