Prepared by Lejins, Torgans & Vansovics
General Regulatory Framework
Latvian corporate law has recently undergone significant changes. The Commercial Law came into effect at the very beginning of 2002. It covers, amongst other things, incorporation and management issues for corporate entities. For now, the Commercial Law is applicable only to newly registered companies and companies re-registered with the Commercial Register. However, by December 31, 2004 all the companies registered under the old corporate laws have to re-register with the Commercial Register and upon such re-registration they will become subject to the Commercial Law. Until then, those companies remain subject to the previous corporate laws.
This overview has been compiled to aid those setting up new entities and, hence, covers the provisions of the Commercial Law relevant to that.
Forms of Presence in Latvia
According to the Commercial Law a foreign entity has the following options for corporate presence in Latvia:
• joint-stock company (A/S);
• limited liability company (SIA);
• representative office;
Choosing the most appropriate form of presence is dependent on a number of factors.
When evaluating the choice between branch or subsidiary, the most important advantage of a subsidiary is limited liability. Branches do not have a separate legal identity, therefore, a creditor of a branch may make claims on the assets of the foreign entity. On the other hand, branches have certain other advantages, such as the option to transfer the branch’s profit abroad without the imposition of withholding tax (5 – 10% withholding tax is applicable to dividends transferred abroad), and the facility to allocate head office expenses to the branch in proportion to the profit generated by the branch against that generated world-wide.
The choice of the form of presence also depends on the type of business to be conducted in Latvia. For example, banks and insurance companies in Latvia may only be established as JSCs. Foreign banks have the option of operating in Latvia through branches.
If it is intended at some point to make shares of the company available for public sale, JSC would be the appropriate form as shares of LLCs may not be offered to the public.
A representative office, in turn, may only be set up if no commercial activities are to be carried out. Usually representative offices are maintained for market research and promotional activities.
Overall, the most common choice of foreign investors is the LLC which is also the most popular form of incorporation for local businesses.
Establishment of Corporate Presence
Since company formation (LLC or JSC) is th e mo st likely form of presence to be selected by foreign investors, the following is an outline of requirements for company incorporation:
Firstly, it should be noted that certain types of business activities are subject to the receipt of a licence or permission from the responsible state or self-regulating institution. For example, a licence is required for banks, insurance companies, insurance brokerage companies, customs warehouses, companies dealing with excise goods, and others. Regulated businesses may be subject to special capital requirements, requirements for the qualifications of management, etc. Therefore, in addition to the general requirements below, where applicable, requirements for obtaining licences must already be explored at the incorporation stage.
A number of prescribed incorporation documents must be drafted and submitted to the Commercial Register. Shareholders’ signatures on any incorporation documents (foundation agreement or resolution, charter, application for registration), as well as sample signatures of Management Board members have to be certified by a notary public. If certified by a foreign notary, documents must also be authenticated in Latvia (apostle (according to Hague Convention of October 5, 1961 Abolishing the Requirement of Legalisation for Foreign Public Documents) or legalised). Exceptions are documents certified in countries with which Latvia has signed bi-lateral treaties on legal assistance — Belarus, Estonia, Kyrgyzstan, Lithuania, Moldova, Poland, Russia and Uzbekistan.
The minimum share capital requirement is LVL 2 000 (EUR 3 400) for LLCs and LVL 25 000 (EUR 42 500) for JSCs.
The share capital of a company can comprise investment in cash or in kind. Cash investments must be endorsed by a notice from the bank showing payment to the temporary account of the company being established. Investment in kind in most cases must be evaluated by certified assessors selected from the list approved by the Commercial Register.
At least 50% of the share capital of a LLC must have been established by the date of submission of the incorporation documents to the Commercial Registry. JSCs are required to demonstrate payment of at least 25% of the subscribed capital by the date of submission of incorporation documents, but the sum cannot be less than the minimum capital required for the establishment of JSCs, which is LVL 25 000.
