Latvia Investment Climate 200918 November 2009
by Ina Dimireva -- last modified 18 November 2009
The Latvian government actively encourages foreign direct investment, and works with investors to improve the country's business climate. In keeping with European Union and World Trade Organization requirements, there is no screening of foreign investment. The government continually strives to bring Latvian economic institutions, laws and regulations into conformity with EU directives.
Openness to Foreign Investment
Business activities are regulated by the Commercial Law, which serves as the legal framework for establishing, registering, operating and closing a business in Latvia. The law specifies the five possible business legal entities: individual entrepreneurs, partnerships (general and limited) and corporations (joint stock and limited liability companies).
The Commercial Law, which came into force on January 1, 2002, provides protection for creditors, stipulates accountability requirements for managers, requires off-shore companies to disclose their shareholders, and prohibits companies from using cash reserves to purchase their own shares.
Land may be purchased freely by citizens of the EU, governmental entities, and companies registered in the Register of Enterprises of the Republic of Latvia, provided that more than 50 percent of the company is owned by:
- Latvian citizens and/or Latvian governmental entities; and/or
- Physical or legal persons from other countries with which Latvia has signed and ratified an international agreement on the promotion and protection of investments by 31 December, 1996, or for agreements concluded after this date - in cases when such agreements provide for reciprocal rights to land acquisition. US citizens and companies also are entitled to these rights.
Physical and legal persons who do not fit into the above categories can obtain land and property (except territories in Latvia's border area, dune areas of the Baltic Sea and the Gulf of Riga, as well as protected areas of other public waters, land of state nature reserves, and land usable for agriculture and forestry) in accordance with the general plan of that particular region. In addition, foreign investors can lease land for up to 99 years.
Privatization of small and medium state enterprises is virtually complete.
The Law on Privatization of State and Municipal Property governs the privatization process in Latvia. The Latvian Privatization Agency (LPA, www.lpa.bkc.lv), established in 1994 to carry out the privatization program, uses a case-by-case approach to determine the method of privatization for each state enterprise. The three major methods are public offering, auction for selected bidders, and international tender. For some of the largest companies, a certain percentage of shares are sold publicly on the Riga Stock Exchange. The government can decide to maintain a certain number of shares in companies that are deemed important to the state's strategic interests.
In case of greenfield investment, the government does not screen investment projects except in special cases, when a certain type of license is required (in sectors regulated by the Public Services Regulatory Commission) or the state is prepared to offer considerable tax exemptions, or other concessions. Tender regulations for greenfield projects are prepared on a case-by-case basis.
Conversion and Transfer Policies
Latvian law provides for unrestricted repatriation of profits associated with an investment. Investors can freely convert local currency into foreign exchange at market rates, and have no difficulty obtaining foreign exchange from Latvian commercial banks for investment remittances. Exchange rates and other financial information can be obtained at the Bank of Latvia's web site at www.bank.lv.
Expropriation and Compensation
There have been no cases of arbitrary expropriation of private property by the government of independent Latvia. Expropriation of foreign investment is possible in a very limited number of cases specified in the law on expropriation of real property. Compensation must be paid in full within three months of the date of expropriation. If the owner of the property claimed by the government deems the compensation inadequate, the owner has the right to appeal to a Latvian court.
The 1993 Law on Judicial Power introduced a three-tier court system. Currently, judicial power is exercised by town, city and rural districts; regional courts; and the Supreme Court. In addition, the Constitutional Court reviews the compatibility of decrees and acts of the President of the Republic, the government and local authorities with the constitution and the law. Unless otherwise stipulated by law, district courts are the courts of first instance in all civil, criminal and administrative cases. Regional courts are vested with the authority of appellate review for district court verdicts. In addition, regional courts are courts of first instance for cases specified in the Civil Code. Such cases include claims exceeding LVL 15,000 (approximately USD 30,000), adoption cases, cases related to immovable property and serious criminal offenses. The Supreme Court consists of the Senate and two Chambers of Court: the Civil Chamber of Court and the Criminal Chamber of Court.
Judges are appointed by the Minister of Justice and their appointments are confirmed by parliament after two years of professional practice. After the parliament confirmation, judges have absolute security of office, which can only be called into question if they have committed a crime. Supreme Court justices are determined by the parliament, upon the recommendation by the Chief Justice.
City and regional courts are administered by the Ministry of Justice (www.tm.gov.lv). The Supreme Court and Constitutional Court are independent. However, improvements in the judicial system are needed to accelerate the adjudication of cases, to strengthen the enforcement of court decisions, and to upgrade professional standards.
