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Wednesday, 01.03.2017, 19:45
About the upcoming changes in the micro tax in Latvia
In addition, on September 22, 2015, the Government has recently reviewed and supported the bill on further amendments, which at the time of creating of this article have not been signed yet by the prime minister.
What is the purpose for the proposed changes?
Firstly, the amendments to the Law on State Social Insurance, which directly affect the provisions of the Micro-enterprise Tax Law regarding social insurance of employees.
Secondly, the tax rate will be differentiated and will depend on the period of economic activity and the amount of turnover.
Thirdly, there are imposed restrictions on the granting of the status of micro-enterprises.
The tax rate, the taxable amount and the tax period
The amount of the turnover, as well as the size and terms of the applied rate of Micro-enterprise Tax depend on whether the above-mentioned amendments to the Law on State Social Insurance come into legal force on January 1, 2016.
According to the amendments, employees of the micro-enterprise should be socially insured in addition to the specified by the Micro-enterprise Tax Law, so that within three years the amount of contributions of mandatory state social insurance for them will be equal with the amount of mandatory social contributions of the employer and the employee, charged with the minimum monthly wage, which currently is 122 euros. Accordingly, the tax burden on employees of micro-enterprises increases: in 2017 it will be 22.6% and in 2018 - about 28.5%.
To our mind, this is a very important amendment, as the existing now taxation rules do not give employees of micro-enterprises even the minimum social guarantees. Contributions from the Micro-enterprise Tax in the mandatory state social insurance do not even provide the fact that the employee could, for example, qualify for the minimum pension or unemployment benefits.
If the amendments to the Law on State Social Insurance will come into legal force as expected, the following rules will be applied to the enterprises operating in the allowed sectors:
1) the tax rate of 5% will be applied to the entire turnover of up to EUR 100 000 during the first three years of economic activity;
2) the tax rate of 5% will be applied to the turnover of up to 7000 EUR and the tax rate of 8% will be applied to the turnover from 7000, 01 EUR up to EUR 100 000 starting from the fourth year of economic activity.
The Micro-enterprise tax rate is applied in the taxation period - a calendar year, i.e. the year of receipt of micro-enterprise taxpayer status is the first taxation period.
Many people are concerned about how the new rules will apply to previously registered micro-enterprise taxpayers. The answer is the following: for those enterprises that have received the micro-enterprise taxpayer status until December 31, 2014, the three-year period will be counted from January 1, 2015.
Restrictions on obtaining/maintaining the status of microenterprise
What are the restrictions?
Firstly, it will be forbidden to receive the micro-enterprise taxpayer status for the enterprises, operating in certain sectors. In which sectors of economic activity it will not be allowed to register the micro-enterprises, one may find out from the regulations of the Cabinet of Ministers, which currently are in a draft form.
The project includes 37 branches of the national economy. If the project will be signed, soon there will be no mirco-enterprises at all, except for photographers and translators, perhaps, as previously registered micro-enterprises, leading economic activity in the industry, which will be included in the above-mentioned rules of the Cabinet of Ministers, over time will be deprived of the mirco-enterprise tax payer status in following order:
- enterprises that have received the mirco-enterprise tax payer status until 30.04.2015 will be able to apply micro-enterprise tax in 2016, 2017 and 2018, and then they will lose the right to such status;
- enterprises that have received the mirco-enterprise tax payer status in the period from 01.05.2015 to 31.12.2015, will be able to apply micro-enterprise tax only in 2016, and then they will lose the right to such status.
In addition, when registering and submitting an annual declaration, enterprises now will be required to confirm that they do not conduct business activity in the industry banned by the Cabinet of Ministers.
Secondly, it will be forbidden to use a 5% tax rate in the first three years of business activity for those enterprises, in which at least one employee is employed within 3 years or more.
These restrictions have both supporters and opponents. Supporters believe that in the current situation the status of micro-enterprise is actively used for tax optimization - many companies could remain as the usual limited liability companies, but have preferred status that is less profitable for the state budget.
For example, there are entire companies of passenger transportation, where every taxi driver became a micro-entrepreneur. However, how will it affect small businesses and ordinary people to take care of whom the micro-enterprise tax was made? The status of micro-enterprise has been introduced to help people who lost their jobs to find a new location and raise revenue. If an unemployed person can find a job, by creating a micro-enterprise, then why is it necessary to restrict the list of industries? What is the difference between a shoemaker and an architect? Both want to live wealthy. It is obvious that the government intention was to minimize the number of micro-enterprises, to put it mildly. Micro-enterprises, created to overcome the crisis, now, according to the government position, reduce tax revenues of state budget.
This is the current information for today. Which option will ultimately be adopted: the previous with 9% and 12% rates, or the new with 5% and 8%? What is the impact of these amendments on small business in Latvia? Are they going to relate to the grey zone again or to Estonia, for example? We will get the answers in the near future.
If you have any questions relating to the organization and operation of your company, we offer to make an appointment in the legal office INLAT Plus.
Law Office INLAT Plus,
Brivibas street 40-15, Riga, LV-1050,
t. +371 67505970, +371 26403577,