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LATVIA

 

LATVIA COUNTRY BRIEF

 

INTRODUCTION
Latvia, one of the three Baltic States, covers an area of 64,589 square kilometres. At the time of the 2011 Census, Latvia's population was 2.07million, a fall of 13 per cent on the 2000 figure of 2.38 million. This demographic shift reflects factors such as emigration, an aging population and a falling birth rate. The capital of Latvia is Riga. Latvia celebrates its national day on 18 November (Independence Day).

POLITICAL OVERVIEW
Latvia regained its independence from the Soviet Union in August 1991. Under the Constitution, the President is elected by members of the unicameral Parliament (Saeima) for a four-year term and has limited powers. The President appoints the Prime Minister, approves the Cabinet and may return legislation to the Saeima. The Saeima has 100 members, who are elected. Latvian President Andris Berzins, a member of the ruling coalition Greens/Farmers Union Party, was elected on 2 June 2011 for a four-year term, commencing 8 July 2011. Elections for the Saeima were last held on 17 September 2011. Harmony Center (SC) won 31 seats, followed by Zatlers' Reform Party (22), Unity (20), National Alliance (14), and Greens and Farmers Union (ZZS)(13). The next parliamentary elections will be held in September 2015. Mr Valdis Dombrovskis has been Latvia's Prime Minister since 12 March 2009.

Latvia joined the WTO in February 2009. In 2002, Latvia was invited to join the EU and NATO and underwent reforms necessary to comply with membership requirements. A referendum to join the EU was supported by 73 per cent of Latvian voters. Latvia subsequently joined NATO on 2 April 2004 and the EU on 1 May 2004.

ECONOMIC OVERVIEW
The global financial and economic crisis of 2008-09hit the Latvian economy extremely hard. After years of double-digit growth, mainly funded by external borrowing by the country's banks, the lack of further readily-available credit brought the economy to a halt. Latvia's GDP contracted by 18 per cent in 2009.In signs of recovery, the economy grew by 4 per cent in 2011, and the World Bank predicts further growth of around 2.8 per cent in 2012. Unemployment in Latvia rose dramatically during the financial crisis, from around 7 per cent in 2008 to a peak of over 20 per cent in the last quarter of 2009. Unemployment has since gradually fallen, with 15.2 per cent recorded in the first quarter of 2012.

On 23 December 2008 the IMF approved a 27-month Stand-By Arrangement for Latvia to support the country's efforts to stabilise the economy. The IMF package was part of a coordinated international effort which loaned Latvia €7.5 billion (A$15.4 billion) — equivalent to almost one-third of Latvia's GDP. In November 2009, in consultation with the IMF and the European Union, the Dombrovskis Government tabled a budget in Parliament designed to cut the country's 2010 budget deficit and thereby meet the demands of foreign lenders. The IMF/EU Program successfully concluded in December 2011.

BILATERAL RELATINSHIP
Australia recognised Latvia's regaining of independence on 27 August 1991. Australians of full and part Latvian descent number around 30 000, but the Latvian-born community, most of whom arrived in Australia in the 1940s, is small and ageing.

There have been high level visits in both directions. The Prime Minister's Special Envoy, Dr Russell Trood, visited Riga in September 2011, during which he signed a bilateral Social Security Agreement. A Parliamentary delegation led by Senator Grant Chapman visited Latvia in September 2003. Then South Australian Governor Bruno Krumins visited Latvia in August 2001 for Riga's 800th anniversary commemorations and met with the President and Foreign Minister. Lt Governor Krumins visited Latvia again in 2003.

Latvian visitors to Australia have included: a parliamentary delegation led by the Speaker, Mr Indulis Emsis in August 2007; the State Secretary of the Ministry of Foreign Affairs, Mr Normans Penke, in 2006; a Latvian parliamentary delegation led by the Speaker, Mr Alfreds Cepanis, in 1996; and the Latvian Minister for Foreign Affairs, Mr Georgs Andrejevs, in 1993.

The relationship between Australia and Latvia is underpinned by bilateral agreements covering Trade and Economic Cooperation (1993), Extradition (2005) and Social Security (2011).

