Latvia operates a progressive tax system for individuals, with employers playing a crucial role in withholding and remitting various taxes on behalf of their employees. Understanding these obligations is essential for compliant payroll processing and managing employment costs effectively. Both employers and employees contribute to the state social insurance system, and employers are responsible for calculating and remitting personal income tax withheld from employee salaries.
Compliance with Latvian tax regulations involves accurate calculation of contributions and withholdings, timely reporting to the State Revenue Service (SRS), and adherence to specific deadlines throughout the year. The system includes provisions for employee deductions and allowances that can impact the final tax burden, requiring employers to correctly apply these based on employee declarations.
Employer Social Security and Payroll Tax Obligations
Employers in Latvia are required to pay State Mandatory Social Insurance Contributions (VSAOI) for their employees. These contributions cover various social benefits, including pensions, unemployment, and healthcare. The total contribution rate is split between the employer and the employee.
For 2025, the standard total VSAOI rate is expected to remain at 34.09% of the employee's gross salary, up to the maximum annual contribution base. This rate is divided between the employer and the employee as follows:
- Employer contribution: 23.59%
- Employee contribution: 10.50%
The maximum annual contribution base is subject to change each year. Contributions are calculated on the employee's gross salary before the deduction of Personal Income Tax. There are specific rates and rules for certain categories of employees or types of income, but the rates above apply to standard employment relationships.
Employers are responsible for calculating both their portion and the employee's portion of VSAOI, deducting the employee's portion from their gross salary, and remitting the total amount to the State Revenue Service.
Income Tax Withholding Requirements
Employers are obligated to withhold Personal Income Tax (PIT), known as IIN (Iedzīvotāju ienākuma nodoklis), from employee salaries. Latvia applies a progressive PIT rate based on the employee's annual income. The tax is calculated and withheld monthly based on the expected annual income, adjusted for the non-taxable minimum and applicable allowances.
The progressive PIT rates expected for 2025 are:
- 20% on annual income up to €20,004
- 23% on annual income exceeding €20,004
The 23% rate applies to the portion of income exceeding the threshold. Employers typically apply these rates monthly based on the employee's monthly gross income, considering the annual thresholds proportionally.
Employers must also consider the employee's non-taxable minimum and allowances for dependents when calculating the monthly PIT withholding.
Employee Tax Deductions and Allowances
Employees in Latvia are entitled to certain deductions and allowances that reduce their taxable income, thereby lowering their PIT liability. Employers need to consider these when calculating monthly PIT withholding, provided the employee has submitted the necessary documentation (e.g., tax booklet).
Key deductions and allowances include:
- Non-taxable minimum: A monthly amount of income that is not subject to PIT. This amount is progressive, decreasing as income increases and potentially becoming zero for higher earners. The exact progressive scale and maximum non-taxable amount are determined annually.
- Allowance for dependents: A fixed monthly allowance for each dependent (e.g., children, certain family members) declared by the employee. This amount is deducted from the employee's gross income before PIT calculation.
- Justified expenses: Employees can claim deductions for certain expenses, such as education costs, medical expenses, and donations. These are typically claimed by the employee through their annual income declaration, but employers may need to consider them if the employee provides documentation allowing for monthly adjustments (less common for these types of expenses).
- Mandatory social insurance contributions (employee portion): The 10.50% VSAOI contribution paid by the employee is deductible from their gross income for PIT calculation purposes.
Employers must ensure they have the correct information from employees (usually via the electronic tax booklet) to apply the non-taxable minimum and dependent allowances accurately each month.
Tax Compliance and Reporting Deadlines
Employers in Latvia have specific reporting obligations and deadlines for payroll taxes. The primary reporting mechanism is the monthly report submitted to the State Revenue Service.
Key reporting requirements and deadlines:
- Monthly Report on Income Tax and State Mandatory Social Insurance Contributions: Employers must submit a report detailing employee income, withheld PIT, and VSAOI contributions for the previous month. This report is typically due by the 17th day of the following month.
- Payment of Taxes: The calculated PIT and VSAOI amounts must be paid to the State Revenue Service by the same deadline as the monthly report, typically the 17th day of the following month.
- Annual Income Declaration: While primarily an employee's responsibility, employers provide the necessary income and tax information to employees to enable them to file their annual declarations if required (e.g., to claim additional deductions). Employers also submit annual summaries of employee income and taxes to the SRS.
Accurate and timely submission of these reports and payments is critical to avoid penalties and interest.
Special Tax Considerations for Foreign Workers and Companies
Employing foreign workers or operating as a foreign company in Latvia introduces additional tax considerations.
- Tax Residency: The tax treatment of foreign workers depends on their tax residency status in Latvia. Residents are taxed on their worldwide income, while non-residents are generally taxed only on their Latvian-sourced income. Residency is typically determined by the number of days spent in Latvia (183 days or more in a 12-month period) or having a permanent home or center of vital interests in Latvia.
- Double Tax Treaties: Latvia has signed double tax treaties with many countries. These treaties can affect where income is taxed and may provide relief from double taxation. Employers of non-resident workers should consider the provisions of relevant tax treaties.
- Permanent Establishment (PE): A foreign company employing staff in Latvia may inadvertently create a permanent establishment, triggering corporate income tax obligations in Latvia. The definition of a PE under Latvian law and relevant tax treaties is crucial.
- Social Security for Expatriates: Rules regarding social security contributions for foreign workers depend on their country of origin and applicable EU regulations or bilateral social security agreements. Posted workers from EU/EEA countries or Switzerland may remain subject to their home country's social security system under A1 certificates.
Navigating these complexities requires careful consideration of individual circumstances, residency rules, and international agreements. Employers of Record services are particularly valuable in managing these aspects for foreign companies and workers in Latvia.
