Latvia
This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions. Results reported include the marginal and average tax burden for eight different family types.
Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.
Since 2014, the Latvian currency is the Euro (EUR). In 2018, EUR 0.85 was equal to USD 1. That year, the average worker in Latvia earned EUR 11 881 annually (Secretariat estimate).
1. Personal income tax system
From 1 January 2018, Latvia has introduced an ambitious tax reform. One of the main goal of this reform is reach Latvian government as well as international expert’s expectations – to reduce the tax wedge, especially for low-wage earners.
1.1. Central government income tax
With labour tax reform for the first time the progressive income tax system is introduced, as well as the differential non-taxable minimum, the allowance for dependents and the non-taxable minimum for pensioners is increased, and the minimum monthly wage is raised.
1.1.1. Tax unit
The tax unit are individuals.
1.1.2. The main tax allowances
1.1.2.1. Standard tax reliefs
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A general (basic) allowance:
Since 2016, the differentiated non-taxable minimum is introduced.
The differentiated non-taxable minimum varies depending on the person's income level: higher for lower wages, but less for higher wages.
In 2018 the differentiated non-taxable minimum varies from EUR 0 to 200 per month, in 2019 - from EUR 0 to 230 per month and in 2020 - from EUR 0 to 250 per month (see table below).
For example, in 2018, the maximum tax allowance amount is EUR 200 per month and it is applied to persons with the taxable income below EUR 440 per month. If taxable income is between EUR 440 per month and 1,000 EUR per month, the differentiated annual non-taxable minimum is calculated according to specific formula. The allowance gradually decreases until it reaches zero or not be applied. The same calculation will be in 2019 and 2020 with relevant year data.
It is important to note that from 2018, the differentiated non-taxable minimum in full amount is applied already during the tax year. It is based on the State Revenue Service (SRS) forecast which takes account the taxpayer annual income of the previous year. In 2017 the non-taxable minimum was applied only in the minimum amount for all taxpayers (60 EUR) and only after the next tax year, when taxpayer submitted annual tax return, it applied on the basis of the data regarding person’s annual taxable income.
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The allowance for dependents
The allowance for dependents is also deductible from income before taxes.
The tax allowance for each dependant (which in most cases are children) is raised - in 2018 to EUR 200 per month or EUR 2,400 per year, in 2019 to EUR 230 per month or EUR 2,760 per year and in 2020 to EUR 250 per month or EUR 3,000 per year. In 2017, it was EUR 175 per month or EUR 2,100 per year.
The taxpayer can apply allowance for a child below 18 years old and for a child below 24 years old if he or she continues studies of a general, professional, higher or special education. The allowance for child relates to taxpayer's child and in certain cases - sisters, brothers, grandchildren, as well as guardianship or dependent persons.
As of 2016, the rule of law narrowed, removing allowances for unemployed spouse, parents or grandparents, except if these persons are with disabilities.
From 2017, the tax allowance for dependents is expanded by non-working spouse, who is taking care of the minor child with a disability, if the non-working spouse does not receive taxable income or State pension.
In addition, as of July 1, 2018, the allowance is applicable for unemployed spouse who is taking care of:
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one child below 3 years old;
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three or more children below 18 years or below 24 years old (if he/she studies), of which at least one is below 7 years old;
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five children below 18 years or below 24 years old (if he/she studies).
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To support employment of youth during the summer (from June 1st to August 31st), parents can still receive tax allowance for dependents (children while they have working relationship).
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Relief for Compulsory social security contributions: Employee’s state social security contributions are deductible from income before taxes.
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Tax credits: None for employees
1.1.2.2. The main exemptions:
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income from rural tourism or agricultural production, as well as of mushrooming, berry-picking or the collection of wild medicinal plants and flowers or an uncultivated species of an individual - a park of walrus (Helix pomatia), ), if it does not exceed turnover of EUR 3,000 euro per taxation year, including the sums of State aid for agriculture or of the European Union aid for agriculture and rural development in amount EUR 3 000 per taxation year;
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insurance compensations, except such insurance compensations paid on the basis of a life, health and accident insurance contract entered into by the employer and annuity insurance contract (with accrued funded pension assets in accordance with the National Occupational Pensions Act);
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insurance compensations which have been disbursed upon the occurrence of an insurable event in relation to the life and health of the insured person due to an accident or illness, in accordance with the life insurance policy (including with accumulation of funds) regardless of who has entered into the insurance contract;
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the supplementary pension capital, which has been formed from contributions of private individuals or their spouse or a person related to their relatives up to the third stage within the meaning of the Civil Law into private pension funds according to licensed pension plans and paid to participants in pension plans;
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income from Latvian or other EU Member State or EEA State and local government bonds;
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capital gains on immovable property, if the ownership of the payer has been for more than 60 months (5 years) and it has been the declared as place of residence of the person for at least 12 months (1 year);
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capital gains on immovable property, if the ownership of the payer has been for more than 60 months (5 years) and the last 60 months (5 years) this immovable property has been the only real estate of the payer;
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capital gains on immovable property which has occurred in relation to the division of property in the case of dissolution of marriage, if it has been the declared place of residence of both spouses at least 12 months until the day of entering into the alienation contract;
