Latvia: Taxes and Costs

Latvia: Taxes and Costs

EFFECTIVE TAX RATE ON RENTAL INCOME MONTHLY INCOME €1,500 nil €6,000 nil Click HERE for worked sample. SOURCE:  Personal Income Tax: Low or Zero Individuals must declare net rent as income, and are liable to 25% income tax. But there are (usually) generous deductions, which may result in zero effective tax on rental income, at least for the initial years of ownership. Deductions Non-residents are taxed by self-assessment. Owners can deduct depreciation and property taxes. This usually results in a very favourable tax regime, except where the owners are resident in tax havens, when the rental income is subject to a withholding tax of 25% Allowances Non-residents are not eligible for allowances (as distinct from deductions) except where a tax treaty provides otherwise, or they are residents of of another EU member state and derive at least 75% of their total income from Latvia. A withholding tax is levied on payments for the use of property in Latvia (5%), payments for the purchase of real estate located in Latvia (2%), and interest payments (10%). Corporate Route The corporate income tax rate is 15%. Rent is considered business income. As with individuals, companies may set payments and improvements against taxable income. If loans are taken for the purpose of construction, the interest paid before the completion of the building is not deductible from taxable income in the year incurred, but should be added to the book value of the property and depreciated. Other interest charges are deductible up to a certain limit. This limit is calculated through reference to the level of short-term interest rates in the last month of the year and the amount of equity in the company at the beginning of the tax period. (Note that the lower tax rate of the corporate route is offset by the fact that companies must pay capital gains on the sale of properties (see below)). Real Estate Tax: 1.5% Individuals and legal entities that own or have legal control over real estate must pay an annual 1.5% of the net book value of the land and buildings (together). Starting January 1, 2007, the property tax is based on the cadastral value of the buildings and land. The cadastral value is based on the price of the immovable property during the pre-taxation year (average market value of immovable property as used for a specific purpose in a specific territory) taking into account the restrictions for economic activity determined by the law. This change will mean an increase in property tax payments for 2007. Note: Latvia utilizes the double declining-balance method of depreciating fixed assets (real properties, movable properties). The amount written off each year is calculated by dividing the initial value of the fixed asset by the specified (normative) useful life. For buildings the effective annual (double declining) depreciation rate is set at 10% and the useful life is set at 20 years. Capital Gains Tax: None when owned 1 YR + Private owners of real property owned for more than 12 months need not pay capital gains tax on the sale of personal property. Otherwise, capital gains is treated as ordinary taxable income and taxed at 25%. If the taxpayer is liable to pay capital gains tax, acquisition costs and other related expenses are deductible. VAT: New builds only Sales of newly built or reconstructed property are VAT taxable at 18%. This involves: - newly erected buildings - newly erected buildings sold within one year of the date on which the first user took possession - reconstructed buildings sold within one year after the completion of the refurbishment - incomplete structures Refurbishment is defined as work that considerably improves the quality of the building or prolongs its useful life. Mere redecoration or minor repairs does not constitute refurbishments.