Personal income tax highest progressive 31,4% rate is applicable to an annual income exceeding threshold of mandatory social security contribution. Therefore, due to increase of this threshold, increased the threshold amount of income from which the personal income tax rate 31,4% is applied (as of 1st January 2019 for the monthly income which exceeds 5233,33 EUR, until 31st December 2018 it was applicable for the monthly income which exceeds 4583 euro).
PIT treatment changes on income from private pension funds which are paid as part from solidarity tax in accordance with Law on Solidarity Tax
Until 31st December 2018 such kind of income to non-residents was not taxable with PIT in Latvia. However, residents were paying PIT from such an income by submitting annual income tax return (law on PIT, article 8, (3) p.21.). PIT law did not determine, that PIT should be withheld by income payer – the same way as for employers’ payments to private pension funds.
According to the 13th December 2018 amendments in the PIT law, as of 1st January 2019 it is stated that also non-residents income from payments into private pension fund plans, which are made from solidarity tax, will be taxable with PIT in Latvia (PIT law, article 3 (1), p. 15.) and the PIT should be withheld by the income payer. The same withholding rule applies to resident income from private pension funds which are paid as part from solidarity tax in according with Law on Solidarity Tax as of 1st January 2019.
Thus, the application of PIT is equalized regardless of whether income received from payments to private pension funds are done from Solidarity tax or from employers’ payments.
Amendments in law on Solidarity tax as of 3rd January 2019
In order to fulfill Constitutional court’s decision, amendments in Solidarity tax law has been performed. With amendments following were set:
- As of 1st January 2019, solidarity tax rate is 25,50 % from the amount which exceeds 62800 euros per year.
- Annual tax rate is calculated according to the article 18 of the law on State Social insurance. Employer within the year calculates social tax rate as in normal case even when the income of employee exceeds 62 800 EUR.
- Till the 1st September after the taxation year, State revenue service makes calculation and refunds overpaid solidarity tax. If over payment should be refunded to both employer and employee, overpaid tax will be refunded only to the employer. In case when refund should be done to either employer or employee, it will be refunded to this particular person. More specific information will be available in Cabinet regulations which should be prepared by 1st June 2019.
On 13th December of 2018, the parliament adopted amendments to CIT law, which are in force as of 1st January 2019. With these amendments in CIT law was implemented Council Directive 2016/1164 (12.07.2016.) which foreseen rules for such tax avoidance elimination which has direct impact on local markets.
CIT law is updated with rules on Controlled Foreign Entities (CFE), stating that tax payer has obligation to pay CIT also for foreign entity, in which tax payer has significant share, influence, if the profit of this foreign entity is obtained by performing non-existing transactions with purpose to get tax benefit. This rule also concerns tax payer’s permanent establishment in other country.
In order to reduce administrative burden of the State revenue service, an exemption will be set -these rules are not concerning CFE which profit doesn’t exceed 750 000 EUR and income which is not gained from provision of services and goods, doesn’t exceed 75 000 EUR.
This exemption doesn’t concern CFE or existing permanent establishment which is registered in low tax- or tax-free countries or territories, according to Cabinet regulation list.
Information prepared by Leinonen Latvia, Tax & Legal advisory department
