Israel – Latvia Tax Treaty

אמנת מס ישראל לטביה

Israel – Latvia Tax Treaty

Latvia flag

UTC:
Capital City:
Language:
Population:
Currency:
Country Code:
Domain:

+2
Riga
Latvian
1.9 million
Euro
+371
.lv

Latvia-Israel relations

Latvia and Israel first established diplomatic relations in 1992, after the collapse of the Soviet Union. The diplomatic relations led to economic relations. Latvia and Israel signed “The Promotion and Reciprocal Protection of Investments” agreement in 1994. Furthermore, they signed “The Avoidance of Double Taxation and the Prevention of Fiscal Evasion” convention in 2006.

In recent years the connections between the two countries tightened due to the cultivating the relationship by government officials. For example, in 2017, the President of the Association of Chambers of Commerce hosted a business delegation led by the Deputy President of Latvia and the Minister of Economics of Latvia. Diplomatic and economic relations received additional support when the President of Latvia, Egils Levits, visited Israel in 2022 to celebrate 30 years of diplomatic relations between the countries. During his visit, a business seminar was held with the participation of 60 companies in various fields, including renewable energy and environment, education, research and medicine, chemical, pharmaceutical industry, and more. For more details click here.

Details about Israel’s embassy in Latvia

Address: Sporta St. 11, LV-1013 Riga, Latvia
Phone: +371 67635512
Website: https://embassies.gov.il/riga-en/Pages/Departments.aspx
Email: press@rig.mfa.gov.il

Details about Latvia’s embassy in Israel

Address: Amot Investments Tower, Weizman St. 2, Tel Aviv-Yafo
Phone: 03-777-5800
Website: https://www2.mfa.gov.lv/israel/vestnieciba
E-mail: embassy.israel@mfa.gov.lv

Business Activity in Latvia

After the collapse of the Soviet Union the Latvian economy was mostly based on Russia. However, through the 1990’s Latvia acted to disconnect from the Russian dependence and strengthen its connections with Western countries. The peak of this actions happened when Latvia joined the EU in 1998 and to NATO and the World Trade Organization in 2004.

According to the OECD organization, the GDP rate is expected to grow by 2.1% this year (2023), which is slightly lower than the rate of 2.3% recorded in 2022. This can be attributed to the regional instability caused by the ongoing war between Russia and Ukraine. Despite this, the GDP rate is projected to increase in 2024 to 2.3%. However, it is important to note that the country is facing a high inflation rate of 22.2% as of August 2022, primarily caused by the surge in energy and food prices. 

To read more about this subject, you can visit the OECD website by clicking here.

According to the European Union, the gross domestic product in Latvia increased by 1.8% in 2022. It is expected to grow by 0.1% in 2023 and by 2.7% in 2024. Additionally, the country’s credit rating has been stable at category “A” since 2015.

Most of the trade in Latvia is conducted with EU countries, accounting for 72% of its total trade. Latvia primarily exports agricultural and food products (particularly grain products), wood and wood products, machinery, and various metals. Its major export partners include Lithuania, Germany, Poland, Estonia, and Russia. In terms of imports, Latvia mainly brings in machinery and equipment, food products, vehicles, and fuels.

Being a small country, Latvia recognizes the importance of foreign investment. Modern telecommunication services and real estate options provide investors with a comfortable and safe environment for investment. Also, Latvia has adopted European laws and regulations that provide investors with security and service at the highest level. As a member state of the European Union, Latvia operates under the general European legislation to encourage investments. In addition, it implements several programs Supporting investors by channeling EU funds for this purpose.

Business activity due to the Covid-19 Crisis

Despite the COVID-19 crisis, business activity in Latvia was not significantly affected, thanks to fiscal policies and support for companies and workplaces. Latvia was able to react relatively quickly to the changes and uncertainties brought by the pandemic. The GDP decreased by 8.9% in the second quarter of 2020, compared to the EU average decrease of 13.9%. In 2021, the economy began to recover with the removal of COVID-19 restrictions, and the GDP was 10.8% higher than in 2020. In the third quarter of 2021, the GDP increased by 5.1%.

In addition, Latvia received economic assistance from the European Union to mitigate the adverse impacts of the COVID-19 pandemic. Further details on the matter can be accessed on the official website of the European Union, here.

 Agreements between Latvia and Israel

  1. The Promotion and Reciprocal Protection of Investments.
  2. The Avoidance of Double Taxation and the Prevention of Fiscal Evasion.

The Promotion and Reciprocal Protection of Investments

The agreement was signed in February 1994 and an agreement between Israel and Latvia entered into force in May 1995. The purpose of the agreement is to provide protection for the activity of investors against non-commercial risks and to encourage investments between the countries.

To read the agreement in English, click here.

