Running payroll in Latvia

Positioned in Eastern Europe and in relatively close proximity to major European economies, Latvia is a strategic hiring destination for international businesses looking to create a presence in Europe. However, setting up business and employing staff in Latvia comes with its own set of challenges. Foreign companies often struggle with the country’s taxation rules. Monthly payroll reporting is another obligation employers should keep in mind.  

It should be noted that foreign employers are not required to set up a local legal entity if they want to hire employees in Latvia. However, non-resident employers have the same obligations as local employers. These obligations include: 

• Registration with the Latvian State Revenue Service (SRS) for tax purposes

• Filing an electronic hiring notification with the local authorities - no later than on the day prior to the start of the employment

If the hiring declaration is filed via the EDS system, which is the official online portal employers should use for communicating with the SRS, it is sufficient to submit the hiring declaration one hour prior to the employee’s official start at the company. As there is an automatic data exchange between the different authorities linked to payroll processing and employment, no further registration is necessary. 

During the payroll process, employers must calculate and withhold personal income tax and social security contributions from employee salaries. Taxation rules differ slightly for residents and non-residents. Employers are provided with the necessary information on applicable deductions and allowances by the Latvian tax authority.

Tax considerations

Income tax in Latvia is progressive. There are three different tax rates. The base rate is 20% and applies to income of up to EUR 20,004 (valid for 2022). The top rate is 31% and is applicable to income exceeding EUR 78,100. Income between these two thresholds is taxed at a rate of 23%. 

Employers should note that the 31% tax rate is not considered for payroll calculations but is applied retrospectively during the final tax assessment which takes place on the basis of the individual tax return. Monthly earnings exceeding EUR 1,667 are taxed at a rate of 23% during payroll calculations. 

The 23% tax rate must be applied to an employee’s entire earnings if the latter has failed to provide the employer with their wage tax book. Employees who are not required to pay social security in Latvia are subject to different taxation rules.

Medical and education expenses, donations, compulsory social security contributions, life insurance premiums and voluntary contributions to private pension funds are deductible. In addition, there is a differential personal allowance which is determined by the State Revenue Service for each employee and which must be considered for tax calculation. The maximum personal allowance is EUR 350 per month. 

The employer receives information regarding the employee’s personal allowances from the State Revenue Service after filing the electronic hiring declaration - provided the employee has filed a wage tax book. There further is a monthly allowance for dependent children or other dependent family members - subject to certain conditions.   

Residents in Latvia are taxed on their worldwide income. Non-residents only pay tax on income sourced in Latvia. Individuals are considered tax residents if they spend at least 183 days during any given calendar year in Latvia or if their permanent residence is in Latvia. 

Tax withholding and reporting 

It is the employer’s obligation to withhold income tax from employee salaries and wages and to submit the withheld amounts to the State Revenue Service on a monthly basis. A monthly report must be filed with the SRS by the 17th of the following month. 

An annual report of the total amount paid to each employee must be submitted by 1 February. If the employment relationship ends before the end of the financial year, the report must be filed no later than the 15th of the month following the end of the employment. 

The tax year is the calendar year. Individuals earning more than EUR 78,100 per year are required to prepare and file an annual tax return which is due by 1 June of the following year. Joint filing is not permitted. 

Social security contributions

Social security contributions in Latvia are borne by employees and employers. The employee share amounts to 10.5% of the gross salary. Employers pay 23.59% of the employee’s gross salary. Rates are valid as of 2022. 

It should be noted that contributions are only levied on income up to EUR 78,100. However, the income share exceeding this threshold is subject to a 25% solidarity tax which is jointly paid by employee and employer - solidarity tax is paid at the same rates as the social security contributions, but as the effective rate is 25%, employers are refunded for excess payments in the following year. 

Contributions must be paid and reported on a monthly basis. The due date is the 23rd of the following month. Lower rates apply to employees who are eligible for retirement. Employees can choose to contribute to an additional private pension fund. 

For non-residents employed by a non-resident employer, the total contribution rate (employee plus employer share) is 31.83% - unless they fall under an EU social security agreement. Under certain circumstances, foreign employers can transfer the payment and reporting burden for social security contributions to their employee if the latter agrees. 

Employers are furthermore required to make a monthly unemployment risk fee which is set at EUR 0.36 per employee. The fee must be paid to the State Budget once a month.

Employees in Latvia are entitled to various benefits. These include:

• Annual leave and public holidays: 4 weeks, plus 12 public holidays

• Maternity leave: 56 days before and 56 day after birth (extendable to 70 days in case of multiple births, i.e. up to 140 days); maternity benefits amount to 80% of the employee’s usual wages 

• Paternity leave: 10 days; paternity benefits are equal to 80% of the employee’s regular wages

• Parental leave: up to 18 months for each parent; to be taken before the child turns 8

• Sick leave: sick days 2 to 10 are paid by the employer (rates rise progressively from 75% to 80%); thereafter, employees receive statutory sickness benefits equal to 80% of normal wages for up to 26 weeks (extendable to up to 52 weeks)

For more information on employee benefits and other employment requirements in Brazil (including severance pay and termination procedures), check out our Global Hiring Guide.

Minimum wages in Latvia are set by the government. In 2022, the national minimum wage remained fixed at EUR 500 per month for full-time employment. Full-time employees work 40 hours per week. Additional hours are considered as overtime and must be compensated with double pay. There are no legal obligations for employers to provide an annual bonus like a 13th salary or similar. 

Payroll in Latvia is processed twice a month, which is the payment frequency prescribed by law. However, it is also possible to pay employees once a month if they give their written consent. It is mandatory to provide employees in Latvia with a payslip which details the different deductions that have been made from the employee’s pay. Information on overtime pay and other additional pay should also be included in the payslip. Payslips can be issued either in paper form or electronically.

Payments to employees must be made in the local currency, which is Euro (EUR). Although the law defines cash as the standard payment method, most employers opt for non-cash payments. The latter requires the employee’s consent.