The Australian Ambassador in Stockholm is accredited to Latvia. The Latvian Ambassador based in Vienna has non-resident accreditation to Australia. Latvia is represented in Australia by Honorary Consuls in Victoria, South Australia and New South Wales.

BILATERAL ECONOMIC AND TRADE RELATIONSHIP
Two-way merchandise trade in 2011 between Australia and Latvia was A$13.3 million. Australia exported A$8 million worth of goods to Latvia during this period, primarily alcoholic beverages. Imports from Latvia in this period totalled A$5.3 million, primarily telecom equipment and parts, and furniture, mattresses and cushions.

BANKING IN LATVIA
The goal of Latvia is to become a lawful member of the European Monetary Union in the near future. It is envisaged to change from January 1, 2005 the present pegging of the lats to the SDR currency basket to euro, join up the European currency rate mechanism at the start of 2005 (CRM 2) and participate there at least two years to meet the Maastricht criteria. The Bank of Latvia and government the January 1, 2007 as a target date, by the time of which the meeting of the criteria necessary for introduction of euro shall be ensured.

After the European Council will take a decision that Latvia is ready to participate in EMU the national currency in Latvia will be substituted by the euro and the Bank of Latvia will discontinue implementing an independent monetary policy.

This according to the forecasts of the Bank of Latvia could happen at the beginning of 2008. Until then the LVL will remain the national currency of Latvia.

The banking sector is still growing steadily, mainly because of additional investment and high profit margins, which are being achieved as a result of relatively high albeit decreasing loan interest rates. Today there are more than 20 banks operating in Latvia following international bank supervision standards.

A number of foreign investors, including FöreningsSparbanken, SEB (Sweden), Nord/LB (Germany), Nordea (Finland) and Vereins- und Westbank (Germany) together constitute approximately 80% of the commercial bank capital in the country, bringing additional stability and customer reliability to the Latvian market.

Only 8-10 banks operate as full-range banking service providers to both private and corporate customers. All the others have positioned themselves in certain niche markets with specialized services.

In addition to an extensive network of ATM terminals, a number of banks also provide Internet banking and/or mobile banking services to their customers. The most popular brands of credit/payment cards in Latvia are Visa/Visa Electron and MasterCard/Maestro, however, most internationally used cards are accepted by banks and ATMs in Latvia.

Aizkraukles Banka
Bank of Latvia
Parex Bank
Paritate Bank
Rietumu Bank
Rigas Komercbamka PLC
Trust Commercial Bank

WHY INVEST IN LATVIA
Labour force: Latvia is praised for its population, which knows new technologies, speaks several languages, understands the markets of the CIS and the EU, and provides a cost efficient investment choice.

Currency: Strict monetary policies and low deficit budget have guaranteed the stability of the national currency, the Lat.

Latvia's geographic location is supported by an excellent transportation infrastructure. Three major ports (two ice free year round), along with a network of roads and railways are helping to turn Latvia into a transit specialist.

Latvia has achieved political and economic stability. On September 20, 2003, in a nationwide referendum, the Latvians voted to join the European Union and Latvia's EU membership took effect on 1 May 2004. Latvia became a member state of NATO on March 29, 2004. Reforms accomplished in Latvia and integration in the EU have left a positive impact on the economic development of the country.
A dynamic capital: Latvia’s capital, Riga, is regarded as the capital of the Baltic Region. Riga is the region's largest transport hub, a rapidly growing finance and commercial centre, and a metropolis of culture, tourism, education and entertainment.

The Latvian government welcomes foreign investors to Latvia. Foreign investors enjoy all of the same rights and opportunities as local investors, and they are offered investment incentives. Particular advantages are available at Latvia's free ports and Special Economic Zones.

Easy to start-up business: Latvia is ranked among the top ten countries worldwide in terms of business start-up time and length of bankruptcy procedures, according to the recently published World Bank report Doing Business (Oxford University Press), which analyses business regulation in 130 countries across the globe (rru.worldbank.org).

Tax reduction: The government's tax policy is aimed at the reduction of the tax burden on entrepreneurial activity, which would foster economic growth and ensure competitiveness. Currently the corporate income tax rate in Latvia is among the lowest (15%) in the EU. In addition, legislation provides special corporate income tax relief for large-scale investment projects as well as for enterprises operating within the special economic zones.