Management of companies
The Commercial Law requires a two-tier management system consisting of a Supervisory Board and a Management Board. However, the Supervisory Board is optional for LLCs. As the titles of the bodies suggest, the Supervisory Board is designated to execute supervision over the Management Board of the company and to approve certain major transactions, while the Management Board is charged with daily management matters.
The law does not place any restrictions on the citizenship of members of the boards, however, at least half the members of the Management Board must be residents of Latvia. For LLCs the Management Board may consist of only one member.
Timing of Registration with the Commercial Register
T he period of review of incorporation documents and registration with the Commercial Register depends on the amount of state duty paid. For example, the standard duty for registration of LLCs is currently LVL 100 (EUR 180) which allows registration to be completed within 2 weeks. However, registration may be completed within 4 or 2 days if, respectively, double or triple state duties are paid.
Purchase of Real Estate in Latvia
Latvian laws impose certain limitations on foreigners purchasing real estate.
Restrictions on the transfer of Title to Foreigners
Foreign legal entities and individuals are not allowed to purchase land in the following areas:
• land located in the state border zones;
• land in the protected coastal dune zone of the Baltic Sea and the Gulf of Riga, as well as other land in the protected zones of public watercourses and rivers, unless such land is designated for construction use in the general
• plan of the particular city/district;
• land designated for agriculture or forestry under the
• general plan of the particular city/district;
• land within state reserves.
For the purchase of all other land, certain restrictions apply to foreign entities and individuals. As a consequence, before title can be registered with the Land Registry, permission has to be obtained from the local government of the respective city/district.
In order to obtain that consent, an application must be submitted indicating the purpose of use of the land to be acquired. If the purpose of use as indicated in the application does not contradict the general plan approved by the city or district, local government is obliged to grant consent for the transfer of the land. If a general plan has not been developed or approved for the area, local government makes a decision after consultation the Ministry of Environmental Protection and Regional Development. If consent is denied, the decision may be appealed in a court of law.
Foreign legal entities and individuals may become shareholders in local companies which are not subject to the above restrictions, provided certain qualifying requirements for shareholding are satisfied.
Real Estate Purchase Procedures
For real estate transactions and rights on the real estate to be established against third parties, transfers must be registered with the Land Registry. Entries in the Land Registry are made only on the basis of requests by the respective party or parties involved, authorised by a notary public.
In most cases local government has first right of refusal to the real estate available for sale, i.e., the real estate has to be offered to the local government on the same conditions as to the prospective purchaser. Local government has to decide on whether right of refusal will be exercised within 20 days of the date of the offer.
Local government does not have first right of refusal:
• to industrial facilities;
• to apartments;
• to real estate undergoing privatisation;
• to real estate which is exchanged for other real estate, or transferred without charge;
• to real estate which is sold by auction;
• if undivided interest in real estate is sold and the real estate remains in joint ownership of the original parties; or if third parties have first right of refusal to the real estate.
Real estate sale is subject to a state duty of 2% of the value of the real estate, but the total is limited to a maximum of LVL 30 000 (EUR 50 000).
Working Foreign Residents
Foreign individuals intending to work in Latvia are required to obtain employment permits and term residence permits.
Residence of foreigners in Latvia
Foreign citizens may reside in Latvia on the basis of visas or residency permits.
According to international agreements on abolishing visa requirements signed between Latvia and a number of countries, citizens of the following countries do not need visas to enter the territory of the Republic of Latvia: Andorra, Austria, Belgium, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, United Kingdom, USA, Vatican. Most of these agreements provide for a 90 day stay during any 6 month period.
Foreign citizens intending to stay in Latvia for more than 90 days, have to obtain residence permits.
Foreign individuals may perform work in Latvia for one of the following reasons:
• Employment agreement between the foreign individual and a Latvian company;
• Personnel services agreement between the foreign employer of a particular individual and a Latvian company (the individual remains an employee of the foreign company).
