In this article,
the procedure of applying Personal Income Tax (hereinafter – PIT) to the
income of natural person–resident gained in transactions with financial
instruments (i.e. bonds, shares, interest income, etc.) will be discussed. We
will assess how the due date of PIT payment and the amount of taxable income
object changes depending on how natural person–resident (hereinafter –
natural person) secures the transaction with financial instruments.Option 1:
natural person performs transactions with financial instruments
In a standard
situation, for natural person to be able to deal with financial instruments,
natural person opens financial instruments account/securities account or
account that is provided by the bank to perform transactions with financial
instruments (hereinafter – financial instrument account), and performs transactions
with financial instruments (Option 1), or a person can authorize
the professional broker to manage its investment portfolio (broker) (Option
2). From 1 January 2018, natural person has an option to open
investment account that, in its essence, is financial instruments account that
contains a special mark or reference to the status of investment account for
the purposes of the Law On Personal Income Tax (PIT Law) (Option 3).
of PIT application in all three Options are different and accordingly cause
impact on the amount of payable PIT and due date of PIT. Transition from one to
another option can cause PIT liabilities which in all situations have to be
assessed separately. Therefore, before starting to perform transactions with
financial instruments, it is recommended to assess PIT liabilities to determine
the most appropriate way how to trade with finance assets.
To be able to compare
PIT liabilities easily, let’s discuss the following example. Latvian resident,
natural person, has performed the following transactions with financial
In Option 1, PIT
taxable income is determined by separating:
- income from transactions with capital assets (i.e.,
income referred to in Section 119 Paragraph 2 of the PIT Law, for
example, shares, investment gold, investment funds); and
- income from capital that is not capital gain (i.e., income
referred to in Section 119 Paragraph Eleven of the PIT Law, for
example, income from bonds, interest and dividends).
income from capital assets has to be submitted once a quarter until the 15th
day of the following quarter, if the quarterly income exceeds EUR 1,000 or once
a year until the 15th day of the year following the taxation year, if the
quarterly income does not exceed EUR 1,000. Therefore, natural person has to
track the amount of income to determine the deadline for submission of
declaration. In the declaration, each amount and type of income has to be
declared separately, as the date when it has been received and information on
the income payer has to be provided.
Information prepared by Leinonen Latvia, Tax & Legal Advisory Department.
shall declare the income from the capital that is not a capital gain in the annual
income declaration to be submitted to the State Revenue Service, in the year
following the taxation year, from 1 March to 1 June or from 1 April to 1 July,
if income exceeds EUR 55,000.
In the example,
in 2018, natural person earned income from capital that is not capital gain (i.e.,
from bonds, dividends and interest income). Income from Latvia state bonds is
non-taxable income, PIT has been withheld from dividends (distribution of
profit of 2017) by the income payer, therefore, this received income should not
be reported in the annual declaration. Natural person has to declare in annual
income declaration for 2018 income from disposal of Bond “A” (i.e., EUR 1,000)
and interest income from Bond “A” (i.e., EUR 1,000) from which PIT has been
withheld partially, in the amount of 10%.
Thus, in 2018,
PIT liabilities of the natural person amounted to EUR 300 (i.e., EUR 21,000 –
EUR 20,000+ EUR 1,000) *20% - EUR 100).
In 2019 the natural
person earned EUR 2,000 from disposal of shares of AS “X” and natural person is
obliged to submit to SRS quarterly declaration until 15 August 2019 for income
from capital increase and from income EUR 2,000, 20% PIT, i.e., EUR 400, has to
this example, in case of Option 1, total PIT liabilities of natural person
will amount to EUR 700.
administrative point of view, accounting of income and procedure of declaration
in Option 1 is complicated and time-consuming, especially for natural persons
who are actively performing transactions with financial instruments, as well as
in Option 1 it is not possible to use losses of taxation year in following years.
Therefore, an active trader, from the point of view of PIT, would not be
recommended to use this option.
natural person authorizes a professional broker to manage its investment
individual management of financial instruments is formed as positive difference
between the value of all assets that natural person has transferred to the
manager of portfolios during the management contract term and the value of all
assets that the natural person has withdrawn from investment portfolio (Section
119 Paragraph 11 Clause 5 of the PIT Law). Earned income has to be
declared in annual income declaration.
