Attitude toward Foreign Direct Investment
The Latvian government actively encourages foreign direct investment (FDI) and works with investors to improve the country's business climate. To strengthen these efforts, the Latvian government introduced the POLARIS process, a mechanism designed to create an alliance between the public sector, including national and local governments; the private sector, covering both national and international companies; and major Latvian academic and research institutions to encourage FDI and spur economic growth. The Latvian government also meets annually with the Foreign Investors Council in Latvia (FICIL), which represents large foreign companies and chambers of commerce, with the express purposes of improving the business environment and encouraging foreign investment. The Coordination Council for Large and Strategically Important Investment Projects is chaired by the Prime Minister. In 2015, FICIL published its Sentiment Index 2015 – a survey of current foreign investors on the investment climate in Latvia. It is available at: http://www.ficil.lv/f/FICIL%20Sentiment%20Index%20Report%202015.pdf
Other Investment Policy Reviews
The Organization for Economic Cooperation and Development (OECD) published an Economic Survey of Latvia in February 2015 (http://www.oecd.org/economy/surveys/economic-survey-latvia.htm). Although there have been no trade policy reviews specifically involving Latvia, the WTO completed its latest review of the European Union in July 2015. (https://www.wto.org/english/tratop_e/tpr_e/tp417_e.htm). Additionally, in January 2016, the Latvian government signed an agreement with the World Bank to conduct a review of the current tax system. Previously, the World Bank carried out a similar review of Latvia’s port infrastructure in November 2013.
Laws/Regulations on Foreign Direct Investment
Incoming foreign investment in Latvia is regulated by the Commercial Law. The court system is generally viewed as being fair to the interests of foreign investors. The website of the Latvian Investment and Development Agency is a helpful resource for navigating the rules and procedures governing foreign investment. (http://liaa.gov.lv/invest-latvia).
The official website of the Latvian Commercial Register – http://www.ur.gov.lv/ – is not available in English and thus the online business registration process can be difficult for foreign companies to navigate. The World Bank’s Doing Business project has done a detailed review of the business registration process in Latvia, which is available here: http://www.doingbusiness.org/data/exploreeconomies/latvia/starting-a-business.
In addition, the Latvian Investment and Development Agency has prepared a guide with step-by-step information on starting a business in Latvia: http://liaa.gov.lv/invest-latvia/investor-business-guide/operating-environment. The agency prides itself on the fact that a business can be registered in Latvia in a single day.
Latvia follows the definitions of micro, small, and medium enterprises (MSMEs) set by the European Commission (http://ec.europa.eu/growth/smes/business-friendly-environment/sme-definition/index_en.htm). Based on these definitions, Latvia has established a special tax regime for micro businesses. A micro business tax payer may be a self-employed person or a limited liability company with individual shareholders; its turnover in a calendar year must not exceed 100,000 euros; and the number of its employees at any time cannot exceed five. The tax rate charged covers social security contributions, personal income tax, and business risk tax for employees, and includes corporate income tax if the micro business taxpayer is a limited liability company. The maximum remuneration per employee (including the owner) is 720 euros a month. This special tax regime is available to foreign nationals and MSMEs.
Latvia has established a National Industrial Policy (NIP), which aims to promote structural changes in the economy, to foster the manufacture of goods and services with higher added value. More information on the NIP is available here: https://www.em.gov.lv/en/sectural_policy/industrial_policy/.
In addition, Latvia has identified the following sectors as having the highest potential for new investment: woodworking, metalworking and mechanical engineering, transport and storage, information technology (including global business services), green technology, health care, life sciences, and food processing. The information is disseminated to the general public and potential investments via the Latvian Investment and Development Agency’s official website (http://liaa.gov.lv/invest-latvia/sectors-and-industries), and through its representative offices (http://liaa.gov.lv/contacts/representative-offices).