The Avoidance of Double Taxation and the Prevention of Fiscal Evasion

The Avoidance of Double Taxation and the Prevention of Fiscal Evasion is a bilateral agreement in which two countries establish the taxation rules that will apply to income and assets that have a connection to both countries. In addition, the agreement includes principles for exchanging information on tax matters between the countries. To read more about Israeli tax treaties, click here.

The treaty for the prevention of double taxation between Israel and Latvia was signed in February 2006, and entered into force on January 1, 2007.

The treaty is based on the OECD model like most of the tax treaties of the State of Israel. The withholding rate in the country from which the payment is made will be 5% of royalties, 5% of interest payments to banks and 10% of other interest payments.

The reduced rate (5%) will take place when the receiving company owns 10% or more of the capital of the company that distributed the dividend. In addition to this, Israel will be entitled to withhold 10% if the dividend is distributed from the company’s profits that are exempt from tax or taxed at a lower rate than the normal corporate tax in Israel.

 Applicability of the MLI (Multilateral Convention)

The Multilateral Instrument (MLI) is a mechanism designed to automatically amend bilateral tax treaties. It only comes into effect when both countries sign and ratify the multilateral treaty and confirm its application in their domestic law. Israel and Latvia both signed the MLI in 2017, with Israel ratifying it in September 2018 and Latvia ratifying it in October 2019. In April 2021, Latvia made several amendments to the MLI.

The list of articles in the MLI that will apply following Israel and Latvia’s ratification and will affect the bilateral agreement include:

article 7 – Prevention of Treaty Abuse.

To read the convention in English, click here.

Residency for tax purposes

 

Residency of an individual or a company

  • an Israeli citizen will be considered a resident of Latvia if they have a permanent home in Latvia. If the individual has a permanent home in both Israel and Latvia, they will be considered a resident of the country where they have a stronger economic connection.
  • If he does not have a permanent residence, he will be considered a resident of the country where he resides.
  • If he resides both in Israel and Latvia intermittently, he will be considered a resident of the country where he is a citizen.
  • If he is a citizen of both countries, he can be considered a resident of Latvia based on a mutual agreement between the two countries.

Latvia’s tax regime

There are a several kinds of taxes in Latvia, here are a few examples:

Individual income tax:

Income tax for a salary up to €20,004 is 20%.

Between €20,004 to €78,100 the income tax will be 23%.

For an income over €78,100 the is 31%.

Corporate and company taxation: 20%.

VAT:

Generally, 21%, however there are some cases for reduce VAT:

  • Food products for babies.
  • Pharm products.
  • Books, newspapers and magazines.
  • Accommodation in hotels
  • Regional heating

Moreover, the VAT rate for fruits and vegetables is 5%.

Capital gain tax: 20%

Treaty Withholding Tax

Latvia Internal tax rate

Israel Internal tax rate

 

 

20%, 23%, 31%

0%-50%

Personal Income tax (Tax brackets)

 

20%

23%

Corporate income tax

 

20%

25%-30% (plus exceptional income tax for high earners at 3%)

Individual capital gains tax rate

 

20%

23%

Branch tax

 

5%, 10%, 15%

20%

25% or 30%

Withholding tax

(Non-Resident)

Dividends

5%

20%

23%-40%

Interest Rates

 

21%

17%

VAT

 

NA

NA

Inheritance tax

To read more about the tax regime in Latvia enter The State Revenue Service website here.

Inheritance tax in Latvia

Latvia does not impose an inheritance tax, however, gifts may be considered as income and therefore subject to income tax.

Gifts received from individuals are subject to a progressive rate of income tax, with an exemption of up to 1,425 euros applied on the value of the gift. However, small gifts valued at up to 15 euros (including VAT) are exempt from income tax. Gifts between spouses and relatives up to the third degree are fully exempt from tax.

Relocation

In Latvia, there is a small Jewish community, a few thousand people. Relocating there is not perceived by Israelis as a popular step compared to other European countries. However, most Israelis who relocate to Latvia recognize the potential in this country. They are mainly entrepreneurs with knowledge in industries such as agriculture, real estate, and high tech who invest in Latvia. It is possible to stay in Latvia for up to 90 days without a visa. However, for longer stays or in case of relocation, a residence permit issued by the Office of Citizenship and Migration Affairs is required.

Relocating to Latvia involves several changes and adjustments, such as work permits, severing residency ties, and different taxation aspects. Contact us, and we will be happy to arrange a meeting with you to ensure a smooth and easy transition.

More information about relocation can be found on the relocation page on our website.

 Real estate taxation in Latvia

In Latvia, every property owner is required to pay a tax at a rate of 1.5% of the cadastral value (an estimation of the property’s value based on various parameters determined by the municipality, such as location, market value, building materials, etc.) for non-residential properties, including land and buildings.

For residential buildings, the tax rate varies according to the cadastral value:

  • For values up to €56,915, the tax rate is 0.2%.
  • For values between €56,915 to €106,715, the tax rate is 0.4%.
  • For values over €106,715, the tax rate is 0.6%.