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capital gains on immovable property, if this income is invested a new in a functionally similar immovable property within 12 months or before alienation of the immovable property or real property prior to expropriation;
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income from the alienation of personal property (movable objects such as furniture, clothing and other movable objects belonging to an individual intended for personal use) except income from the sale of items (tangible or intangible) prepared for sale or purchased, an increase in capital and other income from capital and scrap sales;
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scholarships paid from the budget, association or foundation resources;
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scholarships up to 280 euros per month paid by an entrepreneur in accordance with the procedure set out by the Cabinet of Ministers for the organization and implementation of work environment training shall be paid by the merchant, institution, association, foundation, natural person registered as a performer of economic activity, as well as individual enterprise, including farmer or fishermen's farm, and other economic operators;
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grants paid to a student who attends a medical education program to promote the acquisition of an educational program and which is paid out from the institution of health care institution;
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income obtained as a result of inheritance;
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allowance (alimony);
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prizes of lotteries and gambling if the amount (total amount) of the prize (value thereof) does not exceed EUR 3000 per taxation year;
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goods and services lottery prizes;
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material and monetary prizes (premiums) received at competitions and contests, the total value of which in the taxation year does not exceed EUR 143, and the prizes and premiums acquired at international contests the total value of which does not exceed EUR 1,423 a year, as well as the financial incentive paid out to the laureates of the prizes of the Baltic Assembly and prizes of the Cabinet;
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revenues from gifts up to EUR 1,425 from natural person, other than a close relative;
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revenues from gifts in full amount from natural persons, if the giver is connected to the payer by marriage or kinship to the third degree;
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dividends, income equal to dividends or notional dividends if the enterprise income tax has been paid etc..
1.1.3. Tax schedule
From 2018 the Personal income tax system is progressive (in 2017 the PIT rate was a flat - 23%).
The PIT rates are set:
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20% - for income up to EUR 20,004 per year;
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23% - for income exceeding EUR 20,004 but not exceeding EUR 55,000 per year;
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31.4% - for income exceeding EUR 55,000 per year.
The tax rate 20% and 23% (depending on the level of income) is applicable monthly in the workplace where a payroll tax book is submitted. In the workplace where a payroll tax book is not submitted, only the rate 23% should be applied.
The rate 31.4% has calculated only in annual tax return. During the year, the tax is paid as Solidarity tax for employee revenue above EUR 55,000 per year. The Solidarity tax part of 10.5% is transformed into a Personal income tax rate of 31.4%. Compulsory social security contributions from incomes above EUR 55,000 per year is not be paid.
1.2. Regional and local income tax
No regional and local income taxes.
2. Compulsory social security contributions to schemes operated within the government sector
In 2018, the compulsory social insurance contribution rate is increased by one percentage point from 34.09% to 35.09% to ensure financing of the health sector (0.5% paid by the employee and 0.5% paid by the employer).
Social insurance contributions covers:
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state pension insurance;
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social insurance in case of unemployment;
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social insurance in respect of accidents at work and occupational diseases;
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disability insurance;
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maternity and sickness insurance;
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parental insurance;
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health insurance.
In 2018 the maximum object of mandatory social payments is 55 000 EUR per year.
2.1. Employees’ contributions
Employees pay 11% of their earnings in contributions. The taxable base is the total amount of the gross wage or salary including vacation payments, fringe benefits and remuneration of expenses related to work above a certain threshold. The assessment period is the calendar month.
2.2. Employers’ contributions
Social security contributions are also paid by employers at a rate of 24.09% on behalf of their employees. The taxable base and the assessment period are the same as for employees’ contributions.
The total contribution rates paid by employees and employers are applied:
3. Solidarity tax
From 2016 Solidarity tax was introduced.
Solidarity tax rate is set at the same level as the current social security contributions rates (11% and 24.09%).
The tax is paid for the income exceeding the maximum amount of the social security contributions object. The purpose if this tax is to eliminate existing regressivity in the labour tax system and to equalize the tax burden on labour between low-wage earners and the high wage earners. This problem appeared when the social contribution ceiling was re-introduced in 2014. In 2018 the ceiling is raised to EUR 55 000 per year (in 2017 was EUR 52 400 per year). The tax period is the calendar year.
In 2018, the Solidarity tax is reformed, which means it is divided and transformed into both the pension systems, the personal income tax rate (31.4%), and the state social budget (more see below in the table).
Solidarity tax applies to all socially insured individuals – employees, self-employed, if their income over a calendar year exceeded the maximum amount of mandatory contribution of the statutory social insurance. Employers are also subject to solidarity tax (in the same way, as they are liable for paying employer social insurance contributions).
4. Payroll tax
The Business risk fee is paid in the state basic budget, and then transferred to the Employee claim guarantee fund, which is administrated by the state agency “Insolvency administration”. The Insolvency administration is a public institution controlled by the Ministry of Justice.
