Everyone whose annual income exceeds 200,000 euros will additionally have to pay a personal income tax of 3%

This kind of additional tax payment for wealthier people – Latvian tax residents – was presented at a meeting of the National Tripartite Cooperation Council by Finance Minister Arvils Ašeradens. He pointed out that the fourth part of the labour tax reform is “heading in a European direction”. “In most countries this rate applies to all income, and in Latvia there has been no discussion about this,” A. Ašeradens stressed. He explained that the rate in question would apply to those people who have carried out substantial transactions, received dividends, and also wages. The amount of the tax will be calculated by the tax administration after the submission of a declaration that takes into account all income, not just wages.

“Over the course of two years we will try to understand how effective this is and how it works,” A. Ašeradens said. He stressed that agreement has also been reached on a mechanism for reviewing this provision.

An unknown reaction

“In plain language, it is a tax on the rich,” is how tax expert Ainis Dābols assesses the situation, stressing that the desire to collect larger tax payments from the most enterprising and the wealthiest is even understandable, since there are no real objective grounds for collecting significant additional sums from those earning the minimum or the average wage. “I am not convinced that wealthy people will simply be willing to pay an additional tax of even 3%, because they can hire not only very high-calibre professionals but also put in place measures to protect what they have earned,” A. Dābols says of the likely reaction of the wealthiest part of society to the innovation. He recalls that a Latvian tax resident can become a tax resident of Bulgaria, Malta or Monaco, thereby legally reducing the amount of tax they pay.

“And it seems that no such special wealth tax exists in either Lithuania or Estonia, which essentially opens up opportunities in the immediate neighbouring countries for Latvia's recipients of large dividends – Latvian tax residents – which in turn creates the additional risk that Latvia will not be able to collect any impressive sums from this additional tax,” A. Dābols reasons. He suggests that the target audience for the tax is recipients of large dividends. “Yes, there are enterprising people who, through their own sweat and hard work, possibly at the expense of time taken from their families, have managed to build a well-earning business, but that is not and cannot be grounds for imposing on these financially successful people even a small yet nonetheless additional tax,” A. Dābols concludes. He recalls the solidarity tax introduced in Latvia in the very recent past, which resulted in a decline in the number of payers of that tax, while at the same time some of them became Estonian tax residents and the northern neighbour received the additional tax payments.

The fine calculations

The tax expert acknowledges that at present, when only the idea of introducing this additional tax has been presented and the relevant draft amendments to legislation are not yet in sight – and still less the methodology for applying it – it is practically impossible to work out how many people, Latvian tax residents, might be affected by having to pay such an additional tax.

“There are more questions than answers, but I would assume that the portion of wealthier people who might be affected by these tax payments could immediately take steps to preserve their wealth (income) – by paying out extraordinary dividends, which Latvian regulations permit, or else simply not paying out such dividends for a while,” A. Dābols says, explaining the question of how dividend recipients will react. In his view, for that very reason it is not even possible to forecast how much revenue could be raised by applying the additional 3% rate to dividend recipients whose total annual income exceeds 200,000 euros.

“Even if there is a profit, no one is obliged to pay out dividends,” A. Dābols stresses, explaining that there is somewhat less scope for avoiding this tax for those people who have bought bonds of a particular company and will receive the corresponding returns on them. “The question is whether the amount on which 20% capital gains tax will already have been paid, together with other income, will exceed 200,000 euros,” A. Dābols notes.

The question of the threshold

Several of those surveyed praised the Finance Minister's position – the rich must pay more and be more in solidarity with Latvian society – but at the same time the question was raised as to why the threshold at which the wealth tax is being introduced in Latvia is precisely 200,000 euros. That is, whether there are any publicly known calculations explaining why this sum has not been set at, say, one million euros, or conversely why it has not been introduced from an annual income level of 100,000 euros.

“If the annual income threshold were 100,000 euros, the additional tax would have to be paid by quite a few heads of state institutions and also of state-owned companies, and by politicians themselves; that is precisely why in the initial proposal it has been set comparatively high – at 200,000 euros – and will not affect them,” A. Dābols replies when asked about the justification for setting the income threshold at 200,000 euros. He does allow, however, that when the proposal is considered in the Saeima, the servants of the people in opposition might try to lower that threshold from 200,000 euros to 150,000 euros or even to 110,000 euros, justifying it by the greater revenue for the state purse, which is short of money for providing services important to society in healthcare, education, science and also in strengthening internal security, not to mention the construction of enormous infrastructure projects such as RailBaltic. Another question from those surveyed concerned the size of the additional rate – 3% – since it could equally have been 5%, or the 1% rate that irritates less wealthy people.

“I do not know the assumptions on which the size of the rate is based, but it cannot be ruled out that the practice of the “old” European countries was analysed and “something from abroad” was taken over, although it is unclear whether it will work in Latvia at all and how effective it will be, because there will be more work for the tax administration, but whether it results in additional money from the rich, time will tell,” says A. Dābols. In his view, no one is preventing those reviewing Latvia's tax system from looking at foreign experience and drawing the appropriate conclusions, as well as avoiding and not repeating mistakes made elsewhere.

There will be questions

An interesting set of potential problem areas was outlined by those working in the real estate segment: namely, 200,000 euros is a sum for which one can sell a private house in the capital and especially in its immediate surroundings, and in the countryside land, as well as standing forest and even prepared roundwood assortments. “That there are many buildings in Rīga whose real – rather than asking – market price is considerably higher than 200,000 euros is nothing surprising, but how many such transactions actually take place in a single year in which one of the parties is a natural person rather than a legal entity,” A. Dābols asks rhetorically. In his view, in the case of selling a private house the current capital gains tax rate of 20% applies to the difference between the sale price and the purchase price, not to the entire sum. “For sellers of land, standing forest and prepared roundwood assortments this could be a relevant question only with a relatively large volume of timber for sale or with truly noteworthy areas of land being sold (at least 100 ha),” A. Dābols predicts. In his view, there will be a great deal of speculation until the version of the bill voted through in its final reading in the Saeima comes into force. “Like pitchforks in water,” is A. Dābols's laconic assessment of the current level of reliability of analysis and risk evaluation.