LATVIA: COUNTRY AND FOREIGN INVESTMENT REGIME

Latvia History, Population, Language and Culture

The population of Latvia is about 2.3m (July 2004 est.), with a substantial Russian minority.

Baltic tribes which arrived in 2,000 BC are the forefathers of the Latvian people. From the beginning Latvia was well known as a trading crossroads on the "route from the Vikings to the Greeks" mentioned in ancient chronicles.

The Germans christianized Latvia, and founded Riga in 1201. Gradually it became the largest and most beautiful city in the southern part of the Baltic Sea. In the 1200s, a confederation of feudal nations developed under German rule that was called Livonia, including today's Latvia and Estonia. Riga was included in the Hanseatic League and became an important point in west-east trading.

After the so-called "Livonian War" (1558-1583) today's Latvian territory came under Polish-Lithuanian rule, and after the Polish-Swedish war (1600-1629) Riga came under Swedish rule in 1621.

Consolidation of the Latvian nation and development of a common language took place in the in the 1600s. However, by the end of the 18th century, all of Latvia's territory was under Russian rule. Latvia became Russia's most developed province. Although Latvians sought independence from 1800 onwards, it was not achieved until the end of WWI, but Latvia was then occupied by Russia in 1940, an occupation which was maintained apart from a brief German presence during WWII until 1991.

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Latvia Government

Latvia is a parliamentary democracy. There is a unicameral Parliament or Saeima with 100 seats; members are elected by direct, popular vote to serve four-year terms. Elections were last held 5 October 2002 (next to be held by October 2006).

The president is elected by Parliament for a four-year term; this election was last held 20 June 2003 (next to be held by June 2007); the prime minister is appointed by the president. The head of state is President Vaira Vike-Freeiberga.

The Council of Ministers is nominated by the prime minister and appointed by the Parliament.

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Latvia Economy and Currency

With few natural resources, Latvia's economy is highly dependent on manufacturing and services, and until very recently was strongly linked to the Russian economy.

The 1998 Russian financial crisis was hurtful, but the government's budget stringency and a gradual reorientation of exports toward EU countries has lessened Latvia's trade dependency on Russia.

Most companies, banks, and real estate have been privatized, although the state still holds sizable stakes in a few large enterprises. Latvia officially joined the World Trade Organization in February 1999, and joined the EU in May, 2004.

GDP in 2003 at purchasing power parity was $23.9 billion, and growth in that year was 7.4%. GDP per head at purchasing power parity was $10,200 in 2003. Inflation was 2.9% in that year, with unemployment at 8.6%.

The Latvian currency is the Lat, standing at 0.5715 to the US dollar in 2003. The Lat is stable, although during the first year of EU membership it experienced rapid inflation. However, starting in 2005, the Lat is pegged to Euro at the rate of 0.702804 Lats for 1 Euro. It is expected that Latvia will be dealing in euros as a domestic currency by 2008.

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Latvia Entry and Residence

EU citizens evidently have freedom of entry into Latvia.

Visa-free entry is available into Latvia for nationals of a number of other states, including the US, Canada, South Africa, and a number of South American countries. Foreigners from these countries may stay without visa in Latvia for up to 90 days.

In a number of cases, Lithuanian or Estonian entry visas are accepted by Latvia.

There are various types of visa, including:

Private visas which are valid for a stay of no longer than 90 days within half year period and may be used for purposes such as private visits, business trips, medical treatment, training or scientific work or tourism. Private Visas are also issued to persons entering Latvia in order to receive transit freights or escort them via Latvian ports or airports, as well as deliver or receive other types of freight, upon presentation of relevant documents.

Transit visas are valid for a stay of no longer than 48 hours and may be used for purposes such as traveling through the territory of Latvia, receiving a cargo in Latvia or delivering a cargo to Latvia. This kind of visa can be issued if an applicant already holds a visa - if it is necessary - to enter the country of destination.

Airport Transit Visas allow airline passengers to enter transit areas only - after landing in order to change to other international flights within airport territory. Citizens of Afghanistan, Bangladesh, Eritrea, Ethiopia, Ghana, Iraq, Iran, Congo, Nigeria, Pakistan, Somalia, Sri Lanka have to obtain Latvian Airport Transit Visas.

Emergency visas are valid for a stay of no longer than seven days. Reasons for obtaining emergency visas to enter Latvia include an illness of a close relative, the death of a relative, the consequences of a natural disaster or other extreme situations, accompanying shipment of humanitarian aid or other emergency conditions.

Diplomatic and service visas are valid for a stay of no longer than three years. These visas are issued to persons who, in accordance with the legislation and international agreements, are guaranteed diplomatic, consular or equivalent privileges and immunities, and who enter the country officially or travel through Latvia to a third country. Diplomatic and service visas are issued by representatives and consulates of Latvia abroad and the Consular Department of the Ministry of Foreign Affairs of Latvia.

Special visas allow individuals to stay in Latvia for up to one year. They are designed for business people, scholars and persons arriving to assist the state of Latvia or a Latvian municipality. To be eligible for a special visa, a person must be a citizen of a country whose citizens are allowed to enter the country without obtaining an invitation verified by immigration authorities. In general, a special-visa applicant entering Latvia for commercial purposes must supply a document certifying that the applicant is a shareholder of a Latvian business entity or representative of foreign company having representative office in Latvia.

