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Employee shares and exemption from the payroll tax

On 1 January 2013, came into force amendments to the Latvian law "On Personal Income Tax" (PIT Act), which provided for the payroll tax exemption for employee income received from rights to purchase employer’s shares. As shown by the experience of other countries, the company's share purchase by employees is an effective way to motivate and attract employees, so it was decided to introduce a similar regime in Latvia. 

Unfortunately, practice shows that employers are not always timely informed about this kind of payroll tax exemption, as well about the deadlines and what actions should be carried out by the employer to obtain the exemption.

Employee’s income from share purchase rights’ enforcement is exempt from payroll tax and state social insurance contributions, if the share purchase rights are granted pursuant to the share purchase plan and the following conditions are fulfilled:

a) the share purchase rights of the minimum holding period (period from the date of granting of share purchase rights to the date when the employee is entitled to initiate share purchase rights) of not less than 36 months,

b) during the share purchase rights holding period (period from the date of granting of share purchase rights to the share purchase enforcement date) the employee has an employment relationship with the company, which has granted to the taxpayer the share purchase rights or with a related company, according to PIT Law, which has granted the share purchase rights,

c) the employer has submitted to the State Revenue Service (SRS) the information listed in the Article 11(11)4 of the PIT Law, including criteria for the employees, the minimum holding period of share purchase rights, the conditions if the employment relationship is terminated, and other information.

The employer must submit the information to SRS within two months after the end of the period during which employees could apply to the share purchase rights or the share purchase rights were granted (in case that share purchase enforcement plan does not provide for application to the share purchase rights).

If the employer has not submitted timely to SRS the information required by the PIT Act and Cabinet regulations No. 899 or other conditions of the PIT Law have not been fulfilled, the income from share purchase enforcement is subject to the payroll tax and state social security contributions. The taxable income shall be determined as the difference between the share market value at the purchase date and the share purchase value.


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