The Republic of Latvia

The most common for-profit organizational form is a limited liability company (“LLC”, in Latvian - “sabiedrÄ«ba ar ierobežotu atbildÄ«bu”). The founders of the LLC can be individuals and/or legal entities and/or partnerships, which make the cash or property contribution in the share capital of the LLC. Generally, the liability of the LLC and its shareholders is separated, and the shareholder is not liable for the obligations of the LLC. The LLC is established and obtains the status of the legal entity as of its registration with the Enterprise Register of Latvia.

The second most popular form used by Enterprises in Latvia is a farm entity (in Latvian – “zemnieku saimniecÄ«ba”) which is a specific type of an individual entity. The owner of a farm entity shall own or use the land which is tilled to produce agricultural production for sale. To compare, in March 2021 there were approximately 290 thousand LLCs and 38 thousand farm entities in Latvia.

As to other forms, the following can be mentioned:

• Individual merchant (in Latvian – “individuÄlais komersants”) or individual entity (in Latvian – “individuÄlais uzņēmums”) may be established by an individual. The individual merchant and owner of individual entity is liable for the obligations of the individual merchant or individual entity with all his property;
• Latvia has also introduced a cooperative society (in Latvian – “kooperatÄ«vÄ sabiedrÄ«ba”) structure that is used for cooperation by legal entities and/or individuals pursuing the same economic interests (such as foresters, farmers, owners of flats in the same residential building in order to manage this building, etc.). The minimum number of founders is 3 (three);
•  Not that common as the LLC but another form of a capital company is a joint stock company (“JSC”, in Latvian – “akciju sabiedrÄ«ba”). In contrast to the LLC, the shares of the JSC can be publicly traded in the stock exchange, and its shareholders register is not registered with publicly available in the Enterprise Register;
• A craft business (in Latvian – “amatniecÄ«bas uzņēmums”) produces and trades with craft production;
• Two types of partnerships can also be established – a general partnership (in Latvia - “pilnsabiedrÄ«ba”), the liability of its founders is not limited; and a limited partnership (in Latvian - “komandÄ«tsabiedrÄ«ba”), where the liability of at least one member is limited to his investment in this partnership.

a. Most common for-profit organizational forms used by Enterprises seeking financing from investors are the LLCs.  

b. According to the Social Enterprise Act, in Latvia the only organizational form available for social enterprises is a LLC.

No requirement. For-profit corporate organizational forms mentioned above are generally the business entities the purpose of which is to make businesses gain profit. Thus, generally, the decision making is based on the economic interests of their shareholders/owners.

With respect to the LLC and the JSC, it is recognized that the member of the Management Board owes the duty of loyalty to the company and the economic interests of its shareholders. He is a trustee of the company’s shareholders, who is entrusted with the management of other person’s assets, and as such he shall facilitate achievement of the company’s objective – enforcement of the economic interests of the shareholders. Consequently, the member of the management board is obliged to make economically sound decisions.

Yes.

a. The only organizational form available for social enterprises is an LLC.

b. The general regulation is the same as to the traditional LLC, however:

• The status of a social enterprise is granted to the LLC by the commission established by the Ministry of Welfare. In order to get and maintain such status, the LLC shall conform to specific criteria set by the Social Enterprise Act. Inter alia, (i) the purpose of the LLC set by the articles of association shall conform to the purpose set by the law, and it shall conduct an economic activity that creates a positive social impact (e.g., environmental protection, promotion of education, support for science, etc); (ii) the shareholders meeting has to adopt the decision to obtain the status of a social enterprise with at least 2/3 of the shareholders participating in the meeting, unless the articles of association require a higher threshold; (iii) the profit shall be reinvested to pursue the purpose set by the articles of association, and not distributed to the shareholders; (iv) the executive or monitoring body shall contain at least one member from the target groups which are set by the Government, or the member from the target group, or non-profit organization representing the target group or expert of the particular field shall be a member of the advisory body (if such is established);
• In addition to the standard registration with the Register of Enterprises and standard reporting obligations, the social enterprise shall be registered with the register of social enterprises maintained by the Ministry of Welfare (this is done simultaneously with granting the status of a social enterprise) and submit the annual activity report to the said Ministry;
• The assets and financial resources shall be used only for the purpose set by the articles of association.

