As any other country, the Latvian value added tax (VAT) is included in the price of a product or service. A taxable object implies goods and services (the tax is added to their price).
The basic VAT rate in Latvia is 21%. The reduced one - 12%. For more information on basic tax, see the Latvian Value Added Tax Act.
In Latvia, VAT taxable transactions include the:
- sale of goods;
- provision of services;
- purchase of goods within the EU territory;
- purchase of a new vehicle within the EU by someone who is not a VAT payer;
- regular supply of new vehicles to the EU;
- import of goods.
Now let’s talk about the Latvian reverse charge mechanism for paying VAT. The main objective of this procedure is to prevent VAT evasion, as well as VAT fraud.
The reverse charge mechanism applies to the following transactions:
- wood supply and related services;
- supply of scrap metal, metal products and related services;
- construction services and sale of building materials;
- supply of mobile phones, tablets and laptops;
- supply of household electronic or electric equipment;
- supply of raw precious metals, alloys of precious metals and metals with precious stones;
- supply of cereals and industrial crops.
How does the reverse procedure work and what are the main steps?
1. The seller writes an invoice to the buyer, which indicates the price of the product / service without VAT;
2. The buyer pays the seller the indicated amount;
3. The buyer calculates the VAT on the amount indicated in the invoice;
4. If the goods are used for VAT taxable transactions, the buyer has the right to deduct the accrued VAT in the same tax return.
In this case, the buyer does not pay VAT on this transaction/purchase.
The same procedure for paying VAT applies if a Latvian company buys goods or receives services from entrepreneurs (companies) who are registered as VAT payers in another EU country. Still, the Latvian company has to use the received goods to carry out VAT taxable transactions within the country.
But what about general registration of value added tax payers?
You’ll have to carry out the registration at the State Revenue Service (SRS). If you register (establish) a new business, you can apply for VAT registration at the Register of companies, using the required set of documents. The Register of companies will then forward your application to the SRS.
Then, you’ll have to show the SRS a confirmation document that gives your company the right to use a legal address (for example, a rent contract).
The SRS will be considering your application within 5 working days before issuing a decision on registration.
Quite often, the SRS requires additional information and documents that confirm the technical and financial capabilities of the entrepreneur to conduct real business activities. It’s nothing to panic about, the SRS employees just want to make sure that your company is ready and able to conduct real legitimate business activities and will pay taxes.
Are you intrigued? Do you want to find out more about Latvian company formation? Feel free to contact us and receive the proper legal counselling that will help you bring your awesome business idea to life!