A register of arbitration institutions was established in 2005. At present, there are 156 arbitration institutions registered in Latvia (www.ur.gov.lv). In most commercial agreements today, the parties opt to refer their disputes to arbitration rather than to the Latvian courts.
The Civil Procedure Law, which came into force on March 1, 1999, contains a section on arbitration courts. This section was drafted on the basis of the UNCITRAL model law, thus providing full compliance with international standards. The law also governs the enforcement of rulings of foreign non-arbitral courts and foreign arbitrations.
Latvia joined the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and thus judgments of foreign arbitral courts that are made in accordance with the convention can be enforced in Latvia. In addition, the civil procedure law stipulates that the judgments of foreign non-arbitral courts can be enforced in Latvia.
There are two laws governing bankruptcy procedure: the Law on Insolvency that came into force on January 1, 2008; and the Law on Credit Institutions, which regulates bankruptcy procedures for banks and other financial sector companies, which came into effect in 1995. The Law on Insolvency assists the enterprise or natural person to become solvent again and to protect the creditor's interests by applying reconciliation, rehabilitation or bankruptcy procedure in case of limited solvency or insolvency. It also provides for insolvency of natural persons, not only legal entities. According to the Law on Insolvency, the State Revenue Service and local governments will no longer have privileged rights in the insolvency process. However, creditors have one year to submit claims to recover debts, or risk losing creditor status. The Law on Credit Institutions and the Law on Deposit Insurance regulate bank bankruptcy procedures and establish a similar order of priority for claims.
The Latvian government extends national treatment to foreign investors. Therefore most investment incentives and requirements apply equally to local and foreign businesses.
However, the Latvian government has prepared a series of incentive schemes for investment, both foreign and domestic, in several free ports, special economic zones, and in special support regions (see www.liaa.gov.lv). Two other incentive packages apply to companies producing hi-tech products and to projects that have received the status of a "state-supported investment". In addition, all investors are exempt from VAT and customs duties on fixed assets, which are imported as long-term investments.
Except for specific requirements for investors acquiring former state enterprises through the privatization process, there are no performance requirements for a foreign investor to establish, maintain or expand an investment in Latvia. In the privatization process, performance requirements for investors, both foreign and domestic, are determined on case-by-case basis. Typically, those include requirements to maintain a certain employment level and to invest a certain amount of money into the company. The privatization requirements are subject to negotiation. The Privatization Control Department at the Latvian Privatization Agency reviews the progress of each privatized company over the three years following privatization. If an investor does not meet the requirements specified in the privatization regulations, the LPA breaks the agreement with the investor. As the requirements are easily measurable, LPA decisions in such situations are reasonably transparent and fair.
Under Latvian law, foreign citizens can enter Latvia for temporary business activities for up to three months in a half-year period. For longer periods of time, foreigners are required to obtain residence and work permits.
Right to Private Ownership and Establishment
The Latvian constitution guarantees the right to private ownership. Both domestic and foreign private entities have the right to establish and own business enterprises and engage in all forms of commercial activity, except those prohibited by the law. Private enterprises have competitive equality with public enterprises with respect to access to markets and business operations.
Protection of Property Rights
In the 17 years since regaining independence, Latvia has restored full legal rights to property.
In an effort to harmonize its legislation with EU and WTO requirements, Latvia has established a legal framework for the protection of intellectual property. In 1993, the Latvian Parliament passed legislation to protect copyrights, trademarks and patents. In 2000, the Parliament adopted a new Law on Copyrights. The law strengthens protection of software copyright, and neighboring rights. Foreign owners may seek redress for violation of their intellectual property rights through the appellation council at the Latvian Patent Office; court action can also be sought in such cases. In copyright violation cases the interested party can request through the court that use of the pirated works be prohibited, that pirated copies be destroyed and that remuneration for losses be paid (including for lost profits). The criminal law stipulates penalties for copyright violations.
In July 1994, the United States signed a Trade and Intellectual Property Rights Agreement with Latvia. Latvia has been a member of the World Intellectual Property Organization (WIPO) since January 1993, a member of the Paris Convention since September 1993, a member of the Berne Convention since August 1995, and the Geneva Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of their Phonograms since August 1997. In addition, the Latvian government has amended all relevant laws and regulations in order to comply with the requirements of the WTO TRIPS agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights), to which Latvia acceded by joining the WTO.
