Business forms in Latvia
Most businesses in Latvia are carried on by limited liability (SIA) or stock companies (AS) with share capital. A limited liability company is a less onerous form suitable to small and medium size businesses. There are two forms of stock company: private and public. Only a public stock company may offer its shares to the public.
The overwhelming majority of Latvian businesses are launched as limited liability companies. Foreigners who consider commencing business in Latvia also frequently prefer this form of entrepreneurial activity. There are no restrictions on the ownership of Latvian companies by foreigners.
A company is a distinct, legal entity from its owners, the shareholders, who exercise ultimate control over the management of the company through the election of managers. Companies are afforded all the rights to own property and the rights to carry on business as are enjoyed by a natural person.
Foreigners may carry out business in Latvia in the form of a limited liability company (SIA), a stock company (AS) or through a branch of a foreign company. It is also possible to set up a representative office, which however has no rights to carry out entrepreneurial activities.
A joint venture is a form of business organization that is based on a contract. It is not recognized as a distinct and separate entity, and as a result, it cannot sue or be sued. The joint venture agreement will delineate the respective rights and liabilities of the joint venturers, including their right to bind other parties.
In some cases, the decision to expand into Latvia may be realized without actually having the foreign business entity carry on business in Latvia. The granting of a franchise or the entering into of a distribution contract or agency agreement in Latvia does not, in and of itself, constitute carrying on business in Latvia. Accordingly, it is often appropriate for a foreign entity to consider the use of a Latvian agent, distributor or master franchise, or to expand its business operations into Latvia.
Branch vs. subsidiary
Branches of foreign companies in Latvia have no legal personality. However a branch of a non-resident company is treated by the law as a separate Latvian taxpayer subject to the same reporting and audit requirements as are applied in respect of local companies.
Profits of a Latvian branch of a non-resident company are taxed on a normal assessment basis at the same rate as the profits of a resident company. There is no withholding tax on the remittance of taxed branch profits to the head office, whilst a withholding tax may be imposed on the remittance of dividends out of taxed profits from a Latvian subsidiary. The branch structure appears to have one more potential advantage. This structure can be useful for a new business where start-up losses are expected, provided that these losses can be set off for tax purposes against profits arising in the country of residence of the head office.
No tax incentives are available to branches. Taxable base of branch is determined when a deduction has been made for allowable expenses as allowed pursuant to specific regulations. The list of deductible expenses as applied to branches is smaller in comparison with those upheld in respect of subsidiaries.
Suggested advantages of having a subsidiary in Latvia are limited liability (the Latvian subsidiary’s creditors may not have access to the foreign shareholder’s funds) and possible requirements for greater disclosure of foreign operations in the branch structure.
Management of the company
Latvian company law calls for the creation of three-tier governing structure – the shareholders’ meeting, the management board and the supervisory board. The latter organ, however, is optional for limited liability companies. The law sets out the powers vested to the shareholders‘meeting and transfers all other powers to the management board. The supervisory board represents shareholders between the shareholders‘meetings and controls the management board. The right of representation of board members – the authority to represent the company jointly or severally must be explicitly stated in the statutes.
Every manager of a company is required to act honestly and in good faith with a view to the best interests of the company when exercising his duties. In addition, every manager must utilize the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances. Managers are also required to comply with the legislation, company’s statutes and shareholders’ resolution. In certain circumstances, managers will attract personal liability.
Shares and Shareholders
Both limited liabilities and stock companies are vested with the status of a legal entity, distinct from the personality of their shareholders. Shares in a company represent a portion of corporate capital and entitle the holder to a proportional right to corporate assets on dissolution. There is no minimum or maximum amount of shares that a company is allowed to issue, unless otherwise specified in the incorporating documents. “One shareholder” companies are also permissible in Latvian law.
Stock companies (AS) may issue both registered and bearer shares as well as bonds while a limited liability company (SIA) may issue just registered shares. Statutes of the stock company may provide for the conversion of registered shares into bearer ones and vice versa. A stock company is generally entitled to issue different classes of shares which may confer on their holders different rights, such as voting rights, rights to fixed dividends, and a right of priority on winding up, etc.
Stock companies are entitled to issue non-voting preference shares subject to the provisions of the statutes.
The minimum requirements for the registered share capital in limited liability and stock companies are set at LVL 2,000 and LVL 25,000 respectively. Higher capital requirements apply in respect of stock companies operating e.g. in banking and insurance. Shares in any company may be paid up in money or money’s worth (including intellectual property). Investments in kind in most cases have to be evaluated by independent experts.
A company is formed by filing certain prescribed documents with the Companies’ registry. The registration procedure would normally be carried out on behalf of the foreign investor by lawyers or other professional advisers.
The cost of establishing a Latvian company is relatively inexpensive.
Legal fees vary depending upon the complexity of the company’s structure. The incorporation of a routine Latvian limited liability company can be accomplished very quickly. The company comes into existence on the date of issue of a certificate of incorporation by the registrar. Simultaneously, the company is registered as a taxpayer with the State Revenue service. A separate registration with the VAT taxable persons’ register is required where necessary.
The name of the company or Firma is strictly regulated in order to avoid names that are too general or misleading. There is a screening process and it is possible to pre-clear a name prior to application for incorporation.
Generally, an application for registration must be submitted to the Registrar within two weeks of the foundation meeting. The registration is performed within three working days.
All the documents are to be filed with the Registry in Latvian. Documents in other languages have to be translated and verified by a Notary Public. Public documents issued abroad must be legalised. Under bilateral Legal Assistance Treaties documents executed in Belarus, Estonia, Kirghizia, Lithuania, Russia, Moldova, Poland and Uzbekistan do not need legalisation.
All company documents filed with the Registrar are open to public inspection at a nominal charge. Copies of the relevant company files may be inspected personally at the Companies’ registry office.
Certain business activities require a special permit to be obtained from a relevant state or municipal authority. The permits are issued for the time period not shorter than one year and not longer than five years. License can be issued for particular occasion, as well. License fees range widely.
Business in Latvia is governed by the Commercial Code effective 1 January 2002. Strongly influenced by German law, the Code has been accepted in order to bring Latvian commercial law in line with European Union directives. A number of areas of commercial law are the subject of special enactments, e.g. the Bills of Exchange Act, the Competition Act, the Concerns Act, etc.
Protection of creditors’ and minority shareholders’ interests has been given the utmost attention by the Code especially where reorganisation of the company or the reduction of capital takes place.
The Code contains provisions regarding status of merchants, commercial transactions, the commercial register, form of business names and their registration, special types of commercial agency, commission agents. For the first time detailed rules on dissolution, liquidation and reorganisation of commercial partnerships and companies are stipulated.
The provisions of the Code apply to merchants and their commercial transactions. A merchant is defined in the Code as a sole trader, a commercial partnership (limited or unlimited), or a company. Both companies and partnerships invariably have merchant status because of the legal form of their organisation. A sole trader must register as a merchant if he/she meets certain requirements. The status of a merchant is acquired upon registering in the Commercial register.
One of the legal institutes re-introduced by the Code is “Firma” or business name used by a merchant in business. The Firma must correspond to actual activities when it is first registered. The Code abolishes limitations with respect to the use of foreign languages for Firma. Firma must be clearly distinguishable from every other registered Firma.
Another novella introduced by the Code is the widest form of commercial agency – a Prokura. A Prokura empowers the procurator to undertake all manners of transactions related to the management of a business. A Prokura normally is granted to the trusted person who needs not be an officer or employee. A Prokura may be granted by the sole trader or management of a company and is not transferable, but revocable at any time. Both grant and revocation of the Prokura must be entered in the commercial register.
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