On Friday, 28 July, the Saeima adopted in the final reading laws ensuring the implementation of the tax policy reform as of next year.
Jānis Vucāns, Chairman of the Saeima Budget and Finance (Taxation) Committee, responsible for the new legislation throughout the process of its development, remarked: “The tax policy reform entails significant changes to the personal income tax and social contributions, a new corporate tax regime and changes affecting the payers of the micro-enterprise tax, as well as greater relief for families with children and people with lower income. In order to implement the so-called largest reform measures, compensation mechanisms have also been established, and they mainly pertain to combatting the shadow economy and improving tax administration”.
As of next year, the minimum monthly salary will be increased to EUR 430 from the current EUR 380. The maximum differentiated untaxable minimum income will also increase – from EUR 115 to EUR 200, further increasing to EUR 230 in 2019 and EUR 250 in 2020. The untaxable minimum will gradually decrease based on total income and will not be applicable to income above EUR 1000 per month in 2018, EUR 1100 per month in 2019, and EUR 1200 per month in 2020. Next year the untaxable minimum for pensions will increase to EUR 250 per month from the current EUR 235, reaching EUR 270 in 2019 and EUR 300 in 2020. The untaxable minimum will be applied directly without having to submit the annual income declaration.
As of 1 January 2018, the application of personal income tax will be differentiated with a progressive rate of 31.4% being applied to the portion of income exceeding EUR 55 000 per year. In turn, the rate for income up to EUR 20 000 per year will be 20%, and income between EUR 20 000 and EUR 55 000 per year will be taxed 23%. A higher tax – 20% instead of the current 10% or 15% - will be levied on income from capital and capital gains.
The personal income tax relief for dependents will be increased from the current EUR 175 to EUR 200 per month, reaching EUR 230 in 2019 and EUR 250 in 2020.
For natural persons the total amount of eligible expenses for health care, education and donations as of next year will be EUR 600 per year per family member, but not more than 50% of the tax payer’s total taxable annual income. Until now the maximum amount of eligible expenses per year was set at EUR 215 for education and medical services, whereas there was no limit set for dentistry and planned surgeries. As regards private pension funds and life insurance premiums, the redeemable amount will be limited to 10% of taxable annual income, but not more than EUR 4000 per year.
Next year, the rate for patent fees will also change to EUR 50 or EUR 100 per month instead of the current EUR 43 to EUR 100. As of 1 January, persons with Group I and II disabilities will be allowed to pay a reduced patent fee.
The social contribution rate for both employers and employees will increase by 0.5% next year. Furthermore, 1% of state social insurance mandatory contributions will be earmarked for health care. The use of funds allocated for health care services shall be regulated by a law on health care financing.
As of 2018, mandatory social insurance contributions will also have to be made from royalties. The payer of a royalty will have to pay a 5% social contribution for the recipient, and these contributions will be paid into the person’s pension insurance.
Mandatory contributions of at least 5% will also be paid by economic operators if their monthly income does not exceed EUR 430. For higher monthly income, social contributions of 32.13% will have to be made from a freely chosen portion of income (but no less than the national minimum salary, i.e. EUR 430), and at least 5% of the difference between the chosen amount and actual income will have to be paid into pension insurance. In turn, operators whose total annual income does not exceed EUR 50 will be exempt from social contributions.
As of next year, a new corporate tax regime – the reinvested profit model - will be introduced, meaning that the tax will be suspended until profits are distributed or used for purposes other than ensuring the company’s further development. Taxes will not be levied on reinvested profits, but the rate on distributed profits will be 20%. Until now the corporate income tax rate was 15%. Dividends will henceforth be taxed at corporate level at a rate of 20%, therefore natural persons will no longer have to pay personal income tax on the dividends they receive.
As regards tax relief for donations to social organisations, enterprises will have a choice of three options: 1) reduce taxable profits by the donated amount, but not more than 5% of total profit in the previous year; 2) reduce the taxable profit by an amount not exceeding 2% of the total gross salaries paid to employees in the previous year from which the social tax has been paid; 3) reduce the tax on dividends by 75% of profits, but not more than by 20% of the calculated tax.
Furthermore, the new tax regime provides that, as of 1 July 2018, corporate income tax will no longer have to be paid in advance. A transition period of two years has been set for distributing previously accumulated profits, to which a 10% personal income tax will be applied.
Amendments to the microenterprise tax regime provide that companies operating within this regime will henceforth pay a uniform rate of 15% of turnover, whereas the maximum turnover will be reduced to EUR 40 000 per year from the current EUR 100 000. The amendments also stipulate that, as of 1 January 2019, employees of microenterprises will only be allowed to work in one microenterprise.
The turnover threshold at which economic operators must register with the State Revenue Service as value added tax payers will now be reduced from EUR 50 000 per year to EUR 40 000. The threshold for indicating a breakdown of VAT transactions will be reduced to EUR 150 from the current EUR 1430.
As of 2018, the reverse charge VAT will be applied to a broader range of industries and will henceforth include delivery of gaming consoles and home appliances, delivery of construction materials and metal products and related services.
A special law has been adopted to allow natural and legal persons to repay outstanding tax debts, stipulating that as of 1 January 2018 the State Revenue Service may dismiss accumulated late fees and fines.
In order to compensate unearned income in the state and municipal budgets due to the tax reform, as of next year, the gambling tax and excise duties will be increased. The price of cigarettes, alcohol and fuel will increase, the tax on gambling machines and tables will increase by 30%, and online gambling will also be taxed. Furthermore, as of next year, winnings exceeding EUR 3000 per year will be subject to the progressive personal income tax rate.
The new regulations stipulate an annual obligation for credit institutions and payment service providers to submit to the State Revenue Service information about natural persons, whose account turnover has exceeded EUR 15 000 in the previous year.
Saeima Press Service