Latvia has also acceded to the following international treaties and agreements:
- Patent Co-operation Treaty (September 1993);
- Budapest Treaty on the International Recognition of the Deposit of Micro-organisms for the Purposes of Patent Procedure (December 1994);
- Madrid Agreement on International Registration of Trade Marks (January 1995);
- Nice Agreement on International Classification of Goods and Services for the Purposes of Trade Mark Registration (January 1995);
- Rome Convention for the Protection of the Rights of Performers, Producers of Phonograms and Broadcasting Organizations (with a note to not apply the article 12 of the convention concerning phonograms of producers that are not nationals of contracting states), (August 1999);
- Geneva Agreement on Trade Marks (December 1999).
Transparency of the Regulatory System
The Latvian government has amended its laws and regulatory procedures in an effort to bring Latvia's legislation in compliance with the European Union and WTO GPA requirements. A number of legislative changes were aimed at increasing the transparency of the Latvian business environment and the regulatory system. At the same time, the massive legislative changes carried out in a short period of time have led to some laws and regulations that could be subject to conflicting interpretations. The Latvian government has developed a good working relationship with the foreign business community (through the Latvian Foreign Investors Council) to streamline various bureaucratic procedures and to address legal and regulatory issues.
Efficient Capital Markets and Portfolio Investment
Latvian government policies do not interfere in the free flow of financial resources or the allocation of credit. Local bank loans are available to foreign investors.
The regulatory framework for commercial banking incorporates all principal requirements of European Union directives. A unified capital and financial markets regulator was launched on July 1, 2001, replacing the Securities Market Commission, the Insurance Inspectorate, and the Bank of Latvia's Banking Supervision Department. Existing banking legislation includes provisions on accounting and financial statements (strict adherence to the international accounting standards is required), minimal initial capital requirements, capital adequacy requirements, large exposures, restrictions on insider lending, open foreign exchange positions and loan-loss provisions. An Anti-Money Laundering Law and Deposit Insurance Law have been adopted, and an independent anti-money laundering unit is operating under the supervision of the Prosecutor General's Office. Some of the banking regulations, such as capital adequacy and loan-loss provisions, exceed EU requirements.
Total assets of the country’s 10 largest banks are approximately 36 billion USD (exchange rate used 1 USD=0.56 Lats). Latvia’s 2nd largest bank in 2008 faced serious financial difficulties and had been nationalized at the end of 2008. Looking at the total asset base, 2.4% of the assets can be estimated as non-performing.
Securities markets are regulated by the 2000 Law on Consolidated Capital Markets Regulator, 2004 Law on Financial Instrument Market, and several other laws and regulations. Protection of investor interests is ensured by strict control over participants in the securities market. Transparency of the market is achieved by issuing Riga Stock Exchange (RSE) bulletins after each trading session and by offering securities market information on the Internet.
The Riga Stock Exchange (www.lv.omxgroup.com) began operations in 1995. France assisted Latvia in setting up the securities market based on a continental European model. In 1997, the RSE was admitted to the International Federation of Stock Exchanges as a corresponding emerging market. The RSE was the first exchange in Eastern Europe to create an index in cooperation with Dow Jones.
There have been no reports of political violence or politically-motivated damage to foreign investors' projects or installations since Latvia regained its independence in 1991. The likelihood of widespread civil disturbances is very low.
Foreign business representatives and non-governmental organizations, such as Transparency International, have identified corruption and the perception of corruption as a persistent problem in Latvia. According to the latest (September, 2008) corruption perception index by Transparency International organization, Latvia ranks 52nd among the world's most corrupt countries, although relative to peers in the EU Latvia has improved somewhat; it is currently only the 8th most corrupt EU member state.
In an effort to strengthen its anti-corruption efforts, the Latvian government has adopted several laws and regulations, including the 1998 law on Money Laundering, and a new law on conflict of interest, which came into force on May 10, 2002 (replacing the 1995 anti-corruption law). The conflict of interest law imposes a number of restrictions and requirements for public officials and their relatives. Several provisions of the law deal with the currently widespread practice of holding several positions simultaneously, often both in the public and private sector. The law includes a comprehensive list of state and municipal jobs that cannot be combined with additional employment. Moreover, the law expands the scope of the term "state official" to include members of boards and councils of companies with state or municipal capital exceeding 50 percent.
Latvia has signed the Criminal Convention on Corruption of the Council of Europe and the United Nations Convention against Corruption. Latvia has expressed interest in joining the OECD Convention on Combating Bribery. According to the Latvian law, it is a crime to offer or to accept a bribe or to facilitate an act of bribery. Although the law stipulates heavy penalties for bribery, there have so far been only a limited number of government officials prosecuted and convicted for corruption.
