VAT in Latvia

Value Added Tax (VAT) is a consumption tax. Typically, the seller or service provider includes VAT in the price of the goods or services.

VAT is an indirect tax. In Latvia, value added tax is applied rather than a general turnover tax.

The main law is the Value Added Tax Law.

VAT rules in the European Union Member States are based on common EU legislation (directives). However, specific rates, exemptions, thresholds and certain procedures may differ between countries.

VAT rates

The 0% rate and VAT exemption are not the same. When the 0% rate is applied, the transaction is subject to VAT, but the tax is calculated at a rate of 0%. When a transaction is exempt from VAT, different rules apply.

If a company is registered as a VAT payer and purchases goods or services for its business, the company can recover (deduct) this tax. As a result, the business reduces its tax liability to the goverment, while the final consumer (ordinary buyer) pays the full amount of VAT.

For example, a company purchased goods for a price of EUR 1,000 + 21% VAT (EUR 210) and sold the goods for a price of EUR 1,200 + 21% VAT (EUR 252).

The company must pay EUR 42 of VAT to the state budget (EUR 252 minus EUR 210), or 21% of EUR 200 (the markup). In other words, the company effectively pays (collects) VAT only on the added value (which is why the tax is called value added tax).

Transactions subject to and not subject to VAT

In Latvia, VAT-taxable transactions include:

• the supply of goods for consideration;
• the provision of services for consideration;
• the acquisition of goods within the European Union;
• the acquisition of a new means of transport within the European Union in cases provided for by law;
• the import of goods;
• the receipt in Latvia of certain services from taxpayers from other EU countries, third countries or third territories.

The law provides for goods and services (for example, certain postal, medical and financial services and cultural services) that are exempt from VAT.

A company that sells goods or provides services that are exempt from VAT does not have the right to deduct VAT on goods and services that are used to provide VAT-exempt transactions.

VAT application procedure

Standard procedure

The standard VAT procedure in Latvia is as follows:

• The seller of goods or provider of services sells the goods or provides the service to the buyer or recipient and, in cases provided for by law, charges VAT (issues an invoice including VAT).
• The buyer pays the seller the amount specified in the invoice, including VAT.
• The seller reports the VAT charged in its VAT return and, after deducting allowable input VAT, pays the resulting VAT liability to the state budget.
• The buyer, if registered as a VAT payer and entitled to deduct input VAT, reports the VAT paid to the supplier as input VAT and reduces its VAT liability by that amount.

If input VAT exceeds output VAT, a VAT overpayment arises. Depending on the circumstances, the amount may be carried forward to subsequent periods or refunded in accordance with the procedure established by law.

Reverse charge procedure

Latvia also has a "reverse charge" VAT procedure.

The main purpose of this procedure is to reduce the risk of VAT evasion and VAT fraud.

Reverse charge VAT applies only to specific groups of goods and services listed in the VAT Law. This procedure applies when both the seller and the buyer are registered VAT payers and the transaction takes place in Latvia.

The reverse charge procedure applies to the following transactions:

• the supply of timber and related services;
• the supply of scrap metal, metal products and related services;
• construction services;
• the supply of mobile phones, tablet and portable computers and integrated circuit devices;
• the supply of game consoles;
• the supply of grain and technical crops;
• the supply of unprocessed precious metals, precious metal alloys and metal clad with precious metal;
• the supply of semi-finished products made of ferrous and non-ferrous metals and certain metal products.

The reverse charge procedure is as follows:

• The seller issues an invoice to the buyer showing the price of the goods / services without VAT.
• The buyer pays the seller the amount specified in the invoice (the amount without VAT).
• The buyer charges VAT on the amount specified in the invoice in its tax return (VAT payable to the state budget).
• If the goods / services are used for VAT-taxable transactions, the buyer has the right to deduct the VAT charged (VAT payable to the state budget) in the same tax return and thereby reduce the VAT payable to the state budget. If all goods / services are used for VAT-taxable transactions, the buyer does not actually pay VAT on this transaction (purchase).

The same VAT payment procedure applies when a Latvian company purchases goods or receives services from persons (companies) registered as VAT payers in another EU country, provided that the Latvian company uses the goods / services for VAT-taxable transactions.

Special import regime

As a general rule, VAT must be paid upon import. However, a company has the right to obtain permission to apply a special import regime and not pay VAT during the import process. Under the special regime, the company charges VAT on the imported goods and reports the charged amount in its VAT return. As a result, VAT on the imported goods effectively needs to be paid only after the goods have been sold.

