What global businesses need to know about payroll in Latvia

If you want to do business in a place that’s straight-talking and serious about their work, then Latvia could be the place for you. The country has a reputation for keeping its business meetings short and to the point, while its population of just under two million don’t normally hesitate to speak their mind.

Latvia’s economy surged after it joined the European Union in 2004, but this progress was suddenly halted by the global economic crisis of 2008 and 2009. Since then, it has gradually recovered – adopting the euro in 2014 – and now has an annual GDP of around $40 billion. Its economy is fairly service-heavy at 73%, but has been hit in more recent times due to its NATO membership and neighboring Russia being a major trading partner.

This guide gives you all the basic information you need from payroll and employment perspectives, and highlights some of the areas where you may need the help of external expertise.

Getting Started

The most likely option for setting up a business in Latvia is a limited-liability company, which comes with a minimum share capital requirement of €2800 (approx. £2400; $3000). 

To begin, you will need a Memorandum of Association (known as Decision on Foundation) and Articles of Association; as these documents must be in Latvian, you should source the help of local legal professionals for this. Then you will need to set up a temporary bank account in Latvia into which the capital can be transferred.

With this in place, you can submit documents to the Register of Enterprises (this can be done online, although not yet in English at the time of writing). Once your registration is confirmed, you can then open a full corporation bank account, and register with the State Revenue Service for tax, social security and VAT.

Employment Considerations

Collective bargaining is alive in the public sector, but you’ll find very little union influence in the private sector. You will need employee contracts drawn up for all workers that stipulate the nature of the employee/employer relationships. 

Latvia’s standard working week is eight hours per day, Monday to Friday, for a 40-hour week that’s in line with much of the rest of Europe. However, some hazardous jobs are limited to seven hours per day and 35 hours per week. Any work above these levels, and any work on public holidays, is considered overtime and should be paid at 200% of the normal rate.

Notice periods are generally one month. Probation periods are normally three months, but can be extended up to six months through collective bargaining; notice periods during probation are three days.

Compensation, Bonuses & Severance

As of January 1 2024, the minimum wage in Latvia is €700 per month (approx. £600; $750). Three increases since the start of 2021 mean that this rate is around 63% higher than it was at the start of the COVID-19 pandemic, and further increases cannot be ruled out.

Bonuses, raises, and additional compensation are generally agreed to when contracts are first drawn up. There are no rules requiring raises or bonuses, though most companies will reward an employee’s loyalty with additional consideration on a yearly basis. 

Severance pay starts at one month’s salary for employees with less than five years of service, rising to two months after five years, three months after ten years, and four months after 20 years.

Tax and Social Security

Income tax in Latvia is fairly simple to understand as there are only three bandings. The first of 20% applies to the first €20,004 earned each year (approx. £17,100; $21,600), after which a rate of 23% applies. The highest rate of 31% applies to earnings above €78,100 per year (approx. £66,800; $84,400).

Corporation tax in Latvia currently runs at 25%, which represents an increase on previous lower rates. The standard VAT rate is 21%, with a reduced rate of 12% applicable to a number of goods.

Social security contributions are 23.59% by employers, and 10.5% by employees. These rates reduce to 20.77% and 9.25% respectively for employees who are eligible for retirement.

Holidays and Leave

Paid leave entitlement in Latvia starts at four weeks for those employees who have at least six months of service. Three further days are granted to employees with three children under 16, or with a disabled child under 18. One further day is given to employees with one or two children under 14. At least two weeks of the holiday should be taken in one continuous block. There are 15 days of public holidays each year in Latvia, and holidays that fall on weekends are often moved to the following Monday for the paid time off. 

Maternity leave is 16 weeks, with eight weeks on either side of the birth. Paternity leave is ten days, and should be used within the first six months post-birth. Social security covers both types at 80% of normal salary.

Parental leave was reformed for parents of children born after January 1 2023, and parents have two choices:

• The 13-month option: nine months taken by one parent during the first year post-birth (inclusive of maternity leave); two months for each parent used at any time before the child turns eight. All time off is paid by social security at 60% of salary.
• The 19-month option: 15 months taken by one parent during the first year post-birth (inclusive of maternity leave); two months for each parent used at any time before the child turns eight. All time off is paid by social security at 43.75% of salary.

Anyone who works through their parental leave entitlement is still entitled to receive half the benefits.

Sick pay is covered by employers at 75% of salary for the first three days, then 80% for the following seven. Social security picks up the tab thereafter.

In Summary

While Latvia has a lot of positives going for it as a destination for Eastern European expansion, there is a lot of payroll complexity. The rules around maternity and parental leave, and the need to conduct the business set-up process in Latvian, means it’s essential that you can access Latvia-specific expertise every step of the way. As well as using Latvian legal professionals, we would also strongly recommend partnering with a global payroll expert, so you can make sure your payroll team is on the right track.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.