The primary institution responsible for combating corruption is the Crime and Corruption Prevention Council chaired by the Prime Minister and including the Ministers of Defence, Interior, Justice, and Health and the Prosecutor General. The Ministry of Justice is the day-to-day supervisor of the CCPC Secretariat. Latvia has created an independent anti-corruption agency -- the Anti-Corruption Bureau whose task is to carry out operational activities on fighting the corruption incidents. The Anti-Corruption Bureau has recently been involved in controversies that have limited its effectiveness. In addition, the Prosecutor General's Office plays an important role.
OPIC and Other Investment Insurance Programs
Overseas Private Investment Corporation (OPIC) political risk insurance coverage is available for U.S. investments in Latvia. Latvia is a member of the Multilateral Investment Guarantee Agency (MIGA)
Since January 1, 2005, the Latvian national currency known as the Lat has been pegged to the Euro at a rate 0.70284 Lat per 1 Euro.
Currently the state of Latvia is experiencing serious economic difficulties and has received a 7.5 billion euro ($10.4 billion) assistance package from the International Monetary Fund (IMF) and the European Union. The IMF will provide 1.7 billion euros, the Nordic countries - 1.8 billion euros, the European Commission - 3.1 billion euros, and the EBRD and other EU Member States – 0.9 billion Euros. The financial assistance program's terms do not call for monetary policy changes, thus allowing Latvia to maintain its currency's exchange rate peg to the euro. In order to achieve the goals of the program without devaluation, severe fiscal policy tightening is required. Key elements of the government's revised budget and economic restructuring program are the following: immediate measures to stem the loss of bank deposits and international reserves; steps to restore confidence in the banking system in the medium-term and to support private debt restructuring; fiscal measures to restrain inflation, limit government spending and reduce current account imbalances (while also avoiding a substantial widening of the budget deficit due to decreasing revenues and preparing for early fulfillment of Maastricht criteria); and social policy and structural reforms that will rebuild competitiveness and make government more efficient.
The official rate of registered unemployment in November 2008 was 6.1 percent. Unemployment is significantly higher in rural areas. A high percentage of the workforce has completed at least secondary or vocational education. Foreign managers agree that Latvians generally are hard working, reliable and quick to learn. However, there is a shortage of mid- and senior-level managers with western-style management skills.
Companies must keep wages above a legally specified minimum, which from January 1, 2009 is LVL 180 (approximately USD 360) per month. Union influence on the wage setting process is limited. Trade unions do not have significant influence on labor market.
Now, the largest challenge that employers face is the fact that since Latvia joined the EU many skilled employees can find employment opportunities in other EU countries that have opened their borders. Unofficial statistics speak of more than 100,000 people that have moved to other EU countries since May 1, 2004. Real wage growth has dropped significantly in the last year. In Q3 of 2007 real wage growth was 20.9 percent, but Q3 of 2008 was a more modest 5.6%.
On June 1, 2002, a new Labor Law came into effect. The law addresses discrimination issues, provides more detailed provisions on rights and obligations of employees' representatives, as well as creates a new institution - the Work Dispute Settlement Commission - that can be established in a workplace.
Full-time employees in Latvia work 40 hours a week. Normally, there are five working days per week, but employers are allowed to schedule six working days per week. Employees are entitled to four calendar weeks of annual paid vacations per year.An employer is prohibited from entering into an employment contract with a foreign individual who does not have a valid work permit.
The Latvian government is committed to adhere to the ILO convention protecting worker rights.
Foreign Trade Zones/Free Ports
There are four free trade areas in Latvia: free ports are established in the Riga and Ventspils ports, and special economic zones (SEZ) are created in Liepaja, a port city in western Latvia, and Rezekne, the center of an eastern Latvian region which borders on Russia. The IMF objects to free trade zones on the grounds that they distort competition and create tax collection problems.
Somewhat different rules apply to each of the four zones. In general, the two free ports provide for exemptions from indirect taxes, including exemptions from customs duties, VAT and excise tax. The SEZ offer additional incentives, such as 80-100 percent reduction of corporate income taxes and real estate taxes. In order to qualify for tax relief and other benefits, companies must receive permits and sign agreements with the appropriate authorities: the Riga and the Ventspils port authority, for the relevant free port; or the Liepaja SEZ administration or Rezekne SEZ administration.
Source: U.S. Department of State