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A new regime for taxation of employee stock options in Latvia: what will change?

Written by
COBALT, the full-service law firm in Latvia of choice for local and multinational businesses and global top law firms.
Authors
Sandija Novicka
Partner - Latvia
COBALT (Latvia)
Latvia
30.12.20
2
On 17 December 2020 amendments to the Personal Income Tax Law were approved by the Latvian Parliament. As a result of the amendments, the exemption from payroll taxes for employee stock options will also cover options issued by limited liability companies.

Despite regulatory hurdles, the number of Latvia–based employees that receive stock options is constantly increasing. 

In the past, stock options were typically received by employees of Latvian companies that belonged to large international groups, and tax rules for stock options that were introduced back in 2013 were tailored with large internationals in mind.  

Now the situation has changed. The main demand for stock-options comes from start-ups, as, at their early stage of development, they are typically unable to pay high or even middling salaries. Meanwhile, a number of stories about freshly minted start-up millionaires have been widely publicised.  

As a result, Latvian start-up companies are increasingly eager to use the stock option tool to attract and motivate employees. We are also seeing growing demand for stock option plans from other small and medium–sized companies, which have good chances for growth but are unable to increase salaries at the current time. 

Under the previous regime, an employee’s income from stock options is exempt from payroll taxes in Latvia provided that:  

  • The stock options were granted pursuant to a stock option plan.  
  • The holding period of the options (the period between when the option was granted and when it was exercised, i.e., by acquiring shares) is at least 36 months.  
  • During the entire period from the date of grant until the date of exercise the individual remained employed either by the company that granted the stock option or by an affiliate.  
  • the Revenue Service is notified about the grant of stock options no later than two months from the date of grant or the date at which the employee can apply for the stock options. 

 

The majority of start-ups and small and medium–sized companies could not benefit from this tax exemption, as the vast majority of them are incorporated as limited liability companies, and the Ministry of Finance and the Revenue Service interpreted the law to mean that the exemption is available only where the stock options are issued by a joint stock company. This applied even where the issuer of options was incorporated abroad. 

What will change?  

The amendments approved on 17 December extend the tax exemption to options issued by limited liability companies. The minimum holding period is reduced from 36 months to 12 months. In addition, it will be possible to exercise the option within six months after employment is terminated without losing the tax exemption. 

According to the amendments the tax exemption will be available, if at the moment of the exercise of the option there is no outstanding loan due from the employee to the company (its affiliate) which has granted the options. 

The adopted amendments will significantly improve competitiveness of Latvia. This change is particularly relevant for start-ups that usually are incorporated in the form of limited liability companies. 

The amendments still need to be promulgated by the president of Latvia in order to become effective.