Alternative tax regimes of economic activity

It is known that until the end of 2023, the transition period is being extended, during which royalty recipients have the opportunity to pay taxes from royalties without registering as economic operators. This is provided for by amendments to the laws "On personal income tax" and "On state social insurance". There will likely be no sudden changes in economic activity regimes in 2023. Let's see what alternative tax payment regimes are still relevant!

Economic activity is any kind of business activity, which can take the form of production of goods, trade or performance of work for payment. The purpose of the activity is to systematically make a profit. When starting your economic activity, it is essential to know how to proceed, in what form and tax regime to work, in what order to register.
There is an opportunity to register as an economic activity performer - a natural person - in the State Revenue Service (SRS) register and continue to carry out your economic activity as a self-employed person. This option is suitable for a small business, and several factors should be evaluated in each case. The second option is to register your company and become a merchant, this already means taking on additional obligations. The form of activity also significantly affects the choice of possible tax regimes.
Option to choose the most suitable one
Latvian legislation provides several possible solutions and tax regimes for the self-employed and merchants. When choosing one of the modes, it is important to look at all the conditions related to the future activity: scope of activity, number of employees, planned turnover, etc. In the following, the tax regimes that are possible for economic activity performers - natural persons - as well as merchants - legal persons will be examined.

Tax regimes
General tax payment regime

The first option for an economic operator who decided not to register as a merchant is to pay taxes in the general regime. In such a situation, the self-employed person pays both personal income tax (IIN) and compulsory state social insurance contributions (VSAOI) from his income.
IIT payments are subject to the same IIT regulation as income from salaried work - a progressive rate from 20% to 31% of income earned throughout the year. However, if even the income from the economic activity is small or the economic activity was not carried out in the reporting year, then the mandatory minimum VAT - 50 euros - will have to be paid into the budget in the unified tax account. A self-employed person, in case of general tax payment, keeps accounts to provide information about his income and expenses, which were related to economic activity. Once a year, the operator of the economic activity submits the annual income declaration, where he must fill out the D3 appendix on his income from the economic activity. When calculating the amount of VAT, it should be noted that if the self-employed person is also an employee, all income for the reporting year should be taken into account in the VAT calculation. Also, the self-employed person is entitled to apply the non-taxable minimum, etc. tax benefits.
With regard to VSAOI, the self-employed person pays tax for himself at the rate of 31.07% and the minimum VSAOI object is valid, from which social tax must be paid. Currently, there is a requirement that contributions must be made for an amount of 500 euros per month, even despite the fact that the actual income is lower. If, however, the amount exceeds 500 euros, then the self-employed person can choose to pay VSAOI in full from the entire amount or to make contributions to pension insurance from the remaining amount, which is greater than 500 euros. The amount of this contribution is 10% of the income earned in the quarter above the minimum VSAOI amount.

Micro business tax regime

The second of the alternative and possible tax regimes for economic activity performers is the micro-enterprise tax (MUN) regime. The Latvian regulation from 2021 significantly changed the application of MUN and the conditions under which a company can operate and pay this tax.
From 2021, only the owner of the company can pay MUN tax for himself, while for each employee, IIN and VSAOI must be paid according to the general procedure, which means that now the employees of micro-enterprises are more socially insured, but the head of the company expects a general procedure for paying taxes for for its employees, it requires higher costs. However, the new regulation no longer limits the number of employees who may be employed in a micro-enterprise. In order to operate in this tax regime, the annual turnover of the economic operator cannot exceed 40,000 euros, because if this threshold is exceeded, the taxpayer is obliged to register as a value added tax (VAT) payer, therefore the status of MUN payer will be lost with the next calendar year after registration in the VAT register. Only companies that have received permission from the SRS to become MUN payers can pay taxes in this mode. This status is not granted automatically.
The MUN rate for a company whose annual turnover does not exceed 25,000 euros is 25%, and after this threshold the rate is 40%. The paid tax is divided in the proportion of 20/80, which means that 20% of the paid amount is credited as VAT for the owner of the company, and the remaining amount - in the special budget of VSAOI in order to socially protect the operator of economic activity. When applying the MUN regime, the manager cannot apply the non-taxable minimum, allowances for dependent persons and other allowances provided for in the Tax Law to his income.

