Latvia - economic overview
Business environment in Latvia
Positioned at the crossroads of Northern and Eastern Europe, the Baltic state of Latvia is rapidly making the most of its status as a member of the EU. Foreign investment is rising strongly and Latvian authorities have taken steps to streamline the regulations governing company formation. The most popular business entity is the limited liability company (SIA). Corporate tax rate is fixed at 20% providing corporate reinvestments at a 0% income tax rate.
Macroeconomic data of Latvia
According to macroeconomic data, economy of Latvia is developing, and country is following strict fiscal policy to avoid economic instability. Inflation in Latvia in 2018 was 3,0% while GDP growth rate of Latvia in 2018 was 5,3% which is one of the highest growth rates among EU Member States. Criterion which illustrates that Latvia runs balanced budget and has no (or very few) macroeconomic imbalances is that country’s debt ratio to GDP is 40% while average in EU Member States is 81,6% of GDP, with highest being 178% in Greece and the lowest – 9% in Estonia. Another criterion which shows that economy of Latvia is stable is that budget deficit of Latvia is at low 0,60 % of the GDP being one of the lowest across EU Member States.
Corporate Tax system in Latvia
From January of 2018, Latvia implemented significant tax reforms with goal to raise competitiveness and attract more investments. Latvia has implemented very similar corporate tax rate system like it is in Estonia – income is taxed at 20% rate only when it is distributed. If company decides to reinvest the profit, then it is not taxed. Such tax reforms moved Latvia to 2nd spot in OECD tax competitiveness rating following Estonia being the first.
Labour force in Latvia
Because of geographical position, educated and relatively cheap labour and low real estate prices Latvia has developed its status as a great place for business relocation or shared service centre opening within European Union.
Unemployment rate in Latvia is 6,9% which is slightly above EU average - 6,6%. In reality this translates in to 60 000 unemployed people who are looking for the job at the moment. According to OECD data, level of education in Latvia is above average in EU if compared with data from mathematics performance, reading performance and science performance. In reality, we can say that people who are interested in employment in international companies are fluent in at least 2 languages – their native (Latvian or Russian) and English. It is not complicated to find an employee who is fluent in at least 3 languages – Latvian, Russian and English.
The average gross monthly salary in Latvia is EUR 1022. Industry specific salary in Latvia is:
Financial and insurance activities – EUR 2020 (gross monthly);
Information and communication (IT) – EUR 1549;
Electricity, gas, steam and air supply– EUR 1373;
Public administration and defence – EUR 1226;
Mining and quarrying – EUR 1163;
Professional, scientific and technical activities – EUR 1114.
Labour taxes in Latvia are very similar to other EU Member States. We will illustrate them by presenting salary computation with gross monthly salary of EUR 2000,00.
Total cost for employer: EUR 2482
Social Tax (employer contribution): 481,80
Business risk fee: 0,36
Social Tax (Employee): 220,00
Personal income tax: 365,99
Gross salary: 2000
Net Salary: 1414,01
The main sector of business in Latvia is services sector which contributes to 75% of GDP and employs 68% of employed people in Latvia. This mainly includes financial sector, IT and communications, legal services, etc. It is followed by industry sector which contributes 21% of the GDP and employs approximately 25% of employed people in Latvia. Industrial sector is expected to increase due to the current real estate market development. The agricultural sector in Latvia contributes around 3% from GDP and employs 7,7% of employed people. Source of data: World Bank.
GATE TO BALTICS provides consultations and market research services for companies who are considering expansion in to new markets. Our experts will analyse market from macroeconomic perspective with relation to business specifics of the customer.
Our experience shows that Latvia is a great jurisdiction for companies who are doing business in following areas: trade with goods; financial services; forestry; IT services; startups.