Potential amendments to Cabinet Regulations on income tax returns

Between August 8 and August 22, 2025, the public was invited to provide feedback on the proposed amendments to the Cabinet of Ministers Regulation No. 662, dated October 30, 2018, titled “Regulations on Personal Income Tax Returns and Procedures for Their Completion” (hereinafter - Cabinet Regulations). These changes are necessary to align the Cabinet Regulations with the amendments to the Law On personal income tax (hereinafter – the Income Tax Law), which came into force on January 1, 2025 and April 25, 2025. While the results of the discussions have not yet been published, this article outlines the key changes currently under review.

1. Unified non-taxable minimum

The Income Tax Law no longer refers to the application of the monthly non-taxable minimum forecasted by the State Revenue Service (SRS), the taxpayer’s own forecasted monthly non-taxable minimum, or the differentiated annual non-taxable minimum. Instead, a unified (fixed) non-taxable minimum has been introduced, applicable to all employees regardless of gross income level: €510 per month in 2025, €550 in 2026, and €570 from 2027 onward. As the current version of the Cabinet Regulations and declaration forms still use the term “differentiated non-taxable minimum,” the proposed amendments suggest replacing it with the term “non-taxable minimum.”

2. Removal of references to line numbers in reporting Forms

The Cabinet Regulations include instructions for completing annual income tax return forms, which currently reference line numbers from the informational declaration titled “Statement of Amounts Paid to a Natural Person.” However, the Cabinet of Ministers Regulation No. 610, dated September 7, 2021, “Regulations on Information to Be Included in the Statement of Amounts Paid to a Natural Person,” no longer defines the structure or line numbering of this form, leading to confusion. To resolve this inconsistency and simplify the reporting process, the proposed amendments would eliminate references to line numbers from the Cabinet Regulations.

3. Clarification of the term for transferred eligible expenses

In Annex D4 of the annual income tax return, the line titled “Excess of eligible expenses over the prescribed limit from previous tax years” was lengthy and difficult to understand, often causing confusion among taxpayers. To simplify and improve clarity, it is proposed to rename this line to “Eligible expenses carried over from previous years.” This change would apply both to the Cabinet Regulations and then annual income tax return form.

4. Introduction of an additional 3% tax rate for high-income earners

The Income Tax Law has revised the progressive tax brackets from three tiers to two and introduced an additional 3% tax rate for annual income exceeding €200,000. The explanatory annotation of the amendments of the Cabinet Regulations under review states that this additional rate does not apply to non-residents. Moreover, the State Revenue Service (SRS) cannot reliably calculate the tax for individuals whose residency status changes during the year, due to the aggregation of various income types into a single annual figure in the tax return. Also, it states that asking taxpayers to separately declare each type of income would impose an excessive administrative burden and prolong the reporting process. To ensure accurate application of the additional rate and reduce complexity, the draft regulations include new subpoints outlining how to report income subject to the additional rate in Form D and how to calculate the tax itself.

It is important to note that the Income Tax Law does not explicitly define who is subject to the 3% additional rate. According to Article 2 of the Income Tax Law, both domestic (residents) and foreign (non-residents) individuals are considered to subject to tax in Latvia as defined by the Law on Taxes and Duties. Article 19 outlines the procedure for calculating income tax via the annual income tax return, which applies to both residents and non-residents with taxable income earned in Latvia. Article 20 provides certain exemptions from filing, including for non-residents. However, Article 20(4) specifies that these exemptions do not apply to taxpayers earning income from business activity or those subject to additional payments under the progressive rate in Article 15(2) or the new additional rate in Article 15.¹.

It is therefore reasonable to conclude that any taxpayer whose income exceeds the threshold stated in Article 15^.1 must submit an annual income tax return and pay the additional 3% tax. The SRS has informally indicated via phone that the 3% rate will not apply to non-residents and that this provision is expected to be clarified in separate Cabinet Regulations (it was not specified in which ones). It should be emphasized, however, that Cabinet Regulations cannot override the Income Tax Law by imposing or exempting tax obligations on specific taxpayers.

5. Clarification of the terms “additional payment” and “overpayment”

Terms “Additional Payment” and “Overpayment” used in the Cabinet Regulations and annual income tax return forms have often been unclear to taxpayers, leading to complaints and dissatisfaction with SRS tax collection procedures. To improve understanding, the following terminology is proposed:

• “Additional Payment” will be replaced with “Tax payable or the amount due to the state budget.”
• “Overpayment” will be replaced with “Overpaid tax or tax refund.”

6. Clarification of reporting procedures for foreign capital income

The Latvian Financial Industry Association has highlighted ambiguities with how foreign-sourced interest and dividend income should be reported in annual income tax returns. The issue stems from the requirement to report non-taxable foreign income three times in Annex D2 and inconsistencies regarding what should be included in Annex D11 when such income is taxable in Latvia. Specifically, D11 does not require information on the foreign currency and the date the income was received.

To improve clarity and reduce administrative burden, explanatory notes will be added to the titles of Annexes D11 and D2. Additionally, the number of fields in Annex D2 will be reduced by eliminating the requirement to report income and foreign tax withheld in foreign currency and the date of receipt of such income itself.

7. Separate line for solidarity tax component in Form D

The SRS frequently receives inquiries regarding the portion of the solidarity tax that is transferred to the personal income tax distribution account. To improve clarity with completing the annual income tax returns (Form D) and to enable taxpayers to verify and adjust the reported amount, a separate numbered line will be introduced in Form D specifically for this solidarity tax component.

8. Inclusion of foreign withholding tax and restrictions on crypto asset transactions

Until now, foreign withholding tax could only be reported in the capital gains declaration (Form DK) for the relevant reporting period. This meant that taxpayers who incurred net losses over the year were still required to submit Form DK solely to account for foreign tax withheld. Additionally, there was a lack of clear guidance on how to calculate the final result in the annual capital gains income adjustment declaration (Form GD) when both profits and losses were incurred from crypto asset transactions and other capital assets.

To reduce the administrative burden and ensure accurate tax calculations, Form GD will now include a dedicated field for reporting foreign withholding tax. Furthermore, the formulas for calculating overpayments have been refined to reflect limitations related to crypto asset transactions.

9. Terminology update: replacing “Virtual Currency” with “Crypto Assets”

Amendments to the Income Tax Law that came into effect on April 25, 2025, replaced the term “virtual currency” with “crypto assets.” To ensure consistency with the updated law, all relevant terminology will be revised accordingly in both the Cabinet Regulations and declaration forms.

10. Effective date of the amendments

The proposed changes will apply to the annual income tax return submitted for the 2025 tax year and subsequent tax periods.

Summary

Overall, these amendments aim to enhance the clarity and efficiency of the tax reporting process, aligning it with the latest version of the Income Tax Law. However, questions remain regarding the scope and legal basis for exempting non-residents from the additional 3% income tax rate, including where and how such exemptions will be formally addressed.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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