ESTABLISHING A BUSINESS IN LATVIA AND BILATERAL RELATIONS BETWEEN TURKEY AND LATVIA.

08.05.2014

 

TABLE OF CONTENTS

I MAIN FACTS

II LOGISTICS CENTER

III HUMAN RESOURCES

V ESTABLISHING A BUSINESS

VI TAXATION

VII RELATIONS BETWEEN TURKEY AND LATVIA

By Vladislava Batceva

I MAIN FACTS

Latvia is located right in the heart of Europe. Its unique geographical position provides a variety of business opportunities and attracts financial flows from all over the world. Latvia regained its independence from the Soviet Union in 1991 and is a democratic parliamentary republic that abides by the rule of law. It is fully integrated into the European Union, applying EU laws and regulations within its legal system. In terms of logistics Latvia is one of the most beneficial places to establish business in Northern Europe.

In this Article the author will demonstrate the advantages of starting a business in Latvia, featuring the main assets possessed by this small European state and introducing the reader to the main aspects necessary to know for a successful commencing of business activity in Latvia. In the end of the Article, a quick overview of the bilateral relationship of Turkey and Latvia will be presented.

II LOGISTICS CENTER

Latvia is a natural gateway between the US, EU and Asia. It is one of only three European countries sharing a border with Russia, which makes it perfect for east/west trade. Latvia's transport system provides an appropriate base to facilitate the growing trade flows between the EU and Russia/CIS, and to serve the needs of local export/import operators.

Latvia's capital, Riga, is the biggest city in Baltic States and is traditionally considered the business center of the region. Located on the costs of the Baltic Sea, Latvia has three ice-free international ports in Ventspils, Riga and Liepaja. All three of them are linked to the road system of the country, which, in its turn, connects with both European and CIS road networks. Moreover, this is the shortest route between the EU and the CIS. The railway corridor following through the country links Latvian ports with Russia and the Far East. Pipeline systems for transit and distribution of Russian oil/natural gas lie on the territory of the country. Riga International Airport is the biggest one in the region and serves as a high-speed cargo distribution center and offers more than 70 international direct destinations.

III HUMAN RESOURCES

Latvia's population in 2012 was 2.06 million, including approximately 55% or 1.16 million economically active people. The labor force is well educated, with one of the highest rates of university attendance in the world. Over 85% of Latvians speak Russian and 70% of people under age 40 speak English. German and Scandinavian languages are also widely spoken. According to the Central Statistical Bureau of Latvia, the average monthly salary in Latvia in March 2012 was EUR 677 gross. Monthly salaries may not be less than the minimum stipulated by the State, which, from 2011, is EUR 285 gross.

Key provisions of the Labor Law:

1. probation period: may not exceed three months. During this period, both the employer and employee can terminate the employment contract giving three days notice and are not obliged to provide a reason for termination;

2. . after the probation period, employers can terminate employment relationships by giving at least one month's notice.

IV INVEST IN LATVIA

Over the last ten years Latvia has experienced an extensive economic growth in all sectors. The global economic crisis led to many economic challenges. The Latvian government has demonstrated its determination to meet these challenges and created a development program. The highest priority of the program is the foreign direct investments (FDI), which is the key to a fast and successful economic recovery.

Latvia is a member of the EU and NATO, which ensures its political stability. This small country is a party to Schengen zone and an active participant of the World Trade Organization, enjoying all the benefits of free and open trade in the world's markets. Customs and border procedures have been standardized for effective planning and coordination with trade partners around the world.

Latvia has signed bilateral agreements for the promotion and mutual protection of investments with 43 countries. In 2014 Latvia joined the Eurozone. Introduction of euro is an additional significant contribution to the facilitation of the international trade.

There are incentives to foster the availability of financing for business development while decreasing the negative impact of direct government support on market competition. In such a manner, opening a business in Latvia one may receive support of such incentives as:

- credit guarantees - investment and working capital loans

- short-term export credit guarantees

- loans to improve competitiveness

- venture capital funding

The Foreign Investors' Council in Latvia (www.ficil.lv) is a non-government organization that unites the largest companies, from different countries and sectors, who have invested significantly in Latvia. Additionally, ten national chambers of commerce operating in Latvia have joined FICIL.

