Last update: June 22, 2020
Working as CEO of Astorts Group, my team and I have received many inquiries about a cost effective way to use the new Latvia corporate law, so I decide to write this bootstrapper's guide that can be useful for many of you.
Are you going to launch a new company or you just wonder to understand better the benefits of the new Latvia regulation? It is a well-known fact that Latvia is estimated as the fastest growing economy in the EU.
The Government is interested in the improvement of the country’s investment environment. It plans on further easing regulatory requirements by coordinating government policy implementation and reducing administrative procedures and redundant regulations. All permitting and initial processes have been making easier and cheaper for business.
Despite of the huge number of financial problems the Latvian Government has been saving one of the lowest rate of tax on corporate income. Making an attempt to attract businesses to regions outside the capital, the Government has arranged Free Economic Zones, offering the special incentives.
From my experience several tricky mattersmay come to your mind when you decide to enter the Latvian market:
- What are the requirements for the company formation in Latvia?
- Can you get the special incentives within the new corporate law?
- What is the actual situation with the conditions of doing business in Latvia?
Latvia has recently fully recovered from the economic recession and its stagnation has been replaced by business development and a positive environment forthe growth and prosperity
Currently, Latvia is rated 19th in the world for ease of doing business (World Bank Report “Doing Business” 2018). Latvian law and its realization ensure the stability and the EU standards of doing business.
One of the most attractive destination to make the investments
The agile and open Latvian economy is beneficial for foreign direct investments (FDI).The Latvian authorities acknowledges the relevance of attracting FDI for ongoing economic advancement. Latvia has consistently pursued liberal trade policies and always welcomed FDI by creating an open and attractive business environment characterized by the following:
- tax rates among the lowest in Europe;
- skilled, multi-lingual labour at reasonable costs;
- business without borders within the EU under European-wide legislation;
- transparent legal and judicial system;
- efficient start-up procedure;
- high quality of life;
- state support programmes.
Briefly about the country:
It is obvious that often the new entrants would like to estimate not only the market conditions but also some important and relevant facts about the usual life of citizens of the chosen country, especially if you intend to relocate. I try to make a briefly overview according to my personal experience.
Located literally between east and west Latvia has become multi-national, open andwestern-oriented society. Moreover, geographical location let Latvia to be a great business hub in the Northern Europe and a base for east-west trade. The Baltic Sea region is the most dynamic regional market in Europe. You can invest in the huge number of sectors: renewable energy, woodworking, construction materials, industrial real estate and others. Being very open, Latvian people are often searching for mutual beneficial cooperation with international partners. Well to notice that the official language is Latvian though Russian, English and German are widely spoken.
You have to be aware of the following requirements and procedures for Latvian company formation:
Types of the legal entities:
Foreign entrepreneurs usually register the following types of undertakings:
- limited liability company (SIA);
- joint stock company (AS);
- representative office of foreign merchant
Founders of Latvian Companies may be legal and natural persons, residents and non-residents of Latvia. The amount of participants is unlimited.
The minimum number of directors is one. They may be natural person residents of any country.
The minimum of equity capital is around EUR 2850 and it is not required to pay the entire equity capital at the moment of registration; the remaining sum might be paid within one year.
From 1 January 2018 the new corporate tax in Latvia has been existing:
- the corporate income tax rate increases from the current rate of 15% to 20%;
- however, at the same time the individual shareholders do not pay 10% dividend tax as it was before.
The new corporate income tax is payable upon the distribution of profits only. Until the Latvian company keeps the profits, 0% tax is payable. Generally the tax is payable as follows:
- 20% from gross profit;
- 25% if the company applies to net payments (dividends, deemed dividends, non-business expenses, loans issued to related parties, interest payments subject to thin capitalization rules, bad debts to be written off, transfer pricing adjustments, liquidation quota)
[20%/80% rule, where the net amount is multiplied by 20%/80% to calculate the tax].
The most beneficial point of the new tax is that the payment of it could be postponed, thus allowing to reinvest it into operations, investment vehicles or simply keep the cash. By paying the tax later the company benefits from the time value of the postponed tax payment.
From my experience I can give you some practical advice:
for local individual shareholders, the new tax is more attractive due to the fact that they do not pay dividend tax anymore. The new tax rate is 20% of the gross dividends instead of previous 15 % Latvian corporate income tax and 10% personal income tax. Latvian tax residents pay no tax on of the dividends they obtain from abroad. To sup up, Latvia is becoming a magnificent destination to save taxes on profits repatriated from overseas investments;
for foreign individual shareholders who are holding shares in a Latvian company, it is a great idea to reconsider their investments. If they plan to distribute profits, the tax payable in Latvia will most likely not be credited against the dividend tax payable in their residence countries. As an alternative key to save profit a foreign owner is able to:
spend more than 183 days in Latvia and become the Latvia tax resident,
place a holding company between the Latvian operating company and him/her or
partly replace the equity financing by loan financing.
Latvian Holding Companies
Last changes in the Latvian corporate law have put the country to the level of other traditional global investment activity centres like Cyprus, Malta, Netherlands and Luxembourg. European Union directives on parent companies, subsidiaries, percent and royalty payments, and big amount of double taxation avoidance (with 51 country, including almost all the EU countries and USA, Canada, Russia, China and CIS countries) allows Latvian Companies avoid or reduce withholding dividends at source, percent, royalty payments or other income taxes that are paid to Latvia and provide a functionality of a Holding Companies regime.
Distributed profit from the sale of shares (except for shares of offshore companies) is not subject tocorporate income tax unless the company has held the relevant shares for less than 36 months. The exemption will not apply in case the main purpose of setting up of the taxpayer or the structure is to benefit from the holding regime (i.e. tax optimization or avoidance of taxes has taken place).Tax exemption will not be applied to profits from the sale of financial instruments (e.g. investment fund notes, securities, bonds, etc.) as well as to royalties and interest received.
Bank account opening:
Undoubtedly, opening a business bank account is getting harder and harder in the EU, but having a strong and faithful connections with banks in Latvia we can help you with the company account opening. If you need bank introduction feel free to contact me.
Usually the package to start your business in Latvia is in the range of 3,000 Euro and includes:
- Company Formation;
- Hot Desk;
- Bank Account Introducing;
To sum up, we dare to say that under the conditions of the changing global market Latvia become as well the new tax haven for all who are interested to reduce the tax burden and use all potential benefits that the holding regime can provide. Also my team could advise you about the incentives and privileges in accordance with the most attractive business activities. The journey to conquer the new market is not an easy one, it requires a lot of time, effort and hard work, my team will be glad to help you cover all obstacles you can face on the road to success.
Alessandro Rocco Pietrocola is an entrepreneur and investor based in London and operating mainly in Europe, Asia and Oceania with main focus on UK, Baltic Countries, Russia, China, Hong Kong, Malaysia, Singapore, Middle East and New Zealand as area of interest! At the moment is the CEO of Astorts Group. He is an UK FCA (Financial Conduct Authority) Approved Person and is has great experience as director of regulated companies. He uses to dedicate part of his life to inspire others and help them achieve the most out of their life. Since he was 20, he had successfully founded and managed several companies operating in the field of management consulting, wealth management and fintech. He loves travelling, he is a cigars lover, an amateur golfer and a dapper man.