INVESTING IN LATVIA

5 REASONS TO INVEST IN LATVIA
Corporate income tax: 15%
Personal Income tax: 25% flat
Days needed to open a Limited company: 3 working days
Average Salary level: Lowest in EU
4 Special Economic Zones with special taxation regime

INVEST IN LATVIA
Latvia, officially known as the Republic of Latvia is a country located in the historically significant Baltic region on the Northern part of Europe. The country is a landlocked country, it is bordered by Estonia in the north and on the southeast Latvia shares its border with Belarus, on the east lies the Russian Federation and on the west it shares its border with Sweden along the coast of Baltic Sea. Latvia being located on the eastern sides of the European plain it has a very pleasant climate and also boasts of fertile soil which is suitable for growing a large variety of crops. Latvia also has a big forest cover that is home to some of the most exotic plants an animal species.

Facts:
The country is one of the key players in the European Union. Latvia, in the recent years have become a hot spot for investment, increasing number of global players are looking to invest in the country and are benefitting for its favorable investment policies. Foreign companies investing in Latvia can enjoy the following advantages:

- Latvia has a very stable bureaucratic set up; this is very useful for foreign investors looking to establish their business base in the country since they can do it without any hassle.
- Latvia also has a transparent and non-biased legal and judicial system in place. it allows the foreign companies to settle any issues fair and square.
- Latvia being a part of the European Union (EU), foreign investors in the country are provided free access to market of other countries which are part of the EU. This is a very significant advantage for investors since they can do business without borders and expand their business base.
- Latvia has a very global business outlook. The work culture throughout Latvia is world class, most of business enterprises in the country work according to the standards of other European nations.
- Labor force is the backbone of any industry and in Latvia there is no shortage for it, foreign investors in Latvia can have access to the huge base of high educated and technically qualified workers. The labor charges in Latvia are also cheap as compared to other countries in the European Union.

Trends:
During the past 5 years, Latvia has experienced significant growth in its economy and it has developed into one of the best economies in the European Union. Most of the industrial sectors in the country have grown drastically and have contributed towards the country’s GDP (Gross Domestic Product).

Like most countries in the world Latvian economy took a major jolt during the economic crisis that threatened the world economies during the third and fourth quarters of 2008, which continued during the early half of the 2009. The GPD slumped to a considerable extent during this period.

However, the federal government of Latvia was determined to not to let the global economic crisis affect the inward flow of foreign investment in the country. To cope with the crisis, the government of Latvia set up several programs to attract FDI (foreign Direct Investment) in the county and give a major boost to the national economy and pave way for growth and development of the country and be at par with other industrially developed and technologically advanced countries of the European Union.

Market Size:
From the economic view point, Latvia is a key player in the European Union. The country has one of the fastest growing markets in the European Union. Over the past few years, Latvia has consistently recorded highest GDP (Gross Domestic Product) growth rates in Europe. The prime reason for the significant is the rich consumption by the locals.

However, during the recession that severely hit the global economy during the later part of the 2008 and the early 2009, the Latvian economy slumped and its GDP fell down drastically at about 18%. The Latvian economy receive a huge support from the IMF (International Monetary Fund) and EU, both rescued the economy with their funds and helped the fiscal deficit by 5% of the GDP. With the decline of recession, the economy recovered well and it registered a significant growth in 2010 and promises to grow further over the next few years.
According to 2009 reports released by the Latvia government, Latvia’s GDP (purchasing power parity) was about $32.4 billion. The major contributing factor to the GDP were the industrial sector, it contributed to 24% of the national GDP and the service sector was the most important contributing factor to the GDP, it represented 72.4% of the GDP. The GDP per capita for the year 2009 was about $14,500.

FDI - Investment Policy:
The Latvia federal government has formulated special foreign investment friendly policies to encourage maximum investment from foreign companies. The government provides several financial grants to foreign investors investing in the country. The grants are mainly in terms of tax exemptions and loans at very cheap interest rates.

Special Incentives:
The government of Latvia provides the following special incentives to foreign investors investing in large projects:

- The government provides corporate tax allowance up to 40% for up to 10 years on investment in certain sectors like real estate, technology and equipment.
- The government also provides organizational and administrative support to businessmen to help them establish their business. Besides the government also provides grants for training of the laborers and development of infrastructure.

Key Investment Sectors:
Latvia has huge industrial sector and its economy is noted for its large manufacturing wing and there is plenty of scope for foreign investors to investing in its diverse manufacturing sectors. Foreign companies can consider investing in various segments like

• Wood processing
• Food processing
• Textiles
• Machinery

Since Latvia is located in close proximity to the Baltic Sea, foreign investors can greatly benefit from it, since it provides a perfect gateway for transportation of goods.

To attract foreign investment in the country’s manufacturing industry, the Latvian government is keen to privatize the sector keeping in mind its contribution to GDP. Since the government of Latvia has privatized the manufacturing sector barring a few sensitive industries, the inflow of FDI was about $11.46 billion in 2009.

Latvia is truly a world class destination to invest, it has all the elements to become a industrial hub in the future. Foreign companies investing the country are sure to earn valuable returns on their investments.

LATVIA
TYPES OF COMPANY

Company formation in Latvia is governed by a new Commercial Code effective 1 January 2002. Influenced by German law, the Code brings Latvian commercial law in line with European Union directives, and simplifies commercial law particularly by reducing the number of available business vehicles from 13 to 5. Protection of creditors' and minority shareholders' interests has been given greater attention especially where reorganization of the company or the reduction of capital takes place. The Code is explicit about the liability of company managers and for the first time provides detailed rules for dissolution, liquidation and reorganisation of commercial partnerships and companies.

The code has reintroduced the legal term "Firma" which is used by a business merchant when concluding and signing contracts. It also abolishes limitations in the use of foreign languages by a Firma.

Currently foreigners are allowed to carry out business activities in Latvia in the form of: a limited liability company (SIA); stock company (A/s – public or closed); or as a branch of a company. It is also possible to register a representative office for the sole purpose of advertising and promoting a business. Representative offices may no longer be used for the actual conduct of business.

There are no restrictions on the ownership of Latvian companies by foreign investors. The overwhelming majority of Latvian businesses are launched as limited liability companies.

In order to be a legal entity and to undertake business activities all companies must be registered with the Latvian Registry of Companies and also as taxpayers with the State Revenue.

A company is formed by filing certain prescribed documents with the Companies' registry. The registration procedure would normally be carried out on behalf of the foreign investor by lawyers or other professional advisers.

Registration fees payable to the Government upon registration are:
- LVL 250 for a stock company;
- LVL 100 for a limited liability company;
- LVL 20 for a Branch;
- LVL 20 for a representative office.

Documents have to be filed with the Registry in Latvian. Documents in other languages have to be translated and notarized. All company documents filed with the Registrar are open to public inspection at a nominal charge.

Latvian company law calls for the creation of a three-tier governing structure – the shareholders' meeting, the management board and the supervisory board (optional for limited liability companies). At least half of the members of the management board must be domiciled in Latvia.

Both limited liabilities and stock companies have legal personality, distinct from that of their shareholders. Shares in a company represent a portion of corporate capital and entitle the holder to proportional right to corporate assets on dissolution. There is no minimum or maximum amount of shares that a company is allowed to issue, unless otherwise specified in the incorporating documents. "One shareholder" companies are also permissible under Latvian law.

Latvia Limited Liability Company
The most common form of a business presence in Latvia is a limited liability company. The minimum share capital required to establish a limited liability company is Ls 2000 which has to be paid before registration with the Commercial Register. Share capital may be contributed in kind.

