Company formation:
Latvia

Located in the heart of the Baltic-Sea region, Latvia offers a unique combination of Northern European orderliness and Eastern European vitality. With a strategic geographic location, the nation acts as a bridge between the EU and the vast markets of Russia and CIS countries. Latvia boasts a stable economic environment, comprehensive infrastructure, and a business-friendly environment. Entrepreneurs benefit from Latvia’s progressive regulatory systems, designed to support and stimulate the growth of both local and foreign enterprises. In addition, Latvia’s membership in the EU ensures that businesses operate in a framework defined by the highest European standards.

Why opening a company in Latvia?

Establishing a company in Latvia presents numerous advantages for entrepreneurs. Latvia’s strategic location, membership in the European Union, and a competitive tax regime make it a suitable option for various business types, especially those eyeing European markets. Latvia’s fiscal policies particularly favor SMEs, startups, and export-oriented businesses, making it an attractive destination for dynamic entrepreneurs.

Advantages

Incorporating a company in Latvia brings several strategic and financial advantages. This Baltic nation has become a hub for businesses, particularly for startups and SMEs, offering a blend of favorable policies, geographic location, and economic conditions. Below is a table that highlights some of the primary advantages of setting up a company in Latvia.

Disadvantages

While Latvia offers numerous advantages, there are also certain challenges that businesses might encounter. As with any other jurisdiction, it’s crucial for entrepreneurs to understand potential pitfalls before making the decision to incorporate in Latvia. Here’s a table that delineates some of these disadvantages:

Most popular sectors to set up a company in Latvia

The most popular sectors in Latvia for business incorporations include IT, logistics, tourism, manufacturing, and agribusiness, due to the country’s natural resources, skilled workforce, and advanced infrastructure.

Fiscal system in Latvia

Latvia’s fiscal system is characterized by its flat tax rate, simplicity, and clarity. Being a member of the EU, the country adheres to European standards in terms of fiscal regulations.

Taxes

Latvia employs a flat tax system, where both individuals and businesses are taxed at a uniform rate of 20%. This transparent system simplifies tax calculations and procedures for businesses, ensuring ease of compliance. Additionally, Latvia has double taxation treaties with numerous countries, ensuring businesses aren’t taxed twice on the same income. Corporate taxes apply to a company’s global revenue. Deductions and incentives are available, particularly for startups, R&D, and businesses in Special Economic Zones. It’s also worth noting that dividend distributions to non-residents are tax-free, further enhancing Latvia’s appeal as a business hub.

VAT in Latvia

VAT in Latvia stands at a standard rate of 21%. Reduced rates and exemptions apply to specific goods and services. Companies must register for VAT if their annual turnover exceeds €40,000.

CFC Rules

Latvia has Controlled Foreign Company (CFC) rules in place. These rules are designed to prevent Latvian residents from shifting income to low or no-tax jurisdictions. If a Latvian resident holds a significant (more than 50%) interest in a foreign entity, and that entity is based in a low-tax jurisdiction, the income may be attributed to the Latvian resident and taxed accordingly.

Requirement

Local director

A company in Latvia is not strictly required to appoint a director who is a resident or citizen of Latvia. However, having a local director can offer certain administrative advantages.

Local secretary

Latvian companies are not obligated to appoint a local secretary.

Annual return

Companies in Latvia are required to file an annual return. This report includes financial statements and details of company shareholders and directors.

Audited accounts

Companies in Latvia with a certain turnover or asset size are required to have their accounts audited. This ensures transparency and adherence to financial regulations.

Company types in Latvia

Limited Liability Company (SIA)

The Limited Liability Company (SIA) is prevalently favored among small to medium-sized businesses in Latvia, thanks to its structure that accommodates a professional yet flexible setup. It’s especially beneficial for startups, family businesses, or individual entrepreneurs.

Target Audience: The SIA suits entrepreneurs seeking to limit their personal liability concerning business debts or losses, as it offers a clear separation between personal and business assets, making it a safe harbor for calculated business risks.