If an enterprise is insolvent, the Insolvency Administration satisfies employee claims for their unpaid salaries, compensations for the paid annual leaves and compensations for dismissal in case of the end of the employment relationships.
The Business risk fee does not confer entitlement to any kind of social benefits.
The Business risk fee is a constant payment for a person EUR 0.36 per employee per month.
5. Universal cash transfers
5.1. Transfers related to marital status
None.
5.2. Transfers for dependent children
From 2015, support for families has been introduced through differentiated family benefits:
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EUR 11.38 per month for the first child,
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EUR 22.76 per month for the second child,
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EUR 34.14 per month for the third child,
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EUR 50.07 per month for the fourth and each subsequent child (only from 2017).
From March 1, 2018 an additional allowance for families is paid:
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EUR 10 per month for 2 children;
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EUR 66 per month for 3 children,
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additionally EUR 50 per month for each subsequent child
For example, for family with six children additional allowance is EUR 216 per month (66 (for 3) +50+50+50).
The state pays family benefits to all children until they reach the age of 15. Children enrolled in basic or secondary schools or vocational education institutions operating on the basis of basic education have the right to receive family benefits until the age of 20 (before was up to 19).
In addition there are four other types of family benefits for which payment depends on either the age of the child(ren) and/ or the status of the person(s) looking after them: maternity and paternity benefit; childbirth benefit; parental benefit; child care benefit (additional benefit for child with disabilities). These are not included in the modelling.
6. Main changes in tax/benefit system in 2018
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From 1th January 2018, Latvia has introduced an ambitious tax reform. One of the main goal of this reform is to reduce the tax wedge, especially for low-wage earners.
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In 2018 the progressive personal income tax system has introduced and set three rates – 20%, 23% and 31.4% (in 2017 the PIT standard rate was a flat - 23%).
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The differential non-taxable minimum is increased - in 2018 ranges from EUR 0 to 200 per month, in 2019 - from EUR 0 to 230 per month and in 2020 - from EUR 0 to 250 per month. In 2017, non-taxable minimum ranged from EUR 60 to 115 per year.
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From 2018, the differentiated non-taxable minimum is applied every month based on the State Revenue Service (SRS) forecast. In 2017, the non-taxable minimum was applied in the minimum amount for all taxpayers (60 EUR) and only during the next tax year, when taxpayer submitted annual tax return, it applied on the basis of the data regarding person’s annual taxable income.
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The tax allowance for each dependant is raised - in 2018 to EUR 200 per month, in 2019 to EUR 230 per month and in 2020 to EUR 250 per month. In 2017, it was EUR 175 per month.
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In addition, as of July 1, 2018, the allowance for each dependant is applicable for unemployed spouse who is taking care of:
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one child below 3 years old;
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three or more children below 18 years or below 24 years old (if in education), of which at least one is below 7 years old;
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five children below 18 years or below 24 years old (if in education).
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The non-taxable minimum for pensioners is increased - in 2018 to EUR 250 per month, in 2019 to EUR 270 per month and in 2020 to EUR 300 per month. In 2017, it was EUR 235 per month.
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The minimum monthly wage is raised to EUR 430 (2017 was EUR 380).
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In 2018, the compulsory social insurance contribution rate is increased by one percentage point from 34.09% (2017) to 35.09% to ensure financing of the health sector (0.5% for the employee and 0.5% for the employer).
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Solidarity tax is reformed in 2018 and tax rate is raised from 34.09% to 35.09%. Solidarity tax is applied to income more than EUR 55,000 per year (in 2017 was EUR 52,400 per year).
Revenue of Solidarity tax is divided and transferred into following budgets:
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1 % into the State basic budget for healthcare financing;
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6 % into the taxpayer the State funded pension scheme account;
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4 % into the tax payers private pension account (taxpayer is a member of the State funded pension scheme) or 10 percentage into the tax payers private pension account (taxpayer is not a member of the State funded pension scheme);
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10.5 % into the Personal Income Tax account;
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13.59 % into the State pension special budget.
In 2016 and 2017, Solidarity tax revenue was transferred into the state budget and was not tied to social services.
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From March 1, 2018 an additional allowance for families is paid - EUR 10 per month for 2 children, EUR 66 per month for 3 children, EUR 50 per month additionally for each subsequent child (for example, for family with six children additional allowance is EUR 216 per month (66+50+50+50)).
7. Memorandum items
7.1. Average gross annual wage earnings
In Latvia the gross earnings figures cover wages and salaries paid to individuals in formal employment including payment for overtime. They also include additional bonuses and payments and other payments such as for the annual and supplementary vacations, public holidays, sick pay (sick-leave certificate A), payment for public holidays and other days not worked, social security compulsory contributions paid by the employees and personal income tax, as well as labour remuneration subsidies.
7.2. Employer contributions to private pension and health schemes
Some employer contributions are made to private health and pension schemes but there is no relevant information available on the amounts that are paid.
2018 Tax equations
The equations for the Latvian system are mostly on an individual basis.
The functions which are used in the equations (Taper, MIN, Tax etc) are described in the technical note about tax equations. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.