Israel – Latvia Tax Treaty

Business Activity in Latvia

Located on the east side of the Baltic Sea, in the heart of the Baltic, Latvia has historically been a major commercial town and trade route. Foreign trade in Latvia has been growing steadily, the expansion reinforced by its 2004 admission to the European Union. Today, Latvia is a significant exporter of diverse goods and materials, including wood, electrical equipment, metals, chemical products, and food.

Latvia is the only country with a worldwide peat export industry, exporting wood and electronic wares. Its leading export markets are Lithuania, Estonia, and Germany whilst its fastest-growing export markets are Poland, the Netherlands, and the United Kingdom.

Latvia is determined to create a culture of innovation and to build a business climate that will encourage its development and growth. This commitment is indeed apparent in different facets that showcase the good environment the country has to do business in. Among its main objectives are to promote startups, to facilitate research and development activities, and to encourage smart industries such as biomedicine, information and communication technology, smart materials, and smart energy, among others.

Bilateral Agreements between Israel and Latvia

• Double Taxation Agreement
• International Investment Agreement

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Latvia regarding avoiding double taxation was signed on February 19, 2006, and entered force on December 31, 2006.

To read the agreement in English, click here.

Reciprocal Promotion and Protection of Investments

The Reciprocal Promotion and Protection of Investments (RPPI) was signed on the 26^th of February, 1994, and went into effect on the 8^th of May, 1995. The RPPI is an agreement between Israel and Latvia that is designed to encourage and safeguard investments made by individuals and companies from each country in the territory of the other. These agreements typically include provisions related to non-discrimination, compensation for expropriation, dispute resolution, and the transfer of funds. 

To read the agreement in English, click here. 

Applicability of the MLI

Both Latvia and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework.

Israel signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019. Latvia, as well, affixed its signature to the MLI on the 7^th of June 2017, and its provisions became effective as of the 1^st of February, 2020.

Residency for Tax Purposes in Latvia

Individuals

Under Latvian law, individuals meeting any of the following criteria are considered tax residents:

• Those with a registered (declared) place of residence in Latvia.
• Those who spend 183 days or more in Latvia within any 12 months.
• Latvian citizens working abroad for an employer registered in Latvia.

To read about how an individual is considered a resident of Israel, click here. 

Companies

A company is deemed a resident of Latvia if it is incorporated, or required to be incorporated, in Latvia.

To learn how a company is considered a resident of Israel, click here.

The Tax System in Latvia

Latvia’s authority is called the State Revenue Service.

Income Taxation: 20% to 31%

Taxation of Companies and Branches: 20%

VAT: 21%

Capital Gains Tax: 20%

Withholding Tax

Inheritance Tax in Latvia

Latvia does not apply an inheritance tax.

Relocation to Latvia

Investments and business expansion are attractive in Latvia, which benefits from a range of accelerant factors. The country is equipped with a highly specialized, educated population served by an organized infrastructure planning to ensure the best possible operation for any sized business. Latvia offers macroeconomic stability and cost efficiency which add to its attractiveness, and for organizations that require a stable and cost-effective base to operate from, it is a considered option.

Due to a dynamic economy, Latvia offers opportunities for diverse sectors. Having strong, billion-dollar export industries, including the timber, manufacturing, and logistics industries, the country also leads the way in some of the groundbreaking solutions being created to some of humanity’s most urgent needs. The Latvian tradition of innovation and sustainable creation is opening the door at the same time for visionary investors, who are looking for future-proof investment opportunities in fields such as information and communication technology, green energy, biomedicine, and high-tech materials.

As of 2023, Latvia is home to approximately 4,500 Jews, representing the largest Jewish community in the Baltic region.

Real Estate Taxation in Latvia

A flat 1.5 percent tax is imposed on the cadastral value of land and buildings which do not constitute residential property or are otherwise exempted. The tax is calculated and collected by municipalities.

Residential building/apartment tax is levied at the following progressive rates:

• 2 percent, for cadastral value not exceedingly approximately 56,915 euros;
• 4 percent, for cadastral value from approximately 56,915 euros to approximately 106,715 euros;
• 6 percent, for cadastral value exceedingly approximately 106,715 euros.

Local municipalities may impose an additional property tax ranging from 0.2 percent to 3.0 percent in accordance with regulations that must be issued by the municipality no later than November 1 of the prior tax year. If no regulations are issued tax is imposed at the default statutory rates.

Transfer of Funds from Israel to Latvia

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax. 

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more. 

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us. 

For more information on money transfers abroad, click here. 

Types of Business Entities in Latvia

Limited Liability Company: This is the most common business form, offering limited liability to its shareholders. The minimum share capital is €2,800, though in certain cases it can be lower.

Joint Stock Company: Suitable for larger businesses, this entity allows for the issuance of shares to the public. The minimum share capital required is €35,000.

Individual Merchant: An individual engaged in business activities under their name, bearing unlimited liability for business obligations.

General Partnership: A business entity where two or more partners share unlimited liability for the partnership’s obligations.

Limited Partnership: Similar to a general partnership, but includes both general partners (with unlimited liability) and limited partners (whose liability is limited to their investment).

Incentive Laws in Latvia

Latvia offers a foreign tax credit for taxes paid abroad on income included in the tax base, allowing deductions up to the amount of Latvian corporate income tax, provided proof from the foreign tax authority is submitted, with unused credits carried forward. Donations to approved public benefit organizations in Latvia, the European Union/European Economic Area, or countries with a tax treaty with Latvia qualify for tax relief through various methods, including excluding a portion of profits or wages from the tax base. Special provisions exist for donations supporting Ukraine.

Companies in free ports or special economic zones, such as Ventspils and Riga, may receive up to 80% corporate income tax and real estate tax relief, with total benefits depending on qualifying investments. Deferred tax assets and liabilities were abolished in 2018 due to changes in accounting rules, and tax incentives for research and development cost deductibility were also removed under the revised corporate income tax regulations.