Reasons for Choice and Advantages:

• Limited Liability: The main advantage is the limitation of shareholders’ liability to their contributions, safeguarding personal assets.
• Flexible Capital Requirements: The option to start with minimal initial capital provides financial flexibility for entrepreneurs.
• Corporate Control: Significant operational control is in the hands of the shareholders, with less rigidity in structure compared to Joint Stock Companies.
• Tax Efficiency: Taxation on profits is deferred until they are distributed, encouraging business growth and reinvestment.

This company type is ideal for individuals or business parties seeking a mix of limited liability, control, and tax efficiency, without the need for substantial initial capital.

Joint Stock Company (AS)

Joint Stock Companies (AS) are structured for larger businesses, suitable for those aiming to go public or seeking to attract significant investments. It’s recognized for its capacity to accommodate an extensive pool of shareholders, making it ideal for sizable or multinational operations.

Target Audience: The AS is designed for entrepreneurs planning large-scale operations, possibly targeting international expansion or attracting substantial public investments. It’s also suitable for entities aiming to list their shares on the stock exchange.

Reasons for Choice and Advantages:

• Ability to Raise Capital: The AS structure facilitates capital accumulation through public shareholding, essential for expansive investments.
• Limited Liability: Shareholders are protected by the limitation of liability to their shareholding.
• Transferability of Shares: Shares can be easily transferred or sold, providing flexibility in ownership and investment.
• Corporate Prestige: Operating as an AS enhances a company’s image and credibility with investors and the public.

An AS, despite its higher regulatory requirements and costs, is beneficial for expansive business visions due to its public investment opportunities, liability protection, and growth potential. It’s tailored for entrepreneurs with substantial ambitions and a clear growth trajectory.

Branch Offices

Branch Offices in Latvia serve as extensions of a foreign parent company. They are not separate legal entities; instead, they operate as a part of the foreign company, which means the parent company retains full liability for the branch’s activities.

Target Audience: Branch Offices are suitable for foreign companies looking to expand their operations into Latvia without establishing a separate legal entity. This setup is ideal for companies planning to carry out activities that don’t require a separate entity or for those testing the market.

Reasons for Choice and Advantages:

• Business Continuity: Branches act as an extension of the parent company, ensuring consistency in branding, service, and management.
• Financial Reporting: Since it’s not a separate legal entity, financial reporting is consolidated with the parent company, which may simplify the accounting process.
• Market Expansion: Establishing a branch office is a strategic way for companies to expand geographically and gain a presence in new markets without the full commitment of incorporating a new entity.
• Full Control: The parent company retains full control over the branch’s operations and management.

Branch Offices are an excellent solution for foreign companies seeking to enter the Latvian market, allowing for operational expansion and brand positioning with a relatively low level of administrative burden and without the need to invest in minimum share capital.

Representative Offices

Representative Offices are established by foreign companies to engage in marketing, promotional activities, or other non-transactional operations in Latvia. They are not allowed to perform commercial activities and, hence, do not earn income. Given this, they are not considered separate legal entities, and the foreign parent company is fully liable for their activities.

Target Audience: Representative Offices are ideal for foreign companies seeking to have a local presence in Latvia for purposes like market research, networking, and establishing contacts without conducting direct commercial transactions.

Reasons for Choice and Advantages:

• Market Presence: Companies can establish a footprint in the Latvian market, which can be valuable for market understanding, research, and visibility.
• Low Cost: Without the pressure of achieving sales or revenue, Representative Offices can operate with lower costs compared to other types of foreign establishments.
• Preparatory Step: Establishing a Representative Office can be a strategic initial step before fully committing to incorporating a company or establishing a Branch Office in Latvia.
• No Tax on Income: Since Representative Offices can’t engage in profit-making activities, they are generally not subject to corporate income tax.

Representative Offices serve as a strategic option for companies planning to explore the Latvian market, allowing them to build relationships, understand the local market dynamics, and prepare for a larger-scale entry in the future.

General Partnership (PS)

General Partnerships (PS) in Latvia are entities formed by two or more individuals (partners) who jointly conduct business under a common firm name. In a PS, partners have unlimited liability, meaning they are personally liable for the debts of the business, making trust and transparency among partners crucial.

Target Audience: PS is suitable for individuals who wish to undertake a joint venture, especially in professional sectors like law, accounting, or consultancy. It’s ideal for those who seek operational flexibility and decision-making with close associates or family members.