c. The main benefit is the support such as the exclusion of expenses in the taxable base with the corporate income tax for some expenses (e.g., insurance of recreational and social inclusion measures, integration of persons in the target group, purchase of assets serving the purpose of attaining the objectives, insurance of social integration measures and for donations to a public benefit organization for such purposes that conform to the objectives of the social enterprise). Moreover, local governments are entitled to grant an immovable property tax exemption. Also, public persons can transfer their movable property without remuneration as well as the LLC as a social enterprise can involve volunteers in activities with no relation to the management, accounting and the core functions of the LLC.  

d. In order to maintain the status of the social enterprise, it shall conform to the particular criteria (see above under (b)). As to impact reporting, the status is withdrawn if, inter alia, the social enterprise does not fulfill the performance indicators set by the Government. For instance, the annual activity report of the social enterprise shall indicate at least two tasks for reaching the social objective the next year, and at least 50 % of these tasks shall be reached.

e. Obtaining the status of a social enterprise and registering with the register of social enterprises is an additional procedure to the standard registration of the LLC with the Register of Enterprises. The decision on granting the status of a social enterprise and registering with the register of social enterprises is taken by the Ministry of Welfare within 1(one) month as of the receipt of all required documents. No fee is payable for this additional procedure.

f. The Social Enterprise Act came into force only in 2018. As of 28 February 2021, there were only 161 (one hundred sixty-one) active social enterprises registered with the social enterprise register (available here, in Latvian only: https://www.lm.gov.lv/lv/socialo-uznemumu-registrs), which comprise. Although the knowledge of social enterprises is improving, they still are uncommon.

No, as the only organizational form available for social enterprises is a LLC, and according to the Commercial Act, a LLC conducts commercial activity with the purpose to gain profit. However, the Social Enterprise shall reinvest its profit, not distribute it to its shareholders.

Non-profit organizations are associations and foundations, which have different regulation and registration procedures.

There is no specific regulation regarding worker-owned Enterprises in Latvia. Workers can choose any of the corporate organizational forms. 

The cooperative societies exist in Latvia, however, their members usually are persons with the same economic interests (such as the farm societies who deal with a similar type of business, such as grain cultivation or milk production), and there is no particular regulation regarding the worker-owned cooperative societies.

In addition to reports required for standard LLC, any social enterprise must submit an activity report for previous year to the Ministry of Welfare. The template report is available on the website of the Ministry of Welfare (please see here, in Latvian only: https://www.lm.gov.lv/lv/projekts/atbalsts-socialajai-uznemejdarbibai). Apart from the general information, the said report, inter alia, shall contain information on the performance indicators of the objectives which had to be reached (such as the qualitative indicators of the social impact of a social enterprise, activities and methods used in order to supervise and measure the social impact of the enterprise, the factors hindering or facilitating the activity of the social enterprise, the information on the persons of the target group employed, etc.), financial indicators and information on the planned activities in the next calendar year.

The Social Enterprise Act came into effect only in 2018. According to the information at our disposal, there is no meaningful publicly available case law regarding social enterprises available yet.

No (apart from general corporate governance, etc regulation).

 No. However:

• the purpose of the Social Enterprise incorporated in its articles of association shall comply with the purpose set by the Social Enterprise Act, which is to facilitate improvement in the quality of life of the society and to foster employment of population groups at risk of social exclusion;
• in order to maintain the status of the social enterprise, the executive or monitoring body of the LLC shall contain at least one member from the target groups which are set by the Government, or the member from the target group or non-profit organization representing the target group, or expert of the particular field shall be a member of the advisory body (if such is established).

No.

a. ESG is one of the priorities of the financial supervisory authority in Latvia nowadays. Institutional investors are called for identifying, assessing and managing ESG risks in their portfolios.

• EU Regulation (EU) 2020/852 of the on the establishment of a framework to facilitate sustainable investment (Sustainable finance taxonomy), which establishes the criteria for determining whether an economic activity qualifies as environmentally sustainable, is directly applicable in Latvia.
• Recommendations have been developed with regard to good corporate governance in line with the standard of the good corporate governance. For example, NASDAQ OMX Riga, the only stock exchange in the Baltics having its seat in Latvia has issued Principles of Corporate Governance and Recommendations on Their Implementation for publicly listed companies
• The recently adopted Corporate Governance Code which is of recommendatory nature is applicable to a wider range of companies. Investors, especially institutional investors, expect a company to abide by the abovementioned principles upon making a decision to invest in such company.

b. Sustainable finance taxonomy Regulation (EU) 2020/852 sets out Criteria for environmentally sustainable economic activities (Art.3).Economic activity shall qualify as environmentally sustainable where that economic activity:

1. contributes substantially to one or more of the environmental objectives set out in Article 9 of the Regulation;
2. does not significantly harm any of the environmental objectives set out in Article 9 of the Regulation;
3. is carried out in compliance with the minimum safeguards laid down in Article 18 of the Regulation;
4. complies with technical screening criteria that have been established by the Commission in accordance with Article 10(3), 11(3), 12(2), 13(2), 14(2) or 15(2) of the Regulation.

