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

• Published date: 05 January 2021
• Subject Matter: Corporate/Commercial Law, Tax, Family and Matrimonial, Corporate and Company Law, Income Tax, Wills/ Intestacy/ Estate Planning
• Law Firm: lus Laboris
• Author: Ms Sandija Novicka (COBALT)

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 companies.

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

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 that:

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