In the situation
mentioned in the example, in 2018, financial assets were not withdrawn from the
financial instruments account, therefore, there are no not PIT taxable income Accordingly
no obligation to submit declaration and pay PIT.
Natural person received
taxable income on 5 June 2019 when natural person withdrew more assets from the
financial instruments account than invested. Therefore, natural person, until 1
June 2020, has to submit annual income declaration where the received income
has to be declared and pay to the state budget PIT of EUR 1,291 ((EUR 81,453
– EUR 75,000) * 20%).
Option 1, the procedure of determining and declaring income is simpler in
Option 2, as every financial transaction does not have to be declared but the
asset flow in the financial instruments account has to be tracked (i.e.,
in-coming and out-going payments from the account), and in case of this option,
tax liabilities do not occur while more money is withdrawn from the account
than it is invested. However, PIT liabilities in Option 2 are higher than in
Option 1, as in Option 2, PIT taxable income cannot be reduced by non-taxable
income, i.e., Latvia state bonds, and by the income, from which the income payer
has already withheld income tax at the moment of payment of income. Income from
dividends which is exempt from PIT according with Section 9 (1) 2.1) of the PIT
Law also has the same negative impact on the PIT liabilities as this type of
income cannot be excluded from the amount of taxable income.
Therefore, if it
is planned to perform transactions with financial instruments that are exempt
from PIT (listed in Section 9 (1) of the PIT Law) or from which PIT is withheld
by the income payer, Option 2 is not recommended from the point of view of PIT.
If Option 3
would not exist, Option 2 would be recommended for those who plan to operate in
long-term and actively in the financial market, as this option entitles person
to sum up income earned from transactions with financial instruments for
several years. However, as there is Option 3, it is recommended to assess it,
as it is, in its essence, improved Option 2.
financial instruments account with special mark or reference to the status of
investment account for the purposes of PIT Law
The same as in
Option 2, in Option 3, PIT taxable income occurs when the amount of assets
withdrawn from the investments account exceeds the amount of assets paid in the
investment account. While assets (i.e., money or securities) are not withdrawn
from the account in the amount that exceeds the invested amount, PIT liabilities
do not occur. In Option 3, compared to Option 2, several advantages exist.
Namely, PIT taxable income can be reduced by the income that is exempt from PIT
(for example, income from Latvia state bonds) and by income from which PIT has
been already withheld by the income payer. If PIT has been withheld partially,
PIT taxable income is reduced in proportion to income from which tax has been
withheld according to the rate determined in the Section 15, Paragraph
five of the PIT Law. Other positive aspects of Option 3 include the opportunity
to transfer financial instruments between investment accounts based on their
acquisition value, thereby not causing PIT liabilities from financial
instrument that is transferred between investment accounts.
investment account is opened, restrictions and conditions prescribed in Section
1113 of the PIT Law have to be considered in regard to transactions
with assets in the investment account (for example, securities cannot serve as
security in purchase of immovable property) to ensure that financial
instruments account would not lose the status of investment account prescribed
in the PIT Law. Restrictions in regard to provider of investment services shall
be considered, too.
In the example,
natural person does not have PIT liabilities in 2018, as assets were not
withdrawn from the financial instruments account.
had PIT taxable income in 2019 only, when natural person withdrew more assets
from the financial instruments account than invested. Natural person has to
declare earned income of EUR 3,333 (i.e., (EUR 81,453 – EUR 75,000 – EUR 2,000
– EUR 220 – EUR 300 – EUR 1,000/2 – EUR 100) * 20%)) in the annual income
declaration for 2019 until 1 June 2020 and PIT of EUR 667 has to be paid
to the state budget.
Option 1 and Option 2, in Option 3, natural person has the lowest PIT liabilities. Although determining taxable income might seem the simplest,
it is not the case, as calculation of taxable income requires deduction of
income that is exempt from PIT and from which tax has been withheld already.
However, it should be noted that some credit institutions offer their customers
investment account report that eases the process of determining the amount of
taxable income and the moment of declaration.
Although, in the
example we concluded that Option 3 is the most favourable, it should be noted
that situations differ and, depending on types of transactions and your goals,
it can have different impact on PIT liabilities.