Tax law changes part of campaign to reduce Latvian inflation

  • 2007-08-01
  • By Uve Zosars, senor associate at Sorainen (Latvia)
On 17.05.2007 the Latvian parliament passed a number of amendments to various tax laws as a part of the campaign to reduce the current rate of inflation in Latvia. The amendments became effective on 12.06.2007, except the provision for a sale of real estate where the transitional period is granted up to 01.07.2010 as explained below.

Personal income tax
Income from the disposal of real estate is now exempt if an owner has owned the real estate for 60 months (since his/her ownership registration with the Land Book) and has for the 12 months prior to conclusion of the agreement, under which the real estate is disposed, been declared as the primary place residence. This is later referred to as the "5+1 rule".

Note that the Parliament replaced the word "sale" in the previously used phrase "income from the sale of real estate" with the word "disposal". As a consequence not only the sale of real estate triggers personal income tax consequences but bur so will also gifts and other type of transactions where the ownership of the real estate changes. 

Moreover, due to the changes in the law the disposal of real estate is now defined to also include the sale of shares in a company which in the year of disposal or the pervious year had more than 50% of its assets directly or indirectly consisting of real estate located in Latvia. This definition applies to qualifying share sales by both resident and non-resident taxpayers. As of the end of last year a sale of real estate already included a sale of those shares where real estate was contributed into the share capital of the company in who the shares are being sold.

The changes to the law also provide for transitional provisions that will allow certain real estate to be sold up to 01.07.2010 (generally 's if ownership to the property was registered with the Land Book Register by 12.06.2007) and still be treated as exempt in accordance with the law that existed prior to these changes (12 months rule). 

State duty in case of real estate disposal registration
From 16.04.2007 stamp duty that is applicable to the registration of the change of the ownership to real estate with the Land book in various occasions has been increased from the prior 2% duty and total capped  amount of LVL 30,000.00 (EUR 43,000.00).
4% duty without a cap applies to individuals who have already registered with the Land book ownership to two real estate properties and wish to register a third or more.
A 3% duty capped to LVL 50,000.00 applies to the registration of first two real estate properties received by an individual as a gift. The registration of subsequent gifted real estate properties are subject to a 6% duty.

Corporate income tax
Under the Corporate Income Tax Law non-residents who sell Latvian real estate were and are subject to a 2% withholding tax on the total value of the sale proceeds. The 2% withholding tax now also applies to the sale of shares in a company, which in the year of alienation or the pervious year had more than 50% of its assets directly or indirectly consisting of real estate located in Latvia.

Apart from real estate new provisions in corporate income tax regulation target also luxury motor vehicles. The type of passenger vehicle that can be used by a company in its business and qualify for tax deductions has now been restricted. Luxury cars in most cases no longer qualify as company vehicles (unless they are purchased before 12.06.2007, in which case the new provisions do not apply).

A vehicle will not be qualified for tax deductions if it meets the following criteria:

(a) it has less than 8 seats excluding the driver, (b) its value including VAT, is more than ~ LVL 30,000.00 (EUR 43,000.00), (c) it is not designed for use as a specialised transport vehicle or has not been modified to operate as such, or (d)  is not a demonstration vehicle used by a dealer of the particular vehicle make.

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