Important changes in the Latvian tax legislation in 2018

16.10.2017 Maya Geraskina, tax consultant

The year 2018 is not far, which carries with it the following changes in taxation. In July 2017, the Saeima adopted a number of laws within the framework of the tax reform, which will change 9 taxes from 15 existing ones.

The most ambitious changes are stipulated in the laws on personal income tax (PIT), on the tax of solidarity, on the profit tax of the enterprise, the law on social insurance, and the excise tax. In addition, some changes have affected the law on VAT, the tax on microenterprises, the tax on the operation of vehicles, on lotteries and gambling. 

In this article, we offer you an analysis of changes in the Law on Personal income tax. Taxpayers in the legislation of the Republic of Latvia can be divided into three main groups:

I. employees,
II. self-employed persons (persons engaged in economic activities), and
III. owners of capital. 

I. Employees will face the following changes: 1) From 1 January 2018, a differentiated personal income tax is introduced:

  • 20% of annual income to 20,000 euros,
  • 23% of the annual income from part of the annual income of more than 20,000 euros, but less than 55,000 euros,
  • 31,4% from the part of the annual income exceeding 55 000 euros. 

A tax rate of 31.4% is applied when submitting a declaration of annual income, and the paid tax includes a part of the solidarity tax established in accordance with the Solidarity Tax Law. 

When providing a declaration of annual income, the State Revenue Service (SRS) calculates a tax refund in the cases specified by law at a rate of only 20%. 

2) The rate of the tax on wages, which the employer keeps and pays to the budget, will be: 

  • 20% of the monthly salary less than 1667 euros,
  • 23% from the part of the salary that exceeds 1667 euros. 

In the event that the employee has not provided the employer with a tax book, a 23% tax applies to salaries of any size. 

3) To the incomes from the author’s remuneration for literary works (only) that are created, published and used in the press and other mass media, the rate of 20% is applied. 

4) In addition, from January 1, 2018, a differentiated non-taxable minimum is introduced, which will be calculated for each employee individually. In the workplaces, in the calculation of wages the forecasted by the SRS monthly non-taxable minimum will be applied if the payer’s tax book is submitted. SRS will report information on the applied forecasted minimum for each employee to the employer through the Electronic Declaration System twice a year – until January 1 and until August 1. 

Based on the foregoing, there may be a situation, when income changes and the application of a differentiated annual non-taxable minimum, the taxpayer will have to pay extra in the PNN budget. 

5) Starting from July 1, 2018, one can get an additional benefit for an unemployed spouse, on whose dependent is:

  • a child under the age of three;
  • three or more children under the age of 18 (or under the age of 24, if continuing the full-time studies), of which at least one is under the age of 7;
  • five children under the age of 18 (or under the age of 24, if continuing the full-time studies). 

6) The amount of the non-taxable burial allowance granted by the employer has risen to 250 euros (now it is 231.43 euros). 

7) Non-taxable gifts from the employer will be 15 euros (now 14.23 euros). 

8) An increase in non-taxable lows for the pensioners is also expected:

  • 2018 – 3000 euros;
  • 2019 – 3240 euros;
  • starting from 2020 – 3600 euros. 

9) The calculation of compensation for justifiable costs will change:From the amount of annual taxable income, one can deduct the justified expenses of a taxpayer or his family members, not exceeding 50% of his income, but not more than 600 euros for each member of the family. It means that if one has an annual income of 1000 euros, then justified costs are accepted only up to 500 euros. 

We would like to remind that the justified expenses are: the costs of treatment, education, donations, including donations to political parties, education of children by interests (swimming, language courses, etc.) 

In addition, the amount of justifiable expenses includes contributions to private pension funds and payments under the life insurance savings agreement, which must be concluded for at least 10 years, in an amount that does not exceed 10% of the taxable income of the taxpayer, but not more than 4000 euro per year. 

II. Taxation of economic activity of an individual will change: 

Since January 1, 2018, the limitation of expenses from economic activities is introduced in the amount of 80% of the total income of economic activities. In reality, of course, the expenses can be even more, but only 80% are taken into account for calculating the tax. 

Also new methods of accounting for depreciation of fixed assets are established, namely: if the cost of fixed assets is more than 1000 euros, then the double wear rate is not applied. 

III. The following changes are related to the capital gains tax: 

  • tax on dividends is cancelled if they are subject to 20% corporate income tax;
  • a general tax rate of 20% is introduced for capital income, including capital gains (currently 10% and 15%);
  • in case of alienation of non-residents’ real estate to a legal entity, at the moment of payment to a non-resident the payer will be obliged to withhold 3% (now 2%);
  • if the income on capital gains is not more than 1000 euros, the declaration is submitted until January 15 of the following year. When income is more than 1000 euros (now 711.44 euros), the declaration is submitted quarterly until the 15th day of the month following the quarter. 

To be continued on the changes in taxes in 2018.

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