More than two
months have passed since 1 July 2021, the effective date of the
highly controversial amendments to the Labour Tax Law. The hardest hit was
taken by those working in non-traditional employment forms: part-time,
self-employed, micro-enterprise owners and royalty recipients – totalling
to around 240,000 people in Latvia. 

The new tax
regime has been rightly criticised not only for significantly worsening the
financial situation of those who receive a smaller or irregular income, but
also for its complexity, as the system continues to cause headaches for even
the most seasoned accountants. 

Inga Pumpure, a
lecturer of the <a target="_blank" href="https://www.biznesakomplekss.lv/profesionalas-pilnveides-programmas?utm_source=1188&amp;utm_medium=1188&amp;utm_campaign=1188&amp;utm_id=1188&amp;utm_term=professional+development+programm+for+accountants&amp;utm_content=accountant">professional
development programmes for accountants</a> and owner of <a target="_blank" href="https://www.biznesakomplekss.lv/?utm_source=1188&amp;utm_medium=1188&amp;utm_campaign=1188&amp;utm_id=1188&amp;utm_term=biznesa+komplekss&amp;utm_content=accountant">SIA
“Biznesa komplekss”</a>, sheds light on the most important aspects of the new
tax payment procedure to clear it up and prevent situations where a person is
forced to pay taxes on income that they haven’t earned. 

<h2>Tax changes for the self-employed</h2>

First of all, as
of 1 July, the rate of mandatory pension insurance contributions has
increased from 5% to 10% of income. 


However, there
is a catch, which lies in the difference between ‘income’ and ‘revenue’, two
terms which often get confused. ‘Income’ means ‘revenue’ (money received from
customers) minus expenses. 

Secondly, as is
well known, from 1 July, a minimum object of MSSIC contributions has been
introduced in Latvia in the amount of one minimum wage (currently
EUR 500). This means that, if a self-employed person’s monthly income
exceeds 500 EUR, their tax payments will consist of 2 parts –
the MSSIC standard rate of 31.07% of at least EUR 500 (a higher amount may
be chosen) and 10% of the difference between the actual income and the amount
for which taxes have been paid in full.

The biggest
concern in terms of the tax reform was the situation of low-income
earners – would they really have to pay taxes on income not earned? 

To avoid this, a
crucial thing for the self-employed, micro-enterprise tax payers and royalty
recipients to remember is to submit a notice to the SRS in a timely manner. If
your planned income for the next quarter does not reach EUR 1500, the
notice must be submitted by the 15th day of the first month of
the respective quarter. 

 Currently, the nearest date to be marked in
red on the calendar is 15 October. If you have submitted this
notice, the SRS will leave you alone and your MSSIC rate will be 10% of the
actual income below the minimum wage. Otherwise, you will be forced to pay the
full amount of taxes in the amount of 31.07% of EUR 500. 

Technically,
submitting a notice is remarkably simple – all you have to do is open the
EDS system, select the section ‘Documents’ and go to ‘Information to the SRS’.

<h2>What’s new for the micro-enterprise tax payers</h2>

Within the
meaning of the Law “On State Social Insurance”, a micro-enterprise tax payer is
currently considered to be self-employed. From 1 January of this year, SIA
and VAT payers can no longer obtain the status of a micro-enterprise. 

Owners of
micro-enterprises have also begun to feel the sting of the unpleasant changes
in the micro-enterprise tax rate, which, as of 1 January, has gone up from
15% to 25%, if the company's turnover is up to EUR 25,000 per year, and
40%, if this threshold is exceeded. The rate is calculated from the company's
turnover, not income. 

The good news is
that the salary limit, which until last year was set at EUR 720, has been
lifted. Now an entrepreneur working under the micro-enterprise regime may
determine the amount of their salary freely, however, they may disburse salary
only to themselves. If the company has employees, payroll taxes must be
calculated in the same manner as under the general tax regime, including both
the PIT and MSSIC. 

<h2>What about royalty recipients?</h2>

The aim of the
reform is, in essence, to bring royalties closer to wages. Royalty recipients
are encouraged to register as performers of economic activity or self-employed.


The rate of
mandatory pension contributions for royalty recipients has been increased from
5% to 10% as well. 

Nothing changes
for those who receive royalties from AKKA/LAA or other collective management
organisations. 

Where royalties
are paid by a merchant and the recipient has not been registered as a performer
of economic activity, a transitional period has been determined until
31 December, during which the same tax rates as in the case of a
micro-enterprise will be applied, but without applying rates of expenditure.
The tax rate is 25% (up to 25,000 per year). This is called personal income tax
(PIT), while in fact it gets divided in the treasury into 20% PIT, and 80%
MSSIC or pension insurance contributions. 

If the recipient
of royalties has registered as a performer of economic activity, they can
choose to pay taxes under the micro-enterprise regime (where expenditure rates
do not apply) or under the general regime at a progressive rate and expenditure
rates of 25% or 50%, depending on the type of activity.

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More than two months have passed since 1 July 2021, the effective date of the highly controversial amendments to the Labour Tax Law. The hardest hit was taken by those...

Tax reform – what's changing for the self-employed, micro-enterprises and royalty recipients?

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