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Eversheds Global Estate Management

Latvia

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - ownership right is the full right of control over property i.e. the right to possess and use it, obtain all possible benefits from it, dispose of it and, in accordance with prescribed procedures, claim its return from any third person.

Leasehold - lease rights entitle to use the real estate or parts of it according to the agreement and applicable law. The lease can be registered in the Land Registry.

Common hold/Usufruct - a usufruct according to the Civil law is a right granted to a person to receive benefits from, to use and to acquire fruits from the property of another person.

Condominium ownership - rights to a flat (apartment), which is a particular, identified part of a house/apartment building. Connected to that is the ownership of an intangible part of land under the building and of the common premises (proportionate to the area of the flat in the house).

Utilisation right - not applicable.

Joint/Co-ownership - according to the Civil law, it is ownership rights which belong to several persons in respect of one and the same undivided property, not as shares divided in actuality but as undivided shares - so that only the substance of the rights is dividend. In the case of co-owned real estate, one owner may perform any actions in respect to the real estate only with the content of the other owner/s. If the owner acts separately without any such consent (alienates, encumbers the real estate etc), this act is void. Furthermore, the person who performed the act is under an obligation to pay damages to the other co-owner/s.

Registration - the ownership of a real estate by a particular person is registered with the Land Register, together with any other optional and mandatory characterising features of the real estate. The Person registered as owner in the Land Register is legally presumed to be the true and lawful owner of the real estate.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

Latvian legislation does not limit the scope of persons who may acquire the ownership of buildings and constructions. However, there are some limitations regarding the acquisition of land.

In the cities of the Republic of Latvia land may be acquired into ownership by:

  1. citizens of Latvia and other EU member states (as from 1 May 2014)
  2. the state and municipalities of Latvia
  3. state and municipal companies
  4. other companies incorporated in Latvia or other EU countries (some conditions apply)
  5. religious organisations registered in Latvia until 21 July 1940
  6. state and local universities

For other persons not mentioned above separate consent from the city or district council is necessary to acquire the ownership of land in cities. However these persons cannot acquire the ownership of:

  1. land in the state border zone
  2. land in the Baltic Sea and Gulf of Riga coastal protection zone
  3. land in the protection zones of other public bodies of water or watercourses, except when the land is planned to be built on according to the general plan of the city;
  4. agricultural and forest land according to the spatial plan of the local government

In rural areas of the Republic of Latvia land may be acquired into ownership by:

  • citizens of Latvia or other EU member states (as from 1 May 2014)
  • the state and municipalities
  • state and municipal companies
  • other companies incorporated in Latvia or other EU countries (as from 1 May 2014)
  • religious organisations registered in Latvia for at least 3 years;
  • farms and individual undertakings registered in the Register of Enterprises of the Republic of Latvia if they belong to the citizens of the Republic of Latvia
  • state and local universities

For other persons not mentioned above separate consent from the district council is necessary to acquire the ownership of land in the rural areas. However these persons cannot acquire the ownership of:

  1. land in the state border zone;
  2. land in the Baltic Sea and Gulf of Riga coastal protection zone
  3. land in the protection zones of other public bodies of water or watercourses, except when the land is planned to be built on according to the general plan of the city;
  4. agricultural and forest land according to the spatial plan of the local government
  5. land in strict nature reserves and in zones of strict nature reserves in other protected territories
  6. land in deposits of mineral resources of national significance.

 

Title to real estate

Title to real estate

Investigation of title - the title of real estate (land plots, buildings) and issues related to encumbrances and usage agreements are registered in the Land Registry. Public registers are usually searched before agreements regarding real estate are concluded.

Registration - the ownership of a real estate by a particular person is registered with the Land Register, together with any other optional and mandatory characterizing features of the real estate. The person registered as owner in the Land Register is legally presumed to be the true and lawful owner of the real estate.

Information on the register – information in the Land Registry is available to everyone for a small fee. The entries of the Land registry have public credibility.

Commercial leases - are regulated according to the same legal regime as non-commercial lease (rent), except for the lease of apartments which is regulated according to a separate law on the lease of residential premises. Thus, general rules of lease stipulated by the Civil Law apply.

 

Structure of a real estate transaction

Structure of a real estate transaction

Investigation of title - the title of real estate (land plots, buildings) and issues related to encumbrances and usage agreements are registered in the Land Registry. Public registers are usually searched before agreements regarding real estate are concluded.

Registration - the ownership of a real estate by a particular person is registered with the Land Register, together with any other optional and mandatory characterizing features of the real estate. The person registered as owner in the Land Register is legally presumed to be the true and lawful owner of the real estate.

Information on the register – information in the Land Registry is available to everyone for a small fee. The entries of the Land registry have public credibility.

Commercial leases - are regulated according to the same legal regime as non-commercial lease (rent), except for the lease of apartments which is regulated according to a separate law on the lease of residential premises. Thus, general rules of lease stipulated by the Civil Law apply.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - legally, there are no special provisions depending on the object of the lease – agricultural land, offices, part of a building or whole building etc. However, from the practical point of view there are differences between the land lease contracts, office premises contracts, warehouse lease contracts etc.