The following documents are required in setting up a limited liability company in Latvia:

- Application form which must be signed by all founders. Signatures and capacity of signatories must be certified by a notary.
- Any power of attorney (notarised) issued by a founder to another person, authorizing such a person to sign the application.
- Shareholders agreement signed by all founders. Signatures must be notarised. In case of a sole founder the Memorandum is replaced by a Resolution on Incorporation.
- Copies of the founders’ passports.
- Articles of association signed by all founders; signatures must be notarised.
- Confirmation letter from the bank (in case of monetary contributions).
- Statement regarding any investments in kind.
- Each Council member’s consent to act as a Council member (If the company has established a Council).
- Passport of the copies of the members of the Council.
- Each Board member’s consent to act as a Board member.
- Passport copies of the Board members.
- Notarised signature samples of the Board members having representation rights.
- The Board’s confirmation of the company's address.
An LLC is prohibited from offering its shares to the public or from trading on the Stock Exchange. The shareholders' liability is limited to the amounts of the capital invested. Share certificates and registration of the shareholders is recorded in the "Shareholders Register". An LLC may issue only registered shares.
A Public Limited Liability Company (with the suffix AS) has a minimum registered share capital of LVL 25,000 (approximately Euro 38,000). The company may offer its shares to the public.

Latvia Joint Stock Company
Joint Stock Companies may issue both registered and bearer shares as well as bonds. Statutes of the joint stock company may provide for the conversion of registered shares into bearer ones and vice versa. A joint stock company is generally entitled to issue different classes of shares which may confer on their holders different rights, such as voting rights, rights to fixed dividends, and a right of priority on winding up, etc. Joint stock companies are entitled to issue non-voting preference shares subject to the provisions of the statutes.

The minimum requirement for the registered share capital of a joint stock companies is set at LVL 25,000. Higher capital requirements apply in respect of joint stock companies operating in banking and insurance.

Shares may be paid up in money or in kind.

Joint stock companies are entitled to issue employees' shares, which should be covered by the profit of the company. The total value of issued employees' shares may not exceed 10% of a company's subscribed share capital. The employees' shares are not transferable and cannot be inherited.

Latvia Representative Office
A non-resident's representative office can be incorporated for an initial period of five years which may be extended for a further five if requested. There are no legal limits to the number of extensions permitted.

The following documents are required:
- A legalised copy of the articles of association of the parent company;
- A legalised copy of the foreign registration certificate of the parent company;
- An authorised and legalised decision of the parent company to establish the RO in Latvia;
- An authorised and legalised decision appointing the head of the RO;
- A document (passport, lease agreement) confirming the legal address of the RO;
- A notarised signature sample of the head of the RO;
- Copy of the RO head's passport.

The application for registration and the foundation documents must be submitted to the Enterprise Register within 14 days of the ratification of the RO by-laws.

Latvia Branch
Branches of foreign companies in Latvia have no legal personality. However a branch of a non-resident company is treated by the law as a separate Latvian taxpayer subject to the same reporting and audit requirements as are applied in respect of local companies.

Profits of a Latvian branch of a non-resident company are taxed on a normal assessment basis at the same rate as the profits of a resident company. There is no withholding tax on the remittance of taxed branch profits to the head office, whilst under the law in general a 10% withholding tax is imposed on the remittance of dividends out of taxed profits from a Latvian subsidiary.

The branch structure can be useful for a new business where start-up losses are expected, provided that these losses can be set off for tax purposes against profits arising in the country of residence of the head office.

Latvia General Partnership
A general partnership is a company in which two or more partners operate under a common business name. A natural person or legal person may be a partner in a general partnership. All partners are jointly liable for the obligations of the general partnership with all of their assets.

A general partnership operates on the basis of a partnership agreement concluded by the partners which may be amended only with the consent of all partners.

Each partner may represent the general partnership in all legal acts unless the partnership agreement prescribes otherwise. The partnership agreement prescribes the amount of contribution to be made by the partners. A contribution may be monetary or non-monetary.
To enter a general partnership into the Commercial Register, a formal request for entry signed by all partners is submitted to the Commercial Register.

Latvia Limited Partnership
A limited partnership is a company in which two or more legal or natural persons operate under a common business name. At least one of the persons (general partner) is liable for the obligations of the limited partnership with all of the general partner’s assets, and at least one of the persons (limited partner) is liable for the obligations of the limited partnership to the extent of the limited partner’s contribution.

The state or a local government may not be partners in a limited partnership. Partners of a limited partnership agree on the business name, amount of contribution of the partners and headquarters of the limited partnership. A contribution may be monetary or non-monetary.
If a limited partner joins a general partnership, the general partnership shall be deemed to be transformed into a limited partnership. If all the limited partners leave or are excluded from a limited partnership and at least two general partners remain, the limited partnership shall be deemed to be transformed into a general partnership.

