#1 Tax incentives in Latvia by BalticLegal 19.11.2022 00:49

Latvia offers a number of tax incentives to encourage business development. These include:

special economic zones
relief through donations
Deferred tax payments
Research and development tax credit
Large investments are tax deductible
special economic zones
There are four special economic zones in Latvia, three of which are ice-free ports in major cities, one of which is in the capital Riga. The special economic zones of Latvia are:

Riga Freeport
Ventspils Freeport
Liepāja Freeport
Rezekne SEZ
The benefits of each of them (ignoring the unrelated benefits such as Rezekne as a major rail hub) are fairly similar, although they may differ somewhat depending on the economic sector and other circumstances:

Up to 100% of the property tax reduction (from an initial 1.5%)
Up to 80% corporate tax reduction (from originally 15%)
Up to 80% reduction in withholding tax on dividends, management fees and IP (intellectual property) usage fees
In the summer of 2016, the Latvian government approved the creation of another SEZ – the Latgale Special Economic Zone. Latgale is the eastern part of Latvia and the new SEZ will be based around the city of Daugavpils – Latvia's second largest city and a major railway hub, best known as the gateway to the Russian market. It is estimated that the new zone will effectively become operational in 2018.

Relief through donations
Donations to certain state-funded institutions allow Latvian companies to reduce their corporate income tax by up to 85% of the amount donated. Apart from state-funded organizations registered in Latvia, this also applies to donations to non-profit organizations within the meaning of the Law on Non-Profit Organizations (Sabiedriskā labuma organizāciju likums). In this case, the tax relief may not exceed 20% of the donation amount. All of these rules also apply to donations to organizations with similar legal status registered in the European Union or European Economic Area.

To prevent fraud and tax evasion, the donating organization must not impose any obligations on the recipient in exchange for the donation. In other words, the recipient cannot be legally required to compensate such a donation or make any other compensation for the donation.

Deferred tax payments
One of the aims of Latvia's economic policy is to modernize industrial production and keep it efficient, which is why Latvian companies have the right to defer tax payments on profits from machine exchanges. If a company buys a new machine in place of an old one (both should be functionally similar for the operation to be considered a replacement) and sells the old one within 12 months before or after the replacement, profit from it will not accrue in the stated taxable period taxed. Tax payment is deferred until that new machine is sold, or alternatively, payment is further deferred when the new asset is also replaced.

Research and development tax credit
There is a possibility of an accelerated amortization of R&D related costs (costs are multiplied by three for tax purposes). This facilitation is intended to promote R&D and applies to employment-related costs and R&D service agreements entered into with certain scientific institutions. These organizations must also be registered in one of the following countries:

European Union
European Economic Area
A county with which Latvia has a double tax treaty
The intellectual property resulting from the R&D activity remains the property of the taxpayer for at least three years. To be eligible for the R&D cost reduction, the taxpayer must have their own project documentation that meets certain rules.

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