Group visas are issued for group of not less than six persons for cultural, tourism and related events, not exceeding 30 days for private visas and 48 hours for transit visas.

Immigration visas allow individuals to stay in Latvia for up to 30 days in order to receive a residence permit. The immigration visa is issued to the applicant not later than two months after the approval of the residence permit is received from the immigration authorities.

Work permits are necessary for all foreign nationals who wish to work in Latvia, as well as for persons having signatory rights in legal entity of Latvia. The state fee for a work permit is around 250 – 350 Lats.

Residence permits. An application for a residence permit should either be submitted to the Latvian Embassy in the foreign national’s country or locally to the appropriate office of the Latvian Citizenship and Migration Department. It is often more efficient to apply locally rather than through the Embassy.

Foreign nationals must obtain residence permits to reside in Latvia longer than three months, except for holders of special visas and diplomatic visas. Residence with employment rights in Latvia may be granted only in the cases when the purpose of entry is one of the following:

• studies;
• scientific work;
• commercial work;
• living with a spouse who is a citizen of Latvia;
• living with a spouse (a foreign national) who has a temporary residence or permanent residence in Latvia.

The Labour Department must approve the employment invitation. The approval procedure takes ten days. The residence permit then is issued for the time period mentioned in the employment invitation.

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Latvia Business Environment

Latvia is one of the more advanced, fast growing 'transition' economies and has well-developed services, transportation network and logistics. There is a well-developed banking system, stable political and monetary conditions, and a favourable taxation regime (see Corporate Taxation).

Latvia is the member of the World Trade Organization and has ratified most of the important international economic treaties. The Latvian economy is rapidly expanding and is buoyed by a young and highly educated work force eager to get ahead. Latvia boasts one of the best international credit ratings in Central and Eastern Europe. Standard & Poor's has given Latvia an "A-minus/stable" rating, while Fitch-IBCA has rated the economy "A-minus/positive".

The government continues to pursue liberal, market-oriented economic policies emphasizing macroeconomic stability and the creation of business-friendly incentive structure.

There is no export duty on most goods exported from Latvia. However, certain goods such as metals, minerals, art, wood and wood products are subject to export duty and a license or permit is required. Zero % VAT is imposed on the export of goods and certain services, including those related to exports, international shipping and airlines.

The Latvian tax system neither favors nor discriminates against inward foreign investment. Companies are taxed at 15% and individuals at 25%. However it government policy to ensure all income generated in transacting business is taxed within the country.

For the last two decades real estate market prices have been constantly rising. Since 1998 residential property prices rose by 300% on average, land prices by 150-250%, and commercial property prices by 70-120%.

The legislation of Latvia provides foreign investors an opportunity to purchase or rent real estate property with virtually no limitations. All real estate is entered in the central land register - the Land Book, protecting ownership rights for the property and land. Mortgages are available for foreigners willing to finance their real estate purchases in Latvia.

There are currently 22 banks in the country with over 8 billion LVL (EUR 11.4bn) in total assets at the end of 2004. The market is relatively saturated in traditional banking services such as private and business accounts and account transactions, financing of import/export operations, lending and leasing, etc. Since 2005, all bank account numbers comply with the IBAN standard. Bank staff speaks at least three languages – English, Latvian and Russian.

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Latvia Investment Incentives

Incentives to invest in Latvia comprise direct incentives such as various tax incentives, the ability to acquire real estate, the existence of special economic zones and free ports and EU aligned customs and other commercial procedures, but also indirect incentives such as numerous international agreements on the mutual promotion and protection of investments, World Trade Organization membership, agreements regarding protection of intellectual property rights, trade marks etc. and the simplification of regulations regarding visas, work permits and other administrative matters related to inward investment.

NB Many Latvian tax incentives were abrogated under State Aid when the country entered the EU; some of the schemes described below are closed to new entrants, and come to an end in any event at the end of 2005.

Infrastructure investment incentive Investors, both foreign and local, can obtain a 40% tax credit based on their investment in approved capital infrastructure projects in Latvia. The capital investment must be at least 10 million LVL and the project must be completed within three years. The tax credit granted must be used within 10 years. To obtain the tax credit, the government must approve the investment project and the right to use the tax credit commences in the year the investment project is completed. In the case of an approved 10 million LVL project, a 4 million LVL credit will become available. Broadly speaking, investors making use of the infrastructure investment incentive are unable to utilize other incentive programs.

Incentive production of hi-tech products and computer programs A 30% tax credit is available on an annual basis to the developers of hi-tech products and computer programs. In order to obtain the 30% tax credit, the producer must be certified according to the requirements of ISO 9001 or ISO 14001 standards. High-tech medical equipment must be certified under the provisions of local law and comply with good manufacturing practice standards. Hi-tech products or computer programs must account for 75% of annual turnover. High tech products and programs must also comply with conditions issued by the Latvian Cabinet of Ministers.

Incentive for small enterprises Latvian Corporate taxation law provides tax relief to enterprises who meet at least two of the following three criteria during a taxation year.

• Book value of fixed assets does not exceed 70 000 LVL;
• Net turnover does not exceed 200 000 LVL;
• The average number of employees does not exceed 25.

If an enterprise meets at least two of these criteria, it is considered a small enterprise and can apply a 20% reduction to the Corporate Income Tax it must pay.

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