The Republic of Latvia is a country located in Northern Europe in the Baltic region, and it is one of the three Baltic states, along with Estonia and Lithuania. Latvia gained its independence in 1991 after the fall of the Soviet Union, and over the years, it has become a member of three significant organizations: NATO (2004), the European Union (2004), and the OECD (2016). From this, it can be understood that Latvia is significantly involved in the international and European communities.
Riga, the capital city of Latvia, is the largest city in the Baltic states, and its metropolitan area has over a million residents.
Latvia’s Economy
The COVID-19 pandemic has had an impact on the economy and the labor market worldwide. In September 2020, the average unemployment rate in OECD countries was 7.7%, while in Latvia, the unemployment rate in 2020 stood at 8.1%. Despite the mentioned crisis, Latvia’s business activity did not suffer significantly, thanks to fiscal policies, support for companies and workplaces, and assistance from the European Union. Latvia managed to adapt quickly to the changes and uncertainties brought by the pandemic. €21.9 million were allocated to support companies and self-employed individuals, €1.8 million were allocated to support farmers, €20 million to support shopping center owners, and more. Latvia’s GDP growth rate decreased by 8.7% in the second quarter of 2020 compared to the European Union’s average decline of 13.9%. In 2021, the economy began to recover with the lifting of COVID-19 restrictions, and the GDP growth rate was higher at 10.8% compared to 2020. In the third quarter of 2021, the GDP growth rate increased by 5.1%.
GBS Companies
Global Business Services (GBS) is a business model who advocates for providing general services to a specific company, that represents a modern development of the traditional outsourcing model used by leading international companies. The goal of this model is to create teams of professionals and experts in areas such as human resources, accounting, information technology, and more, who support the main business objectives of the company.
According to the Investment and Development Agency of Latvia, the GBS sector in Latvia has been one of the fastest-growing sectors in the country, particularly in recent years. Today, more than 50 different GBS companies operate in Riga. In 2021, this sector employed around 17,000 people and accounted for approximately 2.4% of Latvia’s GDP.
In 2022, a survey was conducted among GBS companies operating in Latvia, particularly in Riga. The survey indicated a high level of satisfaction with various aspects such as transportation, quality of life in the city, legal and tax conditions, and more.
Another advantage of establishing a GBS company in Latvia is its highly educated population. As of September 2023, Latvia had 1,826,800 residents, including 75,000 students studying at 52 different academic institutions across the country. Furthermore, 96% of the country’s citizens speak a second language in addition to the local language. Latvia ranks first in the percentage of women working in science and innovative technology fields and is committed to upholding high cybersecurity standards.
ICT Sector
Information and Communications Technology (ICT) is a technological sector that uses technology for the transmission, processing, and presentation of information and communication through various technological means.
In recent years, the ICT sector in Latvia has been growing rapidly and became one of the major contributors to the country’s GDP. Latvian universities offer various programs related to the ICT sector, and it plays a significant role in Latvia’s exports, accounting for 49% of the industry’s production being exported worldwide. The ICT sector is expected to continue its impressive growth in the future.
Startups
In 2017, Latvia enacted a unique legislative framework that encourages startup companies to move to Latvia and develop within its territory. These incentives include options for employees in stocks, tax benefits for startup companies, and simplification of the immigration process for the founders of these companies.
Options for employees
- Purchasing stocks upon the exercise of employee stock options will not be subject to taxation – the employee must hold the options for at least 12 months to benefit from the mentioned tax advantage. Additionally, companies defined as ‘limited liability companies’ can also enjoy this benefit.
Immigration for company founders
- An expedited immigration route for startup company founders would occur with obtaining a residence permit within a period of up to one month from the submission of the application.
Tax Benefits
- Fixed and non-variable national insurance tax. As part of the tax benefits, the calculation of the fixed national insurance tax is done as follows: it is twice the minimum wage (which is 500 euros), and this number is multiplied by the national insurance tax rate of 34.09%. Hence, the total payment of national insurance tax will be 340.90 euros.
- 0% personal income tax. Personal income tax rate in the country varies between the following percentages based on the individual’s monthly salary: 20%, 23%, and 31%.
- 0% corporate tax for reinvested funds in the company. A company will only pay income tax when distributing dividends.
- 45% funding of monthly salaries by the government for highly skilled workers in their respective professions.
Due to unique legislation offering significant benefits to startup companies, Latvia has been ranked as one of the most “startup-friendly” countries in Europe. Beyond the unique domestic legislation, Latvia is a member of the European Union. Therefore, any company established in Latvia enjoys various advantages as those of EU member states, such as the free movement of goods, services, and information without additional charges. Additionally, Latvia boasts an international port, making it one of the most significant ports in Europe for the transfer of goods, cargoes, and commodities.
In recent years, more and more startup companies have been establishing their business in Latvia – In 2021, Latvia was home to 626 different startup companies. Moreover, in 2021, Latvian startups raised over 247 million euros in funding, primarily from companies in the fields of software development, advanced manufacturing technologies, and fintech. Out of this amount, 130 million euros were invested in PRINTFUL, the leading global e-commerce company specializing in custom clothing, which reached a valuation of over one billion dollars, making it the first Latvian “unicorn” company.
The average annual growth rate of investments in Latvian startup companies over the past five years stands at 32%, while the overall average growth in foreign direct investments in the country is at 5%.
Biotechnology industry
The life sciences encompass the study of living organisms on Earth and the development of quality and health in living systems, utilizing advanced technologies. This sector encompasses a variety of different professions such as food, medicine, agriculture, and more. In the past two decades, this field has experienced a significant rise in the international community, with numerous investors supporting startup companies involved in the life sciences. The biotechnology industry in Latvia is growing rapidly, particularly in areas such as medical biotechnology, medical equipment, and biopharmaceuticals (production and development of drugs). Furthermore, universities and research institutions in the country conduct extensive research in this field and can provide various companies with a substantial pool of talented researchers and scientists. Additionally, the Latvian government provides special support to startup companies established in the country.
The pharmaceutical industry constitutes one of the largest sectors of production in Latvia and the life sciences industry is a significant part of Latvia’s exports. For example, in 2021, pharmaceutical exports accounted for 33% of the country’s total exports, reaching a sum of 556 million euros. Latvia’s main export destinations in the life sciences field are Lithuania, the Netherlands, Poland, and Estonia.
Collaboration between life sciences companies, research and development institutes, and various universities creates substantial benefits for all parties involved due to the abundant intellectual capital present in the country. Furthermore, although most researchers and scientists are aged 35 and above, the age distribution in the industry is stable, indicating that new talents entering the field each year ensure the continued growth of the life sciences industry in Latvia.
Our office collaborates continuously with various entities in the country and in Latvia in particular.
We are happy to assist with any relevant matters, and if necessary, connect you with the relevant stakeholders to support your ongoing business activities in Latvia. Please feel free to contact us and schedule an introductory meeting.