The tax considerations for real estate transactions are complex, and it is important to understand the laws, regulations, and information related to this topic. Our office offers consulting services in this field, so please contact us for more information.

Business activity between Israel and Latvia

According to the OECD, the trade volume between Israel and Latvia in 2020 was approximately $96.2 million. The worth of exported goods to Latvia from Israel was around $14.9 million, while importing goods worth 81.3 million dollars.

Israel’s main export to Latvia is electronic products, machinery, and chemicals. The main import from Latvia to Israel is wood and its products, metals, and food products.

Although the trade volume between Israel and Latvia is modest, there is potential for growth in the coming years due to technological and economic cooperation in the fields of innovation and agriculture. The two countries have recently signed agreements for economic cooperation within the framework of diplomatic-economic delegations.

funds transfer from Israel to Latvia

According to Section 170(a) of the Income Tax Ordinance, most transfers of funds from Israel to Latvia will require prior approval from the Israeli IRS.

For counseling on money transfer abroad, in addition to the issue of withholding tax, our office handles the requirements of foreign banks, such as obtaining an approval from an accountant regarding tax payments, and examines other actions required under the CRS uniform standard between countries – automatic exchange of information between countries that initially carried out through banks and then between the tax authorities of both countries.

It is important to seek advice before transferring funds. Please contact us.

Investment incentives in Latvia

The Investment and Development Agency of Latvia (LIAA), which is under the Ministry of Economics, was established to promote business, encourage foreign investments, and entrepreneurship in local and foreign markets. With over 27 years of experience, the agency supports Latvian and international companies interested in creating partnerships with the country. It offers guidance and support throughout the investment process in Latvia, from preparation and innovation to ongoing monitoring.

For further details on the support provided by the Latvian government for entrepreneurs and investors, click here.

Our office offers support, advice, and guidance throughout the investment process. Please contact us, and we will be happy to arrange an introduction meeting with you.

עם יור הרשות לחדשנות הלטבית לאחר החתימה על הסכם שיתוף הפעולה עם הרשות לחדשנות בישראל.

Latvia’s reference to transactions in virtual currencies:

On January 24, 2024, the Latvian State Revenue Department published a set of instructions for implementing tax and accounting regulations on transactions with virtual currency.

In the file, the Latvian government reiterated the official position which states that cryptocurrencies are neither currency nor legal tender and analyzed the issue.

The file includes the opinion of the Latvian government on the legal status and risks involved in the use of virtual currencies.

It should be noted that the file generally specifies the European position (which is the same as the Israeli position at the time the file was published). The matter is rather surprising because the file came out after there were signals from Latvia regarding a more lenient treatment of virtual currencies, considering the lenient approach of neighboring Estonia. Our assessment is that the purpose of the file is to establish a position regarding an official reference (which will apply retroactively) in preparation for the publication of easements in the field.

Accounting in virtual currencies:

The file states that the accounting must include transactions made in virtual currencies when they are converted to euros and included in the company’s books.

In the company’s balance sheets, the value of the virtual currencies should be revalued so that they are recorded at market value or cost – whichever is lower (in fact – as any other asset).

Taxation of virtual currency transactions:

The day the taxpayer receives money or money equivalent is considered the day of receipt of income from the sale of virtual currency. Also in exchange with another virtual currency.

Income from the sale of virtual currency to an individual (natural person) is subject to capital gains tax at a rate of 20%. It should be reported in accordance with the normal rules – if the income increased over 1,000 euros per quarter – on the 15th of the following month for the quarter. If under 1,000 euros – once a year. For foreign residents (outside of Latvia) there is a reporting obligation until the 15th of the month following the month of income generation.

Production of virtual currencies is considered business income.

VAT in virtual currency transactions:

There is no reference in the law, reference must be made to the ruling on the subject.

The ruling states that a transaction of purchase and sale of virtual currencies is a transaction exempt from VAT, therefore – there is also no obligation to register in the VAT payer register of the SRS for a person whose entire business is sensitive and the sale of virtual currencies.

The file also lists rulings in the field, and examples of the application of said guidelines to specific cases.

Link to the file – Click Here

Latvia’s Double Tax Treaties:

Albania

Cypress

Iceland

Luxembourg

Qatar

Turkmenistan

Armenia

Czech Republic

India

Malta

Romania

Ukraine

Austria

Denmark

Ireland

Mexico

Russia

United Arab Emirates

Azerbaijan

Estonia

Israel

Moldova

Serbia

UK

Belarus

Finland

Italy

Montenegro

Singapore

USA

Belgium

France

Kazakhstan

Morocco

Slovakia

Uzbekistan

Bulgaria

Georgia

Korea

Netherlands

Spain

Vietnam

Canada

Greece

Kuwait

Norway

Sweden

 

China

Hong Kong

Kyrgyzstan

Poland

Tajikistan

 

Croatia

Hungary

Lithuania

Portugal

Turkey

 

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