Tax reform – what's changing for the self-employed, micro-enterprises and royalty recipients?

More than two months have passed since 1 July 2021, the effective date of the highly controversial amendments to the Labour Tax Law. The hardest hit was taken by those working in non-traditional employment forms: part-time, self-employed, micro-enterprise owners and royalty recipients – totalling to around 240,000 people in Latvia.

The new tax regime has been rightly criticised not only for significantly worsening the financial situation of those who receive a smaller or irregular income, but also for its complexity, as the system continues to cause headaches for even the most seasoned accountants.

Inga Pumpure, a lecturer of the professional development programmes for accountants and owner of SIA “Biznesa komplekss”, sheds light on the most important aspects of the new tax payment procedure to clear it up and prevent situations where a person is forced to pay taxes on income that they haven’t earned.

Tax changes for the self-employed

First of all, as of 1 July, the rate of mandatory pension insurance contributions has increased from 5% to 10% of income.

However, there is a catch, which lies in the difference between ‘income’ and ‘revenue’, two terms which often get confused. ‘Income’ means ‘revenue’ (money received from customers) minus expenses.

Secondly, as is well known, from 1 July, a minimum object of MSSIC contributions has been introduced in Latvia in the amount of one minimum wage (currently EUR 500). This means that, if a self-employed person’s monthly income exceeds 500 EUR, their tax payments will consist of 2 parts – the MSSIC standard rate of 31.07% of at least EUR 500 (a higher amount may be chosen) and 10% of the difference between the actual income and the amount for which taxes have been paid in full.

The biggest concern in terms of the tax reform was the situation of low-income earners – would they really have to pay taxes on income not earned?

To avoid this, a crucial thing for the self-employed, micro-enterprise tax payers and royalty recipients to remember is to submit a notice to the SRS in a timely manner. If your planned income for the next quarter does not reach EUR 1500, the notice must be submitted by the 15th day of the first month of the respective quarter.

Currently, the nearest date to be marked in red on the calendar is 15 October. If you have submitted this notice, the SRS will leave you alone and your MSSIC rate will be 10% of the actual income below the minimum wage. Otherwise, you will be forced to pay the full amount of taxes in the amount of 31.07% of EUR 500.

Technically, submitting a notice is remarkably simple – all you have to do is open the EDS system, select the section ‘Documents’ and go to ‘Information to the SRS’.

What’s new for the micro-enterprise tax payers

Within the meaning of the Law “On State Social Insurance”, a micro-enterprise tax payer is currently considered to be self-employed. From 1 January of this year, SIA and VAT payers can no longer obtain the status of a micro-enterprise.

Owners of micro-enterprises have also begun to feel the sting of the unpleasant changes in the micro-enterprise tax rate, which, as of 1 January, has gone up from 15% to 25%, if the company's turnover is up to EUR 25,000 per year, and 40%, if this threshold is exceeded. The rate is calculated from the company's turnover, not income.

The good news is that the salary limit, which until last year was set at EUR 720, has been lifted. Now an entrepreneur working under the micro-enterprise regime may determine the amount of their salary freely, however, they may disburse salary only to themselves. If the company has employees, payroll taxes must be calculated in the same manner as under the general tax regime, including both the PIT and MSSIC.

What about royalty recipients?

The aim of the reform is, in essence, to bring royalties closer to wages. Royalty recipients are encouraged to register as performers of economic activity or self-employed.

The rate of mandatory pension contributions for royalty recipients has been increased from 5% to 10% as well.

Nothing changes for those who receive royalties from AKKA/LAA or other collective management organisations.

Where royalties are paid by a merchant and the recipient has not been registered as a performer of economic activity, a transitional period has been determined until 31 December, during which the same tax rates as in the case of a micro-enterprise will be applied, but without applying rates of expenditure. The tax rate is 25% (up to 25,000 per year). This is called personal income tax (PIT), while in fact it gets divided in the treasury into 20% PIT, and 80% MSSIC or pension insurance contributions.

If the recipient of royalties has registered as a performer of economic activity, they can choose to pay taxes under the micro-enterprise regime (where expenditure rates do not apply) or under the general regime at a progressive rate and expenditure rates of 25% or 50%, depending on the type of activity.