The corporate governance focuses on the following aspects: transparent operation of a company, internal culture and ethical conduct, internal control system and risk management, payroll policy, conformity to the interests of shareholders, assessment of a conflict of interests, and effective supervisory board.

c. Besides the profit and ESG, the investors also assess other aspects depending on the investment policies and scope of investments of the particular investor.

According to our understanding, social enterprises usually receive donations, as well as grants from a state-owned development finance institution Altum (please see www.altum.lv), which offers state aid for various target groups with the help of financial tools.

There are a number of green bonds available on the Nasdaq Baltic, the only stock exchange in the Baltic region. Green bonds have mostly been issued by state-owned companies.

The Ministry of Welfare together with a state-owned development finance institution Altum (please see www.altum.lv) offers financial support programs (grants) to the Social Enterprises. The general programs offered by the Latvian Investment and Development Agency (please see www.liaa.lv) are also available to the LLCs which are Social Enterprises. The law allows the authorities to include social criteria in the public procurement requirements and conclude the privileged agreements or apply social clauses (although not commonly used).  

According to the Social Enterprise Act:

• several company income tax reductions are available for Social Enterprises;
• local governments are entitled to grant an immovable property tax exemption;
• particular public persons and entities can transfer their movable property to the social enterprise without remuneration;
• social enterprise can involve volunteers in activities that are not related to the management, accounting and core functions of the social enterprise.

a. We have no information at our disposal on some specific difficulties to obtain governmental funding. As of 28 February 2021, there were 73 (seventy-three) agreements on grants concluded by state-owned development finance institution Altum with the social enterprises (and there were 161 (one hundred sixty-one) active social enterprises at all).  

b. The only form allowed for the Social Enterprise is an LLC. There is a grant program specifically for social entrepreneurship.

No, as the Social Enterprises are established as the LLCs which is the closed capital company which shares may not be listed.

There are no publicly traded Social Enterprises in Latvia.

The impact bonds have never been issued in Latvia.

No.

Crowdfunding services are not regulated in Latvia. A new EU Regulation on European Crowdfunding Service Providers will become applicable in Latvia as of 10 November 2021. The national draft law On Co-financing Services is pending adoption for already three years. The draft law provides for a possibility for private persons and companies to attract crowd financing by way of (i) loans, (ii) issuance of bonds and stocks. The creditworthiness of the applicant shall be evaluated by the crowdfunding service provider. The law does not apply to non-profit projects.

The amendments to the Law on Financial Instrument Market are under discussion to minimize the requirements for small and medium-size companies to attract financing through private and public placements.

Yes, the government allows tax exemptions exclusively for Social Enterprises:

a. Social Enterprises can exclude the following expenditures from the taxable amount subject to corporate income tax: when ensuring the recreation and social inclusion of social enterprise employees included in the target group, integration of the target group into the labor market and improving the quality of life, the acquisition of assets which serve to attain the purpose set in the articles of association, for the social integration measures for the target group, donations to the public benefit organization for the purpose set in the articles of association if the recipient of the donation has provided information by the end of the accounting year.

• The local government is able to grant the relief from immovable property tax in accordance with the law.
• According to a very recent support project in 2021 Social Enterprise can receive a compensation of paid employers’ mandatory insurance contributions for employees with disability if no other compensation is received for the employee. The compensation is paid on quarterly bases (this is a temporary measure at the moment).

b. No, all social enterprises can qualify for tax exemptions

c. The main requirement is for the social enterprise to use the expenditures to achieve the purpose set in the articles of association.

No.

No.

The Ministry of Welfare:

• is responsible for the development of the political planning documents and the support programs for the Social Enterprises,
• adopts the decision on granting or withdrawal or revoking of the status of the Social Enterprise;
• maintains the register of Social Enterprises;
• arranges the assessment of the operation of the Social Enterprises. In this regard, it establishes the Committee of Social Enterprises which evaluates the eligibility of the applicant for the status of social enterprise and whether the social enterprise is still eligible for its status.

