Small businesses have it better in Latvia than Estonia?

In comparison to Estonia - Latvia often bears the brunt of most comparisons with the neighboring country - Latvia is a tax paradise for small businesses, according to a story by LTV's Forbidden Methods (Aizliegtais paņēmiens) that aired Monday. 

In the episode, journalists theory-crafted making a company that produces construction game sets in an attempt to find out which of the two countries has a smaller tax burden.

Projected income and expense

The company the journalists "set up" would sell 40 game sets a month, each with a €100 price tag. That would put the company's income at €4,000 a month or €48,000 annually.

The company wouldn't have to register as a payer of the Value-added tax (VAT) as the threshold for that stands at €50,000; this means that they don't have to charge their clients the tax - currently 21% - for their sets.

Three people would make the sets, including the owner, who would design and sell them. The owner would pay himself €500 a month after taxes and hope to top it off with extra income to pay himself dividends.

The company would also employ a master craftsman for €700 a month, with the third person, who would color the game sets, outsourced from another company for €500 a month.

Manufacturing expenses, including packaging, materials, leasing equipment, renting an office, etc. would come to €1,000.

Projected profit for the company as a micro enterprise in Latvia

A micro enterprise, as LSM reported in the piece on setting up a company in Latvia, must pay a flat tax rate of 15% from the turnover. The tax includes social security payments that employers make on behalf of their employees.

Income and expenses as a micro enterprise

  • Wages - €1,200 a month/€14,400 a year;
  • €6,000 a year for outsourcing;
  • Manufacturing expenses - €1,000 a month/€12,000 a year;
  • Taxes - €7,200 a year (from the planned €48,000 turnover);
  • Expenses - €39,600;
  • Profit - €8,400.

A 10% tax applies to micro enterprise profits when they're paid as dividends, so the total net profit would stand at €7,560 or €630 a month.

The company would pay a total of €8,040 in taxes. 

Projected profit for the company as a regular enterprise

Employment taxes are much higher for regular enterprises. In this scenario, the employees have no dependents.

  • Wages - €2,102 a month/€25,224 a year;
  • €6,000 a year for outsourcing;
  • Manufacturing expenses - €1,000 a month/€12,000 a year;
  • Expenses - €43,224;
  • Profit - €4,776.

The corporate income tax (15%) applies to profits and a further 10% tax on dividends. This leaves the owner with a net profit of about €3,600 annually or €300 a month.

Under this scenario, a regular company would pay a total of €11,934 in taxes. 

Projected profit for the company in Estonia

Estonia doesn't treat smaller companies any differently, so everybody has the same taxes. Labor expenses are slightly lower in Estonia.

  • Wages - €1,957 a month/€23,484 a year;
  • €6,000 a year for outsourcing;
  • Manufacturing expenses - €1,000 a month/€12,000 a year;
  • Expenses - €41,484;
  • Profit - €6,516.

If the owner wants to cash out the money, a tax of 20% applies, meaning the company would have an annual net profit of €5,213 or €434/month.

Here's how the projected earnings for the owner would look like in Latvia and Estonia:

Latvia (micro enterprise): €1,130 a month (€500 salary, €630 profit)

Latvia (regular enterprise): €800 a month (€500 salary, €300 profit)

Estonia (regular enterprise): €934 a month (€500 salary, €434 profit)

VAT in Estonia doesn't favor small businesses

A bid difference between Latvia and Estonia is that up north a company has to register as a VAT payer if the turnover is above €16,000 while the threshold in Latvia is €50,000.

This means that the company would have to apply the 20% VAT to its sales, while it wouldn't have to in Latvia.

Consequently, in Estonia it would either have to sell a single set for €120 instead of €100 or to sell for €100 but reduce the income per one sold set to €83 a month. This would actually make the Estonian company unprofitable.

Mid-sized companies

The show also theory-crafted taxes for mid-sized companies using an existing Latvian company as an example.

Last year it had a €424,000 turnover and employed six people, with the total expenses standing at €320,000 and profit before tax at €25,000.

The company paid each employee €625 a month in wages after taxes. The company pays €48,400 in VAT (21%) annually in Latvia but would pay €46,300 (20%) in Estonia.

The labor taxes, including social security payments, are €33,300 in Latvia and would be €28,600 in Estonia.

In Latvia, the annual profit for a company like this would be at €19,300.

While its annual profit in Estonia would be €23,900.

This would measure up to a difference of about €4,600 or €380 each month.

Thus it could be said there's little difference between Latvia and Estonia as concerns taxes for mid-sized companies.

In the same episode, however, Aizliegtais Paņēmiens also uncovered several Latvia's State Revenue Service officials as unable to offer information about Latvia's tax system in English. 

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