To obtain permission, a company must submit special application to the State Revenue Service. The company must meet the following requirements (Paragraph 4 of Article 85 of the VAT Law):

• The economic activity must be registered in Latvia (for example, the company must be registered in the Enterprise Register). The company must also have been registered as a VAT payer and conducting economic activity in Latvia during the previous 12 months.
• The material, technical and financial resources must correspond to the types of economic activity. For example, the company must have financial resources, equipment, etc.
• The taxpayer must have access to the Electronic Declaration System.
• On the date of submission of the application, the taxpayer must not have tax debts.
• The person with signing authority (for example, a member of the management board) must not have a criminal record for offences in the national economy. The official must also not be included in the list of "risk persons".
• Over the preceding 12 months, the taxpayer submitted the reports and information requested by the State Revenue Service without delay.

It should be noted that if a taxpayer has received permission to apply the special import regime and does not report the VAT charged on the import in its VAT return, the taxpayer must pay 10% of the amount that should have been reported in the VAT return.

Special regime (OSS/IOSS)

A special VAT regime OSS/IOSS operates in the European Union. The regime is related to electronic services and e-commerce. Use of the OSS/IOSS regime allows businesses—in cases provided for by law—to declare and pay VAT relating to multiple EU countries through a single EU country.

The use of OSS/IOSS makes it possible to avoid registering as a VAT payer separately in each EU country where the buyers are located.

OSS applies, among other things, to certain cross-border transactions with persons who are not VAT payers, for example certain distance sales of goods within the EU and certain services provided to private individuals.

IOSS (Import One Stop Shop) applies, in cases provided for by law, to distance sales of goods imported from third countries or third territories in small consignments.

OSS/IOSS should not be confused with ordinary VAT registration in Latvia. It is a separate special regime for declaring and paying VAT.

When is it necessary to register as a VAT payer?

For a domestic taxpayer, the €50,000 registration threshold is a key benchmark. Calculating this threshold involves the value of specific transactions defined in the VAT Law, rather than simply the total amount of funds credited to the bank account.

The obligation to register may also arise independently of this threshold. For example, special rules apply to certain transactions with other EU countries and to the receipt of specific services from foreign suppliers.

A company may also register as a VAT payer voluntarily if this is necessary or economically appropriate for the business.

Therefore, before starting business activities, it is important to assess not only the expected turnover but also the types of planned transactions, customers, suppliers and countries with which the company will operate.

VAT registration procedure

Registration is carried out by the State Revenue Service (SRS).

If you are registering (establishing) a new company, you may submit the application for VAT registration to the Enterprise Register along with the incorporation documents. The Enterprise Register then forwards your application to the SRS.

The SRS usually requires a document giving the company the right to use its registered address; a lease agreement, for example, serves this purpose.

The SRS also requests additional information and documents confirming the company's material, technical and financial ability to conduct the declared economic activity (for example, preliminary agreements with business partners). SRS officials aim to verify that the company is prepared and able to conduct genuine, lawful business operations and meet its tax obligations.

The SRS reviews your application and makes a decision on registration within 5 working days.

VAT tax period and VAT return

Persons registered as VAT payers must submit VAT returns.

The tax (reporting) period depends on the type of transactions and the amount of VAT-taxable transactions during the calendar year.

The VAT return must be submitted every month if any of the following conditions applies:

• The amount of VAT-taxable transactions (invoices issued for the sale of goods and provision of services) during the calendar year exceeds EUR 50,000.
• The VAT payer carries out transactions involving the sale of goods to a person who has a VAT number in another EU country and there is confirmation that the goods have been sent from Latvia to another EU country.
• The VAT payer supplies goods within the EU while participating in a "triangular" transaction. The Latvian VAT payer purchased the goods within the EU from a VAT payer in another EU country (for example, Germany) with the purpose of supplying (selling) the goods to a VAT payer in another/third EU country (for example, Poland). The Latvian VAT payer transports the goods from Germany to Poland and sells them to the Polish VAT payer.
• The VAT payer provides services for which the place of supply is another EU country. Usually, this is the case when the VAT payer provides services to a person registered in another EU country and engaged in economic activity.

The VAT return must also be submitted every month if the company is registered in the VAT payer register during the tax year. The obligation to submit VAT returns remains for 6 months after registration even if the company's activities do not meet the above conditions.

The VAT return must be submitted once every 3 months if the company's activities do not meet the above conditions.

Depending on the transactions carried out, not only the ordinary VAT return but also other reports or notifications may be required. For example, separate reporting may be related to the special OSS/IOSS regimes.