V ESTABLISHING A BUSINESS

There are a few main types of businesses stipulated in Latvia's Commercial Law. The requirements for establishing each of them are provided below.

Individual merchant

Natural persons are obliged to register as an individual merchant with the Commercial Register if the annual turnover from their economic activities exceeds EUR 285 000 or the economic activities performed conform to those of a commercial agent or a broker, or the yearly turnover from performed activities exceeds EUR 30 000 and the natural person provides employment for more than five employees.

Limited Liability Company

Limited liability companies may be established by one or more natural or legal entities. Shareholders may simultaneously be the only member of the Board and the only employee. Permanent presence of shareholders in Latvia is not required, although the board must be reachable at the address of the registered office. The capital of a LLC is divided into shares and the liability of shareholders is limited to their investment in share capital. The minimum share capital of a LLC is LVL 3 000, which shall be paid before a company registration with the Commercial register when the company bank account is opened. LLC may have less share capital if it has no more than five members (all individuals) and certain conditions stipulated by the Commercial Law are met.

Joint-stock company

Joint-stock companies can be closed or open with shares in public circulation. Minimum statutory capital for JSCs is EUR 35 000. JSCs performing the activities of banks, insurance companies or currency exchange require a higher amount of statutory capital. JSCs can issue ordinary and preference shares which can grant shareholders rights to receive dividends, rights to receive a liquidation quota and voting rights at shareholders meetings.

Micro-company

In order to register a micro company, all of the following requirements have to be met:

1. Establisher/shareholder is a natural person (max 5).

2. The same person (s) in board.

3. The person can own only one such micro-company

VI TAXATION

With only 7 payments necessary to pay all taxes, Latvia is ranked no.11 out of 183 countries globally in the 2012 Paying Taxes index. Such taxation policies make Latvia a comfortable place for establishing business. Entrepreneurs will spend a much smaller amount of their profit on taxes than in most European countries.

The State taxes are:

1. Personal income tax

2. Social security payments

3. Real estate tax, including stamp duty

4. Corporate income tax, including withholding taxes

5. Value added tax

6. Excise tax

7. Natural resource tax

8. Motorcycle and motorcar tax

9. Gambling and lottery tax

10. Customs duties

11. Electricity tax

12. Micro-company tax

The examples of the details for the most commonly met taxes are as follows:

Income tax rates:

- for annually taxed income and salary income: 25 %

- for income from capital other than capital gains: 10 %

- for income from capital gains: 15 %

Social Security Contributions (Social tax) The employer deducts 11 % from the employee's gross salary as the social security contribution payable by the employee. The employer must also pay SSC equal to 24.09 % (The total standard rate of the social security contributions is 35.09 %).

Real Estate tax

The standard real estate tax rate for buildings, land and engineering constructions is 1.5 % of the cadastral value. The real estate tax rate for residential houses and apartments not used to conduct business activities varies from 0.2 % to 0.6 % depending on the cadastral value of the real estate. Additional 1.5 % real estate tax is levied on uncultivated agricultural land. The taxation period is a calendar year.

Value added tax is applied on:

- supply of goods and services for consideration, including self-consumption;

- import of goods;

- Intra-Community acquisition of goods.

- Intra-Community acquisition of new means of transport performed by non-taxable persons.

VAT rates applicable in Latvia: 22%, 12% or 0%.

More information about taxes available at: http://www.liaa.gov.lv/invest-latvia/investor-business-guide/taxation

VII RELATIONS BETWEEN TURKEY AND LATVIA

Baltic Turkish Trade Association (BTTA) data shows that the foreign direct investment (FDI) from Latvia was around $62 million between the years 2002-2012. Turkey's FDI in Latvia was $13 million in the same period. According to figures from the BTTA there are 51 Turkish companies registered in Latvia. Moreover, Turkish companies are holding 3 projects in Latvia with a total value of 511 million dollars up until now. There are 17 Latvian companies in Turkey. Trade volume between the two sides is $300 million and has the potential to increase.

