Latvia is a parliamentary republic with a head of government, the prime minister, who chooses the council of ministers and a head of state, the president, who has largely ceremonial powers and appoints the prime minister. The government remains subject to the approval of Parliament for the duration of the entire legislature. The country is divided into 110 municipalities and 9 cities. The latter have their own municipal council and related administrations.
The country has a small economy (the inhabitants are about two million), open and, consequently, dependent on exports and foreign direct investments, even if in 2015 the driving force was internal demand, which contained the repercussions of crisis with Moscow. And consumption and investment, according to the latest forecasts by the EU Commission, should accelerate further this year.
«The composition of the Latvian GDP – Ambassador Fulci explains – is characterized by a clear predominance of the tertiary sector (75%) compared to the primary (4%) and secondary sectors (14%). The government – he adds however – has tried to promote the industrial sector, facilitating the creation of new businesses, especially SMEs, which represent almost 98% of the country’s production structure. As part of this policy, Latvia ratified the “European Charter for Small Enterprises” and adopted a facilitation strategy.’
Riga’s main trading partners remain the neighboring countries. Thus the first recipients of exports are, in order, Lithuania, Estonia, Russia, Germany, Poland and Sweden, the first suppliers still being Lithuania, Germany, Poland, Russia and Estonia.
For the Latvian economy, which has now recovered, the setback in recent years has been the Russia-EU cross-sanctions following the Ukrainian crisis, as confirmed by the Italian ambassador in Riga Sebastiano Fulci: «Russia has responded to EU sanctions with a trade embargo which it has particularly weighed on the economies of countries that share borders with Russia and are largely dependent on it in terms of energy, such as the Baltics. The sector that suffered the most was the agricultural sector, in particular for Latvia the dairy market. With the absence of the main outlet market, there was a substantial collapse in sales, which made the offer disproportionate. The consequence was the collapse of prices. Many farms have been forced to close their doors and others have been saved only thanks to a combined public-private intervention”.
Main sectors of industry
The Latvian agricultural sector has undergone a radical restructuring since the dissolution of the Soviet Union and the country’s independence. Today there are still residues of that era with many small, scarcely productive companies that survive on the edge of subsistence but a sector has also developed made up of modern companies which, even by taking advantage of European funds and programs, have become very competitive. The main productions concern: wheat, barley, apples, pears, onions, potatoes, berries, mushrooms.
The fishing sector is also significant, both in the sea, with a fleet of deep-sea fishing boats that mainly procure herring and cod, and in freshwater with trout and carp breeding facilities.
The primary sector, agriculture, breeding, fishing, produces about 3.5% of the country’s GDP.
The agri-food processing sector represents 24% of the entire manufacturing activity and is mainly oriented towards the domestic market. The most important sectors are those of meat processing, the production of milk and dairy products, that of beverages, that of bakery products.
With the economic growth that the country has had in the last twenty years, the food consumption of the population has also increased, diversified and in part also moved towards previously unknown imported products, such as, for example, olive oil. ‘olive. Latvian consumers are increasingly attentive to both health and environmental issues and therefore the organic products sector is increasing with annual growth rates of 10%
Taxation for businesses in Latvia
The tax is applied to the income produced by legal persons according to the world wide principle according to which the income produced everywhere is taxed for residents and only that from a national source for non-residents. A person is considered a resident if it is incorporated under Latvian law. For permanent establishments, the same rules apply as for residents, albeit with some specifications relating to transfers to the parent company.
The following are exempt from the tax: pension funds; micro enterprises that have opted for the special regime;
One of the main novelties of the corporate income tax reform is the fact that it applies only to redistributed profits (in any form, even indirectly) and is payable only when such distribution is decided or put into practice. Profits reinvested or otherwise maintained in the business are exempt. Expenses not directly attributable to economic activity are treated as income distribution and subject to taxation. The taxable distributed profits are calculated according to national or international accounting standards for which there are no particular tax rules regarding depreciation and write-downs.
Interest expense is deductible according to rules that vary according to their amount:
- for values of less than 3 million euros, interest relating to payables to shareholders exceeding four times the share capital is non-deductible;
- for interest exceeding three million euros, those exceeding 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) are non-deductible;
- Donations to recognized charities have limited deductions.
Expenses relating to the use and maintenance of luxury cars as well as the related depreciation, leasing and rental payments are considered non-related expenses and therefore subject to taxation.
Interest deriving from bonds listed on European markets and dividends produced wherever they are produced (with the exception of those produced in so-called black list jurisdictions) which have already been subject to taxation are exempt. Similarly, capital gains deriving from the sale of shares in companies owned for at least 36 months and not resident in black-listed countries are exempt, while those relating to the sale of real estate are subject to ordinary taxation only if there is a redistribution of the relative profits.
Investing in Latvia
Favorable tax system with 15% corporate tax, 150% depreciation charge for new equipment and 300% for research and development (R&D). For large-scale investments (€10 million or more over 5 years) a corporate tax rebate of up to 25% can be applied.
Four Economic Zones with Special Status which guarantee attractive tax discounts (tax credit up to 35% – 55% of total investments) and functional zones as logistics centres.
Three year-round (ice-free winter) ports – Riga, Ventspils and Liepaja (Ventspils Free Port investment attraction strategy qualified as 2nd best in Europe according to Financial Times research FDI Intelligence “Cities and Regions of the future for the year 2016/17” surpassing all cities in the Baltic countries).
Riga International Airport, the largest growing airport in Europe, serves 46% of passengers and more than 50% of cargo from the Baltic countries. 19 airlines operate at the airport, performing about 80 direct flights and connecting the capital of Latvia with various destinations in Europe, Asia, the Gulf countries and North America.
The motto of Latvia’s National Development Plan for 2021-2027 is “Changing Public Behavior: A Pathway to Development”, which highlights the need to remove many obstacles to development along the path to well-being general. Obstacles that arise from our attitudes, behaviors and way of thinking, all aspects that need to change in terms of environment, work, education and interaction with others.
Based on the National Development Plan, Latvia has set five main objectives for the next programming period, which coincide with the common objectives of cohesion policy:
- a smarter Europe: innovative and smart economic transformation; enhancing research and skills development capacities, business support and digitalisation;
- a greener Europe: climate neutrality, adaptation to climate change and protection of the environment;
- a more connected Europe: developing a safe, sustainable and accessible transport system and improving digital connectivity;
- a more social Europe: equal opportunities and equal access to education, healthcare and the labor market, fair working conditions, social security and inclusion;
- a Europe closer to citizens: sustainable and integrated regional development.