The suitability of one or the other option has to be evaluated from case to case. For instance, if an employment contract is to be entered, the Latvian company is required to notify the Employment State Service of the vacancy to and allow one month for applications by local employees (this requirement is not applicable if the position in question is managerial). In the case of personnel services contracts the terms and conditions of the contract have to be approved by the State Employment Service.
Generally, at least one month should be allowed to complete the process of obtaining employment and residency permits.
Protection of Intellectual Property
Latvia is a member state o f the WIPO (World Intellectual Property Organisation) and has adopted mo st international treaties in the area of intellectual property protection, such as the Paris Convention for the Protection of Industrial Property, Berne Convention for the Protection of Literary and Artistic Works, Madrid Agreement Concerning the International Registration of Marks and the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, to name a few.
The Latvian Patent Board is the institution in charge of industrial intellectual property matters in Latvia. Foreign individuals and entities may apply to the Patent Board and correspond with the Patent Board only via qualified agents certified by the Patent Board.
Latvian law allows the use of unregistered trademarks, provided they do not infringe the rights of other persons and do not violate any provisions of the laws and regulations. However, full protection of a trademark can only be obtained upon its registration.
An applicant can apply for national registration of a trademark (effective in the territory of Latvia only) or for international registration of a trademark under the Madrid Agreement Concerning the International Registration of Marks and Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks.
Registration of a trademark is effective for a term of 10 years starting from the application date. It can be extended an unlimited number of times, each time for another 10 year period.
An inventor may apply for national registration of a patent or for international registration under the procedures set out by the Patent Cooperation Treaty. International registrations performed abroad in accordance with the Patent Cooperation Treaty will be effective in Latvia only if Latvia is indicated as one of the countries to which the registration extends.
Patents for inventions are effective for a term of 20 years from the date the patent is issued.
Patents for industrial designs will be issued for new, attractive designs that can be used for industrial or hand-crafted products. The Patent Board maintains a register of industrial designs.
Initially a patent for an industrial design is granted for five years, however, at the request of the patent owner the term may be extended for another two consecutive five year periods.
Intellectual Property Protection Measures
Under Latvian law an owner of intellectual property is entitled to exercise any legal measures to protect those rights, including submitting a claim with the court in order to prevent the unauthorised use of the intellectual property and to recover damages caused. The court may impose various measures, ranging from cease and desist orders to compensation of lost profit and surrender of items produced or profit gained.
Under the provisions of regulations issued by the Cabinet of Ministers, the owner of intellectual property may request the commencement of special customs measures to preclude the release of counterfeit or pirated goods on the Latvian market.
Business Services (by Latvian Development Agency)
As a result of the high concentration of international business activities and large amounts of technical assistance received from EU, Latvia has a diverse range of business service providers. Companies operating in Latvia can rely on internationally proven competence and in-depth understanding of local practice by a range of consultants, whose activities include:
• Audit, accounting, corporate finance and management consulting, including all of the “Big4” companies (for additional information see also Taxation & Accounting);
• Tax & legal services;
• Recruitment, staffing and HR management (for more information see Human Resources);
• Advertising & media, public relations and strategic communications;
• Market research and competitive intelligence;
• Quality management & standardisation, including ISO certification;
• Customised IT solutions & technical consulting.
In addition to consulting businesses, a number of services for foreign companies operating in Latvia can be provided by business organisations. Along with the largest business organisation in Latvia — the Latvian Chamber of Commerce and Industry, there are a number of branch organisations covering different sectors of the national economy, that deal with issues ranging from marketing and public image promotion to political representation of members’ interests.
Foreign business people in Latvia also have organisations, namely AMCHAM Latvia, the Australian Chamber of Commerce in Latvia, the British Chamber of Commerce in Latvia – BCCL and the Swedish Chamber of Commerce in Latvia, that act mostly as public interest groups for networking and exchange of information.