According to Republic of Turkey Ministry of Economy, Latvia was Turkey's 104th largest goods export market in 2012, constituting the amount of $127 million. The top export categories for 2011 were: textile yarn, fabrics, road vehicles, apparel and clothing accessories; electrical machinery, apparatus and appliances and various manufactured goods.

Latvia was Turkey's 76th largest supplier of goods imports in 2012. Turkish import of goods to Latvia in 2012 amounted to $160 million. The main 5 categories of import for 2011 were: metal ores and scrap, cork and wood manufactures, coal, iron and steel and live animals.

Diplomatic relations between Turkey and Latvia were established in 1925. However, the especial increase in the relations between the two sides happened after Latvia's regaining of its independence from the Soviet Union in 1991.

Turkey has always supported Latvia in EU and NATO bids, so does Latvia concerning Turkey's EU bid. Turkey also reportedly asked Latvia to express the main arguments in Turkey's favor during EU meetings, especially noting the fact that in 2015 Latvia will take up the rotating presidency of the EU in 2015.

In April 2013 President of Turkey Abdullah Gül paid a visit to Latvia to discuss various regional and international issues. During the visit Abdullah Gul noted that: Turkey and Latvia have a long-standing friendship." Latvian President Andris Berzins in the interview for TodaysZaman further said that: "Turkey and Latvia enjoy active and productive relations in all fields. Moreover, President Abdullah Gül's visit to Latvia played a significant role in boosting economic relations".

He also noted that Latvia and Turkey are both countries that were hardly affected by the recent European economic crisis and that the aim of his visit was to take advantage of their mutually strong positions. Gül added that during their meeting, the two leaders talked about Turkey's roadmap to join the 27-nation bloc.

Mentioning that there were 114 Turkish students studying in Latvia, Latvian President said Turkey and Latvia should also increase their partnership in the fields of culture and education.

"Turkey's willingness to be one of the 10 fastest-growing economic powers in the world is of great importance for us, too," Berzins said, adding that Turkey and Latvia should cooperate on energy projects as well.

This visit was of a great importance for the future development of the relationship between the two countries.

The vast list of agreements between Latvia and Turkey demonstrates the active cooperation between these two countries. Thus, the agreements concluded are:

Treaty on Friendship and Cooperation between the Republic of Latvia and the Republic of Turkey, 12 July 1994 (Date of Entry into Force, def:1 October 1996)

International Road Transport Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey, 15 May 1995 (def: 5 June 1996)

Air transport agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey, 15 September 1995 (def: 12 December 2000)

Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey on Cooperation in the Field of Tourism, 9 October 1995 (def: 16 Nisan 2004)

Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey concerning the Reciprocal Promotion and Protection of Investments, 18 February 1997 (def: 3 March 1999)

Military Training Cooperation Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey, Ankara 18 February 1997 (def: 10 July 1997)

Cooperation Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey on Fighting against International Illicit Trafficking in Narcotic Drugs, Psyhotropic Substances, International Terrorism and Organized Crime, Riga 4 June 1997 (def: 8 October 1997)

Maritime Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey, 4 June 1997 (def: 20 January 2004)

Free Trade Agreement between the Republic of Latvia and the Republic of Turkey, Ankara 16 June 1998 (def: 1 July 2000)

Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Ankara 3 June 1999 (def: 23 December 2003)

Agreement for Cooperation on Military Fields of Training, Technics, and Science between the Government of the Republic of Latvia and the Government of the Republic of Turkey, Ankara 30 September 1999 (def: 28 July 2000)

Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey on Industrial Cooperation in the Field of Defence, 13 July 2000 (def: 27 June 2001)

Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey on Co-operation and Mutual Assistance in customs Matters, Ankara 5 May 2003 (def: 15 July 2004)

Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey on Co-operation in the Fields of Education, Science, Culture and Sports, Ankara 19 April 2005 (Not yet in force)

Agreement between the Government of the Republic of Latvia and the Government of the Republic of Turkey on Exemption of the Visa Requirement for Holders of Diplomatic, Special and Service Passports and the Facilitation of Visa Procedures for Ordinary Passports, Riga, 26 June 2006 (def: 13 December 2006)