Choosing the most appropriate form:
Choosing the most appropriate form of presence is dependent on a number of factors.

When evaluating the choice between branch or subsidiary, the most important advantage of a subsidiary is limited liability. Branches do not have a separate legal identity, therefore, a creditor of a branch may make claims on the assets of the foreign entity. On the other hand, branches have certain other advantages, such as the option to transfer the branch's profit abroad without the imposition of withholding tax (5 – 10% withholding tax is applicable to dividends transferred abroad), and the facility to allocate head office expenses to the branch in proportion to the profit generated by the branch against that generated world-wide.

The choice of the form of presence also depends on the type of business to be conducted in Latvia. For example, banks and insurance companies in Latvia may only be established as JSC’s. Foreign banks have the option of operating in Latvia through branches.

If it is intended at some point to make shares of the company available for public sale, JSC would be the appropriate form as shares of LLC’s may not be offered to the public.

A representative office, in turn, may only be set up if no commercial activities are to be carried out. Usually representative offices are maintained for market research and promotional activities.

Overall, the most common choice of foreign investors is the LLC which is also the most popular form of incorporation for local businesses.

GENERAL COMPAMY COMPLIANCE

Establishment of Corporate Presence
Since company formation (LLC or JSC) is the most likely form of presence to be selected by foreign investors, the following is an outline of requirements for company incorporation:
Firstly, it should be noted that certain types of business activities are subject to the receipt of a licence or permission from the responsible state or self-regulating institution. For example, a licence is required for banks, insurance companies, insurance brokerage companies, customs warehouses, companies dealing with excise goods, and others. Regulated businesses may be subject to special capital requirements, requirements for the qualifications of management, etc. Therefore, in addition to the general requirements below, where applicable, requirements for obtaining licences must already be explored at the incorporation stage.

Incorporation documents
A number of prescribed incorporation documents must be drafted and submitted to the Commercial Register. Shareholders' signatures on any incorporation documents (foundation agreement or resolution, charter, application for registration), as well as sample signatures of Management Board members have to be certified by a notary public. If certified by a foreign notary, documents must also be authenticated in Latvia (apostilled according to Hague Convention of October 5, 1961 abolishing the Requirement of Legalisation for Foreign Public Documents) or legalised). Exceptions are documents certified in countries with which Latvia has signed bi-lateral treaties on legal assistance — Belarus, Estonia, Kyrgyzstan, Lithuania, Moldova, Poland, Russia and Uzbekistan.

Share capital
The minimum share capital requirement is LVL 2 000 (EUR 3 400) for LLC’s and LVL 25 000 (EUR 42 500) for JSC’s.

The share capital of a company can comprise investment in cash or in kind. Cash investments must be endorsed by a notice from the bank showing payment to the temporary account of the company being established. Investment in kind in most cases must be evaluated by certified assessors selected from the list approved by the Commercial Register.
At least 50% of the share capital of a LLC must have been established by the date of submission of the incorporation documents to the Commercial Registry. JSC’s are required to demonstrate payment of at least 25% of the subscribed capital by the date of submission of incorporation documents, but the sum cannot be less than the minimum capital required for the establishment of JSC’s, which is LVL 25 000.

Management of companies
The Commercial Law requires a two-tier management system consisting of a Supervisory Board and a Management Board. However, the Supervisory Board is optional for LLC’s. As the titles of the bodies suggest, the Supervisory Board is designated to execute supervision over the Management Board of the company and to approve certain major transactions, while the Management Board is charged with daily management matters.
The law does not place any restrictions on the citizenship of members of the boards, however, at least half the members of the Management Board must be residents of Latvia. For LLC’s the Management Board may consist of only one member.

Timing of Registration with the Commercial Register
The period of review of incorporation documents and registration with the Commercial Register depends on the amount of state duty paid. For example, the standard duty for registration of LLC’s is currently LVL 100 (EUR 180) which allows registration to be completed within 2 weeks. However, registration may be completed within 4 or 2 days if, respectively, double or triple state duties are paid.


 

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