Located in the Baltic region of northeastern Europe, Latvia is a member of the EU, Eurozone, NATO, Organization for Economic Cooperation and Development (OECD), and the World Trade Organization (WTO). The Latvian government recognizes that, as a small country, it must attract foreign investment in order to foster economic growth, and thus has pursued liberal economic policies and developed infrastructure to position itself as a transportation hub. According to the latest World Bank’s Doing Business Report, Latvia remains ranked 19th out of 190 countries in terms of ease of doing business. As a member of the European Union, Latvia applies EU laws and regulations, and, according to current legislation, foreign investors generally possess the same rights and obligations as local investors. Any foreign investor is entitled to establish and own a company in Latvia and may acquire a temporary residence permit.
Latvia implemented a major overhaul of its tax code in 2018. To encourage investment, the tax reforms eliminated corporate taxes on all reinvested profits. Profits distributed or disbursed as dividends, or used for purposes not directly related to business development are taxed at a rate of 20 percent, up from 15 percent.
There is a perceived lack of fairness and transparency in the public procurement process in Latvia. A number of companies, including foreign companies, have complained that bidding requirements are sometimes written with the assistance of potential contractors or couched in terms that exclude all but “preferred” contractors. Foreign investors have praised the reforms in the area of taxation and education, but remain concerned about corruption and a non-transparent or non-responsive bureaucracy and judiciary. Nonetheless, Latvia provides several advantages to potential investors, including:
Regional Hub: Despite ongoing tensions between Russia and the European Union, Latvia remains a bridge between West and East, providing strategic access to both the EU market and to Russia and Central Asia. Latvia’s three ice-free ports are connected to the country’s rail and road networks and to the largest international airport in the Baltic region [Riga International Airport (RIX)]. Latvia is connected to both European and Central Asian road networks. The railroads connect Latvia with the other Baltic states, Russia, and Belarus, with further connections extending into Central Asia and China.
Workforce: Latvia’s workforce is highly educated and multilingual, and its culture promotes hard work and dependability. Labor costs in Latvia are the 4th lowest in the EU.
Competitive Tax system: Latvia ranked 2nd in the OECD 2018 International Tax Competitiveness Index. To further boost its competitiveness, the Latvian government has abolished taxes on reinvested profits and has established special incentives for both foreign and domestic investment. There are five special economic zones (SEZs) in Latvia: Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Rezekne Special Economic Zone, and Latgale Special Economic Zone, which provide various tax benefits for investors. Latgale Special Economic Zone covers a large part of Latgale, which is the most economically challenged region in Latvia, bordering Russia and Belarus.
Latvia’s GDP grew by 4.8 percent in 2018 – its fastest growth rate since 2011 and among the highest in the European Union. Commentators attributed the increased growth rate to rising global economic growth, which contributed to increased demand for Latvian exports, and increased investment from both the private sector and EU structural funds. The most competitive sectors in Latvia include woodworking, metalworking, transportation, IT, green tech, health care, life sciences, food processing, and finance. Recent reports suggest that some of the most significant challenges investors encounter in Latvia are demography, access to labor, and healthcare.
The non-resident banking sector has come under increased regulatory scrutiny in recent years because of inadequate compliance with anti-money laundering (AML) provisions. In the last three years, Latvia’s Financial and Capital Markets Commission has cancelled one bank’s operating licenses and has levied large fines against other banks for failure to comply with AML requirements. On February 13, 2018, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) identified Latvia’s third-largest bank as a “foreign bank of primary money laundering concern” and issued a proposed rule cutting the bank off from the U.S. financial system. On August 23, 2018, MONEYVAL, a Council of Europe agency that assesses member states’ compliance with AML standards, issued a report that found Latvia deficient in several assessment categories. The Government of Latvia has been working to restore confidence in its financial institutions and has proposed several pieces of reform legislation. MONEYVAL plans to assess this progress by the end of 2019.
The chart below shows Latvia’s ranking on several prominent international measures of interest to potential investors.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||41 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2018||19 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||34 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||USD 71 million||U.S. Bureau of Economic Analysis|
|World Bank GNI per capita||2017||USD 14,740||https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=LV|