Recently, circumstances have changed a lot and the government authorities have significantly tightened control. Credit institutions and outsourcing accountants also have started to monitor customer transactions more carefully.
The purpose of the article is to inform about the circumstances which should be taken into account when starting and engaging in commercial activities. In order to avoid surprises and to be able to take into account all the circumstances when planning business activities.
If doing business you don’t take into account these circumstances, then it would be more difficult or even impossible to do business Latvia (for example, a credit institution will close a bank account, an accounting company will be forced to refuse to cooperate, government agencies will often take control measures).
Preferred and undesirable business model.Any legal and real commercial activity which has a connection with Latvia is desirable.
As real commercial activity should be considered an activity, in the framework of which the actual sale (movement) of goods, the provision of services takes place and the purpose of which is understandable and lawful. A Latvian company should not be “artificial”, created with the main aim - for some reasons to participate in any chain of transactions.
An example where a Latvian company should be considered as “artificial”.
- Actual activities (sale / movement of goods, provision of services) take place outside of Latvia.
- Enterprises registered in other countries are fully sufficient to carry out actual activities.
- Performers of activities (managers) are not residents of Latvia.
Not always the totality and purpose of all actions is illegal. It may sometimes be difficult to determine the boundary between illegal activities, legal but undesirable activities, and desired activities.
To consider in the example mentioned activities as desirable, the following requirements must be met:
- All activities must be legal and the aim of the activities should not be “circumvention of the law” (for example, “legally” to avoid paying taxes in any other state).
- Prices in transactions must correspond to market prices (market value).
- There must be some understandable, not fictitious reason why a Latvian company should be used in transactions. There must be a connection with Latvia. The reason can be considered understandable and there is a connection with Latvia if the true beneficiary of the Latvian company would be Latvian resident.
- A company should have a place of business in Latvia (e.g. office, warehouse, etc.).
- In Latvia you must pay taxes in accordance with the law.
What activities and deals should you refrain from?It is necessary to refrain from activities that are illegal or suspicions arise that the activities may be illegal (for example, your company's the business partner evades paying taxes (has tax debt)).
Should refrain from transactions with so called postbox companies.
If you receive services or buy goods from a foreign company, it would be necessary to examine publicly available information about the company, types of business activities, officials, legal address, turnover, amount of paid taxes.
For example, you should refrain from such a transaction: you plan to buy goods, but the seller’s declared business activity is not trading of goods, the seller’s legal address is legal address for 100 other companies, the seller’s declared turnover or the amount of taxes paid is zero or the net turnover / amount of taxes paid is very small, the seller has no employees.
You should be careful when dealing with payers of micro-enterprise tax. When receiving services from a micro-enterprise tax payer, you must make sure that you do not have an obligation to pay additional taxes (must check legislation and compare with actual situation).
You also must be careful if you pay to Latvian company, which money (bank) account is outside Latvia (the account may be both in a credit institution and in a non-banking institution - Revolut, Paysera, etc.). You should make sure that the payee has reported this account to the State Revenue Service (SRS).
It is advisable to avoid frequent and larger amount transactions (purchases) in cash. You should take into account that in certain cases you must inform tax authority about cash transactions and in certain cases cash transactions are prohibited. It is better to pay by credit card or by bank transfer.
It is necessary to examine tripartite and multilateral transactions (the essence of transactions, the goals of all parties). It is advisable to avoid transactions on the transfer of rights of claim (cession).
Before before carrying out a transaction, in some cases it is highly advisable to obtain information about the transaction partner and the true beneficiaries. For example, if the transaction partner is an enterprise, registered outside Latvia and its true beneficiaries (or contact persons) are in high-risk third countries (outside the EU), then it is necessary to carefully check the transaction. Third high-risk countries are, for example, North Korea, Iran, Afghanistan. Additional information: fatf-gafi.org and eur-lex.europa.eu
Opening a bank account.If the true beneficiaries and the management of the company are Latvian residents, then it would be relatively simple and fairly quick to open a bank account.
If the true beneficiaries or directors are foreign nationals, then it would take quite a long time (30 days or longer) to open bank account in Latvian bank. Also must take into account the fact that the bank will request additional information and documents.
For example, a bank may request the following information and documents:
- Documents for proof of directors' income in a certain period (for example, within the last six months).
- The rent agreement for premises. Information and documents about the actual place of business.
- Agreements with business partners.
- Information and documents confirming connection with Latvia (for example, agreements with customers registered in Latvia). An explanation of why it is necessary to open an account in particular bank.
- Business plan. Information about transactions (how transactions will be conducted / will occur). Detailed description of the activity.
- Documents about education of directors (if for planned business activities special knowledge - education is necessary).
Getting a VAT number.You should bear in mind that obtaining a VAT number will take a longer time (about two weeks). The SRS may require that a member of the board personally arrives in the SRS and provide certain documents and information. Before applying for registration, you must open an account in a bank.
SRS may require the same information and documents that a bank has required to open a bank account.
Additionally, the SRS may require the following information and documents:
- Documents proving the ability of the enterprise to carry out the planned activity (documents / information that the company has the necessary fixed assets, stock, cash, employees, premises, etc.).
- If a license is required to carry out activities, you must provide a copy of the licens.
- Contract with an accountant (or an outsource accounting company).
- Bank account statement for a certain period.
- Document proving the rights to use a legal address.
Obligations of outsource accountant.Obligations established in this law.
Must take into account that obligations of outsource accountant are as follows:
- Investigate / examine the client. Before starting cooperation, it is necessary to fill out a client form ("Know Your Client").
- Before starting cooperation, it is necessary to conclude an accounting agreement.
- An accountant must regularly monitor customer transactions, understand and examine / study transactions.
- If the transaction is unusual or suspicious, then the accountant must inform the SRS and other control services about such a transaction.
What may be the reasons for choosing Latvia as a place of business?When communicating with clients, I receive information that in some European Union member states there are less control and burdens for business, thus, it is simpler to do business in the respective countries.
So I asked a question to myself. Why a person exactly in Latvia to engage in commercial activities? Trying to find the answer / reasons. The reasons may be the following:
- Latvia is a permanent residence. If you register an enterprise and do business in another state, additional costs and inconveniences may arise depending on the type of activity. For example, expenses for the legal address, premises. Usually, it is necessary to understand the language of the corresponding country and monitor events, legislation of the country. It may be necessary quite often to visit the country (additional time will be required and additional transportation costs will arise).
- For Russian-speaking Latvia may be appropriate because that most of the population of Latvia is able to communicate in Russian. In addition, a fairly large part of the population of Latvia is able to communicate in English.
- Your main business partners are registered / located in Latvia.
- In Latvia there is real estate that you will use for commercial activities.
- In some cases, Latvia could be considered as a place of import of goods into the European Union. After completing the import procedure, you can sell goods to other EU member states without paying customs duties.
- In Latvia there is a quite well developed infrastructure of electronic communications (the Internet).
- Registration of a merchant (limited liability company, joint stock company) is still quite simple and fast.
- Latvia may be suitable if you plan to invest the company's profit into the development of the company, and not do not plan to divide profit into dividends. If you invest profit into the development of a company, then you have no obligation to pay profit tax (corporate income tax). However there are some nuances in the legislation.
- The Republic of Latvia has concluded treaties (conventions) to avoid double taxation with quite many countries. This is useful if you need to use Latvian company in transactions with the respective countries (in international transactions).
- Latvia may be suitable if in commercial activities you need to use sea (maritime) or air transport (seaports or an airport).