Latvian Micro Enterprise Tax Regime – Lessons and Amendments
Latvia has recently opted to amend its micro enterprise tax regime enacted back in 2010. Having tested the waters for four years Latvia has now decided (i) to narrow the sectors that may use the preferential tax regime and (ii) to rise the tax rate for enterprises with larger revenues.
Introduction of the micro enterprise tax was government’s response to the deep economic crisis of 2009. It was designed to provide an incentive to small private business the role of which was bitterly undervalued during the boom years of the early 21st century. Micro enterprise tax regime means an easy to administer and transparent tax regime accompanied with simplified accounting requirements to encourage small private business activity, self-employment and reduction of grey economy.
In accordance with Latvia’s Micro enterprise Tax Law any legal entity or self-employed person that meet the criteria set in the law may choose to become a payer of the micro enterprise tax instead of the regular enterprise income tax and all other work force related taxes. The micro enterprise tax rate until the end of 2014 was 9% of the company’s annual revenue.
According to the law a micro enterprise is a company: (i) that employs up to 5 employees, (ii) the annual turnover does not exceed EUR 100 000, (iii) all shareholders are natural persons and (iv) monthly salary of any employee may not exceed EUR 720.
More than 42 000 companies have chosen to register as micro enterprise tax payers. The total revenues of the micro enterprise taxpayers in 2014 were more than EUR 50 million.
Having evaluated the tax regime’s performance over the four years, Latvia’s government identified several shortcomings. Amongst the most serious was an observation that employees of the micro enterprise are not sufficiently socially protected i.e. the amount allocated to the social security budget from the micro enterprise tax paid by the company is insufficient to guarantee social security level for the employees.
Another important reason for regime changes was an observation that micro enterprise tax regime was also misused by larger companies to optimize their tax liabilities i.e. replacing regular employment with “outsourcing” of services to micro enterprises.
With the purpose of minimizing the negative effects of the micro enterprise tax regime, Latvia recently adopted amendments to the Micro enterprise Tax Law narrowing the application of the micro enterprise tax to certain industries. Details are yet to be determined by the government but already now we can estimate that legal, accounting and construction services will be excluded from the regime.
The other important change – different tax rates depending on the turnover have been introduced. Tax rate of 9% continue to apply to the annual revenues up to EUR 7 000, whereas for annual revenues of EUR 7 001 to EUR 100 000 12% tax rate is in force from the beginning of 2015.
It must be noted that it is still unclear whether the current tax rate of 12% will continue to apply in 2016. The Latvian government is discussing amendments to the social security legislation with a view to increase the level of social security of employees of micro-enterprises. There is a high likelihood that Latvia’s micro enterprise tax rate will be increased to 13% in 2016 and to 15% in 2017 for the annual revenues exceeding
EUR 7 000. The current low tax rate of 9% will remain effective for annual revenues up to EUR 7 000.