No.

The Ministry of Welfare offers e-courses for starting a social enterprise.  Latvian Investment and Development Agency offers business incubator’s services. 

No.

The Ministry of Welfare:

• is responsible for the development of the political planning documents and the support programs for the Social Enterprises,
• adopts the decision on granting or withdrawal or revoking of the status of the Social Enterprise;
• maintains the register of Social Enterprises;
• arranges the assessment of the operation of the Social Enterprises. In this regard, it establishes the Committee of Social Enterprises which evaluates the eligibility of the applicant for the status of social enterprise and whether the social enterprise is still eligible of its status.

No.

There are several forms of Enterprises available in Latvia, however, as the Social Enterprise can be formed as an LLC only, further information is provided regarding the LLC only.

In our practice, the average time for preparing the necessary documentation and registering with the Enterprise Register takes from 2 (two) weeks to 1,5 months. However, if the documents are complete, the registration of the LLC with the Enterprise Register takes only 1 (one) or 3 (three) business days, depending on the amount of the paid state fee and whether the documents are submitted/received electronically or in a paper form. I.e., the state fee for registration of the limited liability company within 3 (three) business days, if the documents are submitted/received electronically, is EUR 135. In the case of at least 2 (two) founders, then registration within 1 (one) business day, if the documents are submitted/received electronically, the state fee is EUR 405. In case the documents are submitted/received in paper form, the state fee is increased by 10%. Additional time shall be counted in order to draft the necessary documents prior to registration, as well as registration with the VAT payers register (if needed) and to convert the temporary bank account into the permanent one.

In order to obtain the status of the Social Enterprise, the LLC which is registered with the Enterprise Register, submits an application to the Ministry of Welfare which is reviewed free of charge within 1 (one) month (the particular timing depends, inter alia, on the date when the Social Enterprise Commission has scheduled its meeting).

No specific certifications or accreditations.

Yes, generally Enterprises can easily form and flourish in Latvia. As to startups, the legal environment is still developing. It can be noted that after the study ordered by the state in relation to the evaluation of Latvian environment for startups and proposals in this regard (available here, in Latvian only: https://www.em.gov.lv/lv/petijumi-1), in September 2020 the amendments were made to the Law on Aid for the Activities of Start-up Companies dated 2017 with an aim to facilitate the possibilities to obtain the state support.

Social Enterprise can form relatively easily if complied with the requirements set by the Social Enterprise Act. However, the number of Social Enterprises (i.e., as on 28 February 2021, there were only 161 (one hundred sixty-one) active social enterprises registered with the social enterprise register) shows that there are broad development possibilities for social entrepreneurship.

No, there are no specific laws that discourage the foundation of Social Enterprises.  However, it might be that in practice the benefits of the status of Social Enterprise might not seem sufficient to encourage obtaining such status. Also, although it is appropriate that the Social Enterprises are not allowed to distribute profit, but shall reinvest it, this provision might also discourage the potential founders or investors.

There are currently the draft amendments to the Social Enterprise Act, which would clarify and expand the criteria for becoming the Social Enterprise, which from one side would clarify the legal framework, however, there is also a risk that in practice they might implement additional discouraging conditions for the establishment of Social Enterprises.

No.

1. Additional practicable tax benefits because it seems that at the moment in practice almost no Social Enterprise uses the existing tax benefits (apart from the compensation of paid employers’ mandatory insurance contributions for employees with disability if no other compensation is received for the employee);
2. Support for integration and/or subsidies for salaries and/or coverage of sick pay for the representatives of target groups working in Social Enterprises (taking into account that the representatives from target groups might be less productive, and in case of disabled persons their working places might require special adjustments, they may be in temporary incapacity more often than standard employees, etc.);
3. Availability of stable long-term grants (as the currently available resources of Altum grants are almost completely applied for. The projects which have qualified will be implemented during 2022 and first part of 2023, however, no new projects will be able to qualify. The new support might be available for applying from the next planning period in 2023);
4. Motivate more Social Enterprises to operate in the rural areas, where the level of economic development is lower than in areas located near the capital of Latvia, as currently the most part of the Social Enterprises operate in the capital of Latvia (Riga) and nearby.

Less administrative burdens when dealing with the state authorities. 

Please note that the total tax benefits and other benefits from the state (total support from the state) must meet the de minimis requirement (less than EUR 200,000 over three consecutive fiscal years). This most likely will be applicable in all EU countries.