Example
The head of the company does not pay VSAOI and IIN as separate payments, but pays the total amount of MUN. If it is assumed that the monthly income is 1,200 EUR, then the annual turnover of the company is 14,400 EUR, which is less than 25,000 EUR, which allows paying 25% tax on the income. Then 1200 x 25% = 300 EUR will have to be paid for the monthly amount.

Reduced patent fee payment

Another possible tax regime for economic activity is the payment of a reduced patent fee. The essence of the patent fee is that the operator of the economic activity pays a fixed amount of money to the state budget and can continue its activity without keeping accounting records. This means that when choosing this mode, a person does not do accounting even in a simple record system. The patent fee can be paid for a year or for half a year. The annual contribution to the budget is 17 euros, while the half-yearly payment is 9 euros. The patent fee is a payment for the equivalent payment of VAT. Economic operators who choose this mode do not pay VSAOI. However, this regime may not be applied to all persons, but only to pensioners and persons with disabilities of the first and second groups who are not registered anywhere else as employees. It should also be taken into account that a person cannot be both a MUN payer and an economic activity performer who pays tax in the general manner, simultaneously with the use of the patent fee regime. If the income from such activity in the previous reporting year did not exceed 3,000 euros, such turnover is also planned for the next reporting year.
The regime of reduced patent fees is an option for people who operate in several industries, mostly industries related to crafts and private services. Such sectors include:

  • leather and textile, clothing and footwear manufacturing and repair service providers;
  • repair of watches and locks, etc. similar household service providers;
  • craft makers;
  • florists;
  • providers of private household services and home care services.

 

Non-registration of economic activity

There are cases when a person can notify the SRS about his economic activity, but not officially register as a performer of economic activity. Such cases are also provided for by law, and they apply to people who derive income from their own real estate. Economic activity declared in this way is the fourth permissible alternative for natural persons who carry out economic activity. Renting out, renting out property, passing things on to a sublessee, leasing or expropriating movable property, paying for the use of natural resources - all these incomes are included in the income from real estate. In addition, it should be mentioned that expenses from such economic activity may not be deducted.
A 10% VAT rate is applied to the entire amount of annual income and additional tax payments are not withheld. This means that VSAOI will not be withheld for such economic activity. You must notify the SRS of your economic activity within five working days from the conclusion of the lease agreement by submitting an application. A natural person pays this type of income tax once a year by submitting an annual income declaration. A person can record his transactions both in paper and electronic form.

Company registration

A different situation arises if the economic operator decides to establish his own company and become a legal entity within the meaning of the law. In this case, for additional registration with the SRS, the person must register in the Enterprise Register to become a merchant. In the case of establishing a commercial activity, the company must already keep accounting records and submit annual reports.
In the case of a capital company, the tax regime is general - the company pays corporate income tax in the case of profit distribution according to Latvian legislation in the amount of 20% of the distributed profit. You have to pay for your employees in the general scheme of IIN and VSAOI. Usually VSAOI in such a case amounts to 34.09%, of which the employer's share is 23.59%.

It is necessary to develop alternative tax regimes

Choosing the right tax regime can significantly help the economic operator to ease his accounting and tax obligations. However, in order to make the right decision, all the factors that may influence the definition of a better alternative should be evaluated.
Despite the fact that currently there are several tax regimes in Latvia, which can significantly facilitate the earning of income and the fulfillment of related tax obligations for some taxpayers, compared to other countries, they still need to be worked on. For example, after the reform, MUN is no longer so attractive for small businesses. Merchants pay taxes for their employees in the same way as other employers. Small business in Latvia is not so well developed as to be taxed with relatively high taxes. Therefore, the government of Latvia should work on developing alternative tax regimes to support individual businessmen and small business owners, who are the main driving force of the national economy.

Source: iBizness