Limits on Foreign Control and Right to Private Ownership and Establishment
Latvia reserves the right to discriminate against foreign investors in these areas: control of defense industries; manufacturing and sale of narcotics, weapons and explosives; control of newspaper, television and radio broadcasting stations, or news agencies; recovery of all renewable and non-renewable natural resources including resources found on the continental shelf; fishing; hunting; air transportation services and port management; ownership and control of land; brokerage or real property; gambling and lotteries; private security and surveillance services; auditing services; the cross-border provision of banking and financial services; and the cross-border provision of insurance and private pension services.
With these limited exceptions, physical and legal persons who are citizens of Latvia or of other EU countries may freely purchase real property. In general, physical and legal persons who are citizens of non-EU countries (“third-country nationals”) may also freely purchase developed real property. However, third-country nationals may not directly purchase certain types of agricultural, forest, and undeveloped land. Such persons may acquire ownership interest in such land through a company registered in the Register of Enterprises of the Republic of Latvia, provided that more than 50 percent of the company is owned by: (a) Latvian citizens and/or Latvian governmental entities; and/or (b) physical or legal persons from countries with which Latvia signed and ratified an international agreement on the promotion and protection of investments on or before December 31, 1996; or for agreements concluded after this date, so long as such agreements provide for reciprocal rights to land acquisition. The United States and Latvia have such an agreement (a bilateral investment treaty in force since 1996). In addition, foreign investors can lease land without restriction for up to 99 years. As of May 1, 2014 changes in the Law on Land Privatization in Rural Areas allow EU citizens to purchase Latvia’s agricultural land and forests. Other restrictions apply (to both Latvian citizens and foreigners) regarding the acquisition of land in Latvia's border areas, Baltic Sea and Gulf of Riga dune areas, and other protected areas.
The Latvian constitution guarantees the right to private ownership. Both domestic and foreign private entities have the right to establish and own business enterprises and engage in all forms of commercial activity, except those expressly prohibited by law.
The Law on Privatization of State and Municipal Property governs the privatization process in Latvia. The Latvian Privatization Agency (LPA), established in 1994, uses a case-by-case approach to determine the method of privatization for each state enterprise. The three allowable methods are: public offering, auction for selected bidders, and international tender. For some of the largest privatized companies, a percentage of shares may be sold publicly on the NASDAQ OMX Riga Stock Exchange. The government may maintain shares in companies deemed important to the state's strategic interests. Privatization of small and medium-sized state enterprises is considered to be largely complete.
Latvian law designates six State Joint Stock Companies that cannot be privatized: Latvenergo (Energy and Mining), Latvijas Pasts (Services), International Airport Riga, Latvijas DzelzceIs (Automotive and Ground Transportation), Latvijas Gaisa Satiksme (Aerospace and Defense), and Latvijas Valsts Mezi (Forestry). Other large companies in which the Latvian government holds a controlling interest include airBaltic (Travel), Lattelecom (Information and Communication), and Latvian Mobile Telephone (Information and Communication). While Latvia sold a 20 percent stake in national carrier airBaltic to a German investor in early 2016, the government to date has not been successful in finding a strategic investor for the airline.
Screening of FDI
In keeping with EU and World Trade Organization requirements, there is generally no screening of foreign investment. However, in cases of greenfield investment requiring licenses regulated by the Public Services Regulatory Commission, or when the state offers tax exemptions or other concessions, significant due diligence measures may be applied. Tender regulations for greenfield investment projects are prepared on a case-by-case basis.
Business activities are regulated by the Commercial Law, which serves as the legal framework for establishing, registering, operating, expanding, and closing a business in Latvia. The law specifies five possible business legal entities: individual merchants, partnerships (general and limited), and corporations (joint stock and limited liability companies). Legislation that went into effect in 2010 offers special tax treatment for qualifying micro enterprises. Latvia has established the Large and Strategically Important Investment Project Coordination Committee to ensure the successful implementation of key investment projects and to organize cooperation between governmental institutions, municipalities, educational institutions, special economic zones, and free ports. The Committee is led by the Prime Minister as the chairman of the board and the Minister of Economics as the deputy chairman.
The competitive environment is supervised by the Competition Council (CC). More information can be accessed at: http://www.kp.gov.lv/en