A New Regime For Taxation Of Worker Inventory Choices In Latvia: What Will Change? – Tax


A New Regime For Taxation Of Employee Stock Options In Latvia: What Will Change?

05 January 2021

lus Laboris

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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

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

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

  • The stock options were granted pursuant to a stock option
  • 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

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

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

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. 

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


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