Latvia - Taxation

In 1995 Latvia replaced its profits tax with 25% business income tax (BIT). Under amendments in 2001, the BIT rate was reduced to 22% for 2002, and to 19% for 2003, and scheduled to fall to 15% for 2004. Before 2004, large-scale investments in significant projects and producers of high-technology products could obtain BIT reductions of, respectively, 40% and 30%. In 2004, all businesses will be subject to the 15% rate. Small enterprises qualify for a 20% reduction in 2002 and 2003, bringing their tax rates to 17.6% and 15.2%, respectively, for those years. The small-enterprises relief will also be eliminated in 2004. Branches of foreign companies are taxed at the same rate as Latvian companies, but are eligible for the same deductions and allowances. For companies operating in Latvia, capital gains are included in corporate income. There is a 2% withholding tax for nonresident companies on proceeds from the sale of Latvian real estate. The withholding rate on dividends paid to residents is the same as the BIT rate. The withholding tax on dividends paid to nonresidents is 10%. Withholding taxes on various forms of capital income may be reduced or eliminated according to the terms of bilateral double tax prevention agreements. Shipping companies, cargo or passenger, engaged primarily in international commerce, may choose to be taxed according to a tonnage tax introduced in 2002. There are no local taxes.

As of 1995, Latvians pay personal income tax at a flat rate of 25% of taxable income. Taxable income is determined by lump sum deductions, and specific allowances for social security payments, donations to charity, hospitalization and medical expenses, and some school fees. There is also a property tax and a land tax.

The main indirect tax is Latvia's value-added tax (VAT) with a standard rate of 18% for most goods and services. A reduced rate of 9% is applied to medicines, media supplies, baby-care products, hotel accommodations, domestic hot water, heating and sewer products. A 0% VAT applies to exports. There are also excise taxes levied on luxury products at rates ranging from 10-100%, customs taxes, and stamp taxes.

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