Reasons for Choice and Advantages:

• Operational Flexibility: PSs typically have fewer regulations and more management flexibility than corporations, allowing partners to directly manage the business.
• No Minimum Capital: There’s no requirement for minimum share capital, making it easier to establish the business.
• Profit Sharing: Profits are shared directly among partners and are subject to personal income tax, which can be advantageous depending on the tax situation of each partner.
• Decision Making: All partners in a PS have equal rights in decision-making processes, promoting a democratic business environment.

A General Partnership is best suited for entrepreneurs who prefer to work in a collaborative environment with shared responsibilities and have complete trust in their partners, given the element of unlimited liability.

Limited Partnership (KS)

Limited Partnerships (KS) in Latvia are similar to General Partnerships but differ primarily in terms of liability. In a KS, there are two types of partners: general partners with unlimited liability and limited partners whose liability extends only to the amount of their contribution to the partnership.

Target Audience: KS structures are ideal for entrepreneurs and investors who prefer to limit their liability in a business venture. It’s suitable for businesses where some partners prefer to invest capital without involving themselves in daily operations, while others actively manage the business.

Reasons for Choice and Advantages:

• Limited Liability: For limited partners, the liability is restricted to their share of the investment, protecting personal assets.
• Operational Flexibility: Like General Partnerships, KSs offer operational flexibility and less regulatory burden.
• Attracting Investors: KSs can attract investors who wish to participate in the potential gains of a partnership without assuming the risks associated with management or unlimited liability.
• Tax Considerations: Profits are passed through to partners and are subject to personal income tax, potentially leading to tax benefits depending on individual tax situations.

Limited Partnerships cater to individuals seeking investment opportunities without the day-to-day management responsibilities or the risks associated with unlimited liability. They provide a balanced structure for those desiring involvement in a business’s gains while limiting potential losses.

Sole Proprietorship (Individual Merchant or IK)

Sole Proprietorships in Latvia, known as Individual Merchant (IK), are businesses owned and operated by one individual. The owner has unlimited liability, meaning their personal assets can be used to cover business debts. IKs are easy and cost-efficient to establish and offer complete control to the owner.

Target Audience: This form of business structure is ideal for freelancers, consultants, and other individuals offering services or running small businesses, who prefer simplicity in operations and want direct control over all business decisions.

Reasons for Choice and Advantages:

• Full Control: Owners have complete control over the business operations, allowing for direct involvement in every aspect of the business.
• Easy Formation and Management: Setting up an IK is straightforward, with fewer formalities, paperwork, and costs compared to corporations.
• Direct Taxation: Income is taxed once as the owner’s personal income, avoiding double taxation.
• Privacy: Sole proprietors often enjoy more privacy as their business records may not be publicly accessible, depending on local regulations.

IKs are an excellent option for entrepreneurs who want to operate independently, allowing for agility, simplicity, and a direct relationship with their customers. However, the owner must be prepared to assume all risks, as they have unlimited liability for business debts.

Cooperatives

Cooperatives in Latvia are autonomous associations of persons united voluntarily to meet common economic, social, and cultural needs through a jointly owned and democratically controlled enterprise. They operate according to principles of cooperation, including democratic member control, member economic participation, and concern for the community.

Target Audience: Cooperatives are ideal for groups of individuals or businesses looking to achieve a common goal, such as farmers seeking to pool resources, residents aiming to own housing jointly, or businesses wanting to collaborate for greater purchasing power.

Reasons for Choice and Advantages:

• Democratic Control: Each member has equal voting rights regardless of their level of investment, promoting equality and fair decision-making.
• Shared Resources and Risks: Members pool resources to achieve common goals, sharing both the rewards and risks.
• Member Benefits: Surpluses are either reinvested into the cooperative, used to benefit members in proportion to their transactions with the cooperative, or distributed as dividends.
• Community Engagement: Cooperatives often have a strong commitment to community development and can adapt to community needs.

Cooperatives are a unique business model that allows members to work together democratically to achieve a common purpose. They can offer economic, social, and cultural benefits, but require a shared commitment to cooperative principles and values.

Common questions