Latvia's tax system is governed by both Latvian legislation and European Union requirements. It can be described as average because each taxpayer pays an average of 30% of his income into the budget. In addition, the diverse system of tax rates, tax breaks and allowances in Latvia allows each taxpayer to choose the optimal sector for their activities and management of funds. The Republic of Latvia has the lowest effective (average) tax rate in the European Union. There are several areas of commercial business with individual tax privileges - payments that are 80% to 100% lower: for example, Liepāja and Rēzekne have special economic zones, and the free ports of Riga and Ventspils can provide tax relief.

The tax principles are set out in the Law on Taxes and Fees. Taxes are administered by the State Revenue Service (SRS) and are divided into direct and indirect taxes. Indirect taxes are taxes that are not deducted directly from income and are levied on goods and services. Direct taxes, in turn, are taxes that are levied on all taxable income of individuals and companies.

Corporate income tax
The object upon which the corporate income tax is imposed is the taxable income obtained by a tax payer during a taxation period. The tax base is corporate financial income adjusted according to the law. The adjustments are mainly implemented in order to ensure that the income is greater than expenses on which the tax is not levied (for example, expenses that are not directly related to economic activity) or in order to reduce the income by a specific amount in case if the law envisages tax relief.

Corporate income tax payers are the following:

resident or domestic companies performing economic activity, organisations and institutions funded from the state budget or municipal budgets, which obtain income from economic activity;
non-resident or foreign companies, business entities, natural and other persons;
permanent representative offices of non-resident undertakings the income tax rate of which is 20%.
Individual undertakings are payers of the personal income tax, and the tax rate ranges from 20% to 31.4%, depending on the amount of income.

Personal income tax
The personal income tax is one of the steadiest sources of income adding funds to municipal budgets. Personal income tax payers are self-employed persons or undertakings that have been registered as tax payers, including agricultural and fishery farms. It is envisaged to repay the personal income tax to tax payers with eligible expenditure for education and medical services.

The personal income tax rates vary between 20% and 31.4%, depending on your income. It also must be noted that the tax is not levied on all income. Instead, a number of items are deducted from the total income before the tax is calculated:

non-taxable minimum
deductions for being a legal guardian of certain persons (e.g. children)
deductions for people with disabilities
other deductions

Social insurance contributions (social tax)
Compulsory social insurance contributions is a compulsory payment into a special budgetary account stipulated by the Law which entitles the insured person to receive the social insurance services defined by the Law. The social tax payments increase the state social insurance budget. Therefore an insured person can receive the following services: an old-age pension, disability pension, survivor's pension, sickness benefit, maternity benefit, insurance against unemployment and burial allowance.

The standard social tax rate is 35.09%, divided between the employer (24.09%) and the employee (11%). A number of deductions can be applied as well, mainly various tax cuts for state pension receivers.