Latvian Tax Regime for Stock Options

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In Latvia, the tax regime for employee stock options has been designed to encourage employers to use stock options as a tool for long-term staff motivation.
What are the main aims and objectives?

The Latvian tax regime for employee stock options in Latvia has been designed with several key goals in mind that collectively aim to foster a more dynamic and competitive economic environment. By providing tax incentives, the government seeks to encourage long-term employment relationships. This approach helps stabilize the workforce and ensures that employees are invested in the success of their employers over an extended period. Moreover, the tax benefits are particularly advantageous for start-ups and growing businesses that may lack the resources to offer competitive salaries compared to larger, established companies. By offering stock options, these smaller firms can attract and retain the skilled talent they need to innovate and expand.

How does the program work?

The Personal Income Tax Law was amended to exempt employee stock options from payroll taxes and also cover options by limited liability companies. As a result recipients will pay just Capital Gains Tax (CTG) which is set at 20% in Latvia. According to the regulations, employee stock options can be exempt from personal income tax (PIT) only if certain conditions are met:

  1. Stock options must be granted according to an employee stock option plan.
  2. There must be a minimum holding period of 12 months from granting to vesting.
  3. The individual can exercise the option within six months if employment is terminated without losing tax exemption
  4. Tax exemption will be available if there is no outstanding loan due from the employee to the company which has granted the option
  5. The employer must provide the tax authority with the prescribed information within two months after the grant date.

Since January 2021, the PIT treatment of stock options has been expanded to make it more accessible for employees to receive tax-favored treatment, even if they are not part of a publicly traded company. This change has made it possible for limited liability companies (SIA) to also offer stock options to their employees with tax relief.

However, if the stock options do not meet the criteria for tax-favored treatment, they are taxable at the time of vesting. In such cases, the Latvian employer is responsible for reporting the award for PIT and national social insurance contributions (NSIC) purposes and ensuring that the appropriate taxes are paid.

Furthermore, for stock valuation, new PIT rules allow the list of valuers to include both foreign and Latvian certified valuers, which is important for ensuring the accurate reporting of stock option compensation].

What is the overall cost?

There is currently no available information about the cost of the tax changes in terms of lost tax revenue.

How was it implemented?

The Personal Income Tax Law was amended on 17 December 2020, however, the evolution of Latvia's tax policy on employee stock options can be traced back to its broader economic reforms and integration into the global economy, especially following its accession to the European Union in 2004. As part of its commitment to creating a competitive business environment, Latvia has continuously revised its taxation laws to align with international standards and attract foreign investment.

Previously, stock options were received by employees of companies that belonged to large international groups. As a result of this tax rules that were introduced in 2013 had been shaped with large international organizations in mind. Under the previous regime the holding period was 36 months, the employee had to maintain employment for the full period and limited liability companies were not eligible.

What impact has been measured?

There is currently no available evidence on the impact of the tax changes.

What lessons can be learned?

Latvia’s legal framework for stock options is ranked as the most favorable in the world due to the low rate of taxation and the relatively short period before the shares can be exercised.

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom