Chapter 25. Latvia

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

    

25.1. Overview

In 2016, Latvia had 82.4 thousand agricultural holdings with an average size of 35.9 hectares. The total area of utilised agricultural land in 2017 was 1 932.2 thousand hectares and agriculture, forestry and fisheries contributed 3.7% to GDP.

On 1 January 2018, an ambitious tax reform came into effect in Latvia. The aim of tax reform is to provide a stable and predictable tax policy focused on economic growth and welfare of the population and reduce the tax wedge, especially for low-wage earners. A progressive income tax system has been implemented for the first time and a corporate income tax regime with zero tax for reinvested earnings is now in place.

Special tax treatment for agriculture includes: exempting income earnt by small scale farmers and income earned from agricultural subsidies paid by the state or by the European Union; a cap on increases of cadastral values used to calculate real estate taxes for agricultural land; excluding farming buildings from restate estate taxes; flat rate compensation for non-VAT registered farmers; exemptions from capital gains taxes when selling agricultural land; reduced excise taxes for diesel used in agriculture and natural gas for heating in poultry operations and greenhouses; and exemptions from vehicle operation and company car taxes.

25.2. Income taxation

There are two income taxes in Latvia, personal income tax and corporate income tax. General tax rules are applicable to farmers and agro-food companies.

Personal income tax (PIT) is imposed on worldwide income derived by natural persons, including farmers. A progressive income tax system was introduced from 2018 with three tax rates ranging from 20% to 31.4% applying to different income thresholds. Income from capital and capital gains is taxed at 20% and a solidarity tax is levied on annual income exceeding EUR 62 800 (2019).

Farmers who are PIT payers are granted the following tax relief:

• PIT is not imposed on income less than EUR 3 000, for those taxpayers deriving income from agricultural production and rural tourism services.

• All agriculutre subsidies received within the framework of the state support for agriculture or under the European Union support for agriculture and rural development are tax exempt.

PIT from capital gains is payable in Latvia when selling real estate (including land) at a rate of 20%. Capital gains value is determined by subtracting from the price of the capital asset (real estate) the acquisition value and the investment value made to the capital asset during the ownership. Capital gains tax exemptions exist when a person sells land to be used for agricultural purposes.

Corporate income tax (CIT) is paid by the producers of agricultural production as well domestic enterprises (commercial companies, cooperative societies and other private law legal persons), individual merchants, including farms and fishery farms with a turnover during the previous taxation year of greater than EUR 300 000, or those who have opted to become CIT payers.

From 1 January 2018 under the new law:

• CIT is payable on distributed profits (including deemed profit distributions).

• No CIT is payable on undistributed profits.

• CIT is payable on net amount of expenditures not related to business activity.

• The CIT rate is 20% on the gross distributed amount or 20/80 on the net income.

• In case of dividends distributed to individuals, no personal income tax applies.

• The CIT taxable period is one month.

By not taxing reinvested earnings, companies can improve their capitalisation which will facilitate lending and investment.

Farmers who are CIT payers are entitled to reduce CIT taxable income for the amounts received as state aid to agriculture or EU support for agriculture and rural development from the taxable base by up to 50% (and no more than the total taxable income).

25.3. Property taxation

Real estate tax (RET) is calculated from the cadastral value (set by the State Land Service) of the property. The standard rate is 1.5% of the cadastral value for land and buildings. However local governments are entitled to determine RET rates of between 0.2% to 3% of the cadastral value of the property. In order to limit the rapid increase of the cadastral values for agricultural land, from 2016 until 2025 a special value is set for the agricultural lands exceeding than three hectares. Under this rule the increase of the cadastral value shall not exceed 10% of the cadastral value set for the previous year.

The following are excluded from paying RET:

• Buildings and engineering constructions used only in agricultural production.

• Land in special conservation areas, in which economic activity is prohibited by law, and on the existing buildings and engineering structures used for nature protection in these territories.

• Land areas under restored or newly planted forest stands (young forest stands).

25.4. Tax on goods and services

The value added tax (VAT) is the major type of consumption tax. In 2019, the standard rate of VAT was 21% with a reduced rate of 12% applied to some goods and services. From 1 January 2018 until 31 December 2020, a 5% VAT applies to supplies of fresh fruits, berries and vegetables.

Farmers who are not registered as VAT payers, upon supplying untreated, raw agricultural produce to agricultural processors who are registered as the VAT payers, can charge a flat rate of 14% on the delivered agricultural produce. The aim of flat rate is to compensate farmers for VAT they have paid on purchases for their business.

Farmers with incomes above EUR 40 000 must be VAT registered. They are required to account for VAT, submit VAT returns, and are able to claim back VAT paid on inputs.

The VAT for the supply of the cereals and technical crops (including oilseeds) processed for final consumption shall be paid by a recipient of the cereals. This so-called VAT reverse charge mechanism was introduced as of 1 July 2016.

The excise tax (hereinafter referred to as “ET”) is applied to alcohol, tobacco, oil products, natural gas, soft beverages, coffee and liquids used in electronic cigarettes.

From 1 July 2018 to 31 December 2019, the reduced ET rate for diesel fuel for use in agriculture is EUR 55.80 per 1 000 litres, and from 1 January 2020, it will be EUR 62.10 per 1 000 litres. The reduced ET rate is levied on diesel fuel intended for use in agricultural machinery (i.e. for the operation of tractors and self-propelled vehicles and transportation of agricultural produce). This is 15% of the standard ET for diesel fuel. A volume limit applies to the diesel purchased at the reduced rate that depends on the crop and ranges from 60 to 130 litres per hectare of cultivated agricultural land that has been declared and approved for the single area payments (SAP). Furthermore, agricultural producers are granted reduced excise taxes on natural gas used for heating covered areas (i.e. greenhouses) and for heat supply for industrial poultry holdings (i.e. poultry houses) and incubators.

Agricultural producers pay 25% of the total rate of the transport vehicle exploitation tax for the transport vehicle, truck, trailer or semi-trailer. Farmers are exempt from paying the company car tax if their income from agricultural activities is at least EUR 5 000.

25.5. Environmental taxes

The main environmental tax in Latvia is the Natural Resources Tax. Taxes are applied for the use of natural resources, water extraction, water and air pollution. Natural resource taxes are not differentiated between agriculture and other activities and do not differ between regions. The natural resource tax is payable for the pollutants emitted to the environment in accordance with conditions of polluting activity permits. The pollution charges are set in regulations and vary depending on the scope of activities. Fertilisers and pesticides products are not taxed.

25.6. Tax incentives for R&D and innovation

The new CIT law aims to support R&D investments by providing the conceptually new CIT payment regime. It defers the CIT payment until the moment profits are distributed or spent in a manner not providing further development of the enterprise.

25.7. Other taxes

The total State Social Insurance Mandatory Contributions (hereinafter SSIMC) rate is 34.09%. This includes the employee’s SSIMC of 11% and the SSIMC paid by the employer for income derived by their employees of 24.09%. For self-employed persons (also for physical persons, carrying out agricultural activity, and owners of agricultural farms and fishing farms) the SSIMC rate is 32.15%, for retired self-employed persons the SSIMC rate is 30.34%.

PIT for paid labour is imposed on income derived by natural persons and consists of salary tax, which is calculated and paid by the employer for income derived by the employee. PIT salary tax rates for the year 2018 range from 20% to 31.4% and apply to different income thresholds. The seasonal workers’ PIT is 15% of their salary. Seasonal workers are people who are employed in work such as growing or planting fruit trees, berry bushes and vegetables, tending to sowing and planting, and harvesting and sorting of fruits, berries and vegetables.