Alterations/modifications - alterations are usually permitted with the lessor’s consent. Generally, lessees perform any necessary internal repairs and decoration at their own cost. Lessors carry out repairs if the existing state of the real estate would otherwise cause dangerous conditions. The lessor must reimburse to the lessee the necessary and useful expenditures made by the lessee in respect to the leased real estate (repairs etc.). If the lessor does not make the appropriate reimbursement, the lessee is entitled to remove the improvements, if that is advantageous to lessee and if it can be done without the principal property being damaged.

Assignment and sub/under letting - assignment and sub/under letting is permitted only with the consent of the lessor and the adult family members living together with the tenant (when sublease of residential premises is concerned). This general rule is, however, subject to the conditions of each particular agreement.

Destruction/reinstatement - If the property is destroyed through no fault of the lessee, the lessee is not liable for damages incurred to the lessor by such destruction unless he has specifically undertaken the risk.

Disposal/return of the premises - the premises shall be returned in the condition as agreed by the parties or in a condition as good as possible. The real estate is returned together with all its appurtenances received from the lessor.

Duration of lease - shall be agreed by the parties. The minimum or maximum mandatory term for the private individuals or companies generally has not been established by law.

Forfeiture/irritancy - the general rules of forfeiture/irritancy apply. There are no specific rules applicable to the lease agreements.

Insurance - according to the law the insurance is not mandatory for the commercial lease contracts. However, insurance against destruction is common for buildings and other commercial premises (i.e., office space etc.), especially when they have been acquired via obtaining a loan and consequently have a mortgage registered in favour of the creditor. Insurance is less common regarding land.

Rent review - the conditions of commercial lease contract shall determine the rent review.

Repair/decoration/furnishing - necessary and useful expenditures that a lessee has made for the property shall be reimbursed by the lessor in accordance with the general provisions regarding reimbursement of expenditures. The general rule is that the necessary expenditures shall be reimbursed to every person having made them, except if a person has acquired the hold of the property by illegal means.

Service charges - not applicable.

Tenant’s duties - lessee shall treat the obligations arising from the contract with such care as may be reasonably expected from the lessee, especially regarding the maintenance of the property. Therefore, the lessee shall be held liable for each loss that has occurred due to the acts performed in bad faith or negligence. Only accidental losses need not be compensated.

In regard to losses caused by third persons, one party shall be held liable to the other only if contrary to the lease agreement such party itself made it possible for the loss to be caused, or had the means to prevent such loss and did not use them.

If a third party contradicts the legal title of the lessor and the lessee thus loses the ability to use the leased real estate, the lessor must reimburse to the lessee the losses caused by such circumstances, even if the lessor has acted bona fide.

The right of the lessee to compensation for losses shall cease if the lessor provides the lessee with a similar and not less useful real estate in place of the previously leased; it shall be assumed, however, in this case that the lessor of the property acted in good faith when entering into the contract.

A lessee shall pay the lease payment by the term specified in the contract; if payments are delayed, the late-payment interest is calculated. Such interest may be set in the lease agreement. Otherwise the statutory interest is calculated.

The lessee shall use the leased real estate as a good and diligent manager. If this requirement has been complied with, the lessee shall not be liable for the natural wear and tear of the property. The lessee generally may use the leased real estate only for such purpose as was intended in the lease agreement.

After the termination of the lease the lessee shall return the leased property with all its appurtenances to the lessor in as good a condition as possible. If the leased or rented property is destroyed or damaged through no fault of the lessee, then the liability to return the property ceases, unless the lessee has specifically agreed to assume risk.

If certain property or auxiliary property has been transferred to a lessee by setting its price (value), then upon termination of the lease agreement the lessee shall compensate for the destroyed objects according to the price referred to. Additionally, the lessee shall compensate for the damaged, but not destroyed, items to an extent commensurate to the decrease of their value.

Termination/break clauses - both parties to the lease agreement generally have early termination rights. A lease agreement limited only to a goal to be reached or a specified term shall terminate when the goal has been reached or the term has expired. A lease agreement entered into for an indefinite period of time shall terminate, unless otherwise agreed, upon a six months prior notice given by either party of its own volition. If the subject-matter of the contract is a rural farm, such notice shall be given six months prior to the end of the agricultural year. An agricultural year shall begin and end on 23 April. Notice for termination of a lease contract entered into for an indefinite period of time, with a monthly or weekly lease payment, shall be given respectively one month or one week in advance.

Lease contracts may also terminate automatically, before the expiration of the term:

  1. upon the destruction of the leased real estate;
  2. upon termination of the right the lessor had to the object of the lease, but if the lessor has concealed the fact that the right to act with the real estate was effective only for a certain period of time, the lessor shall be liable to the lessee, who has acted in good faith, for fraud; or
  3. where confusion of rights takes place, i.e., if a lessee obtains the ownership of the leased property.
  4. Each contracting party may unilaterally withdraw from a contract, if excessive losses have been incurred.
  5. A lessor may require revocation (via court) of a contract without the consent of the lessee if:
  6. the lease payment has not been paid within the term stipulated in the contract, or, if such term has not been specified, within the term set by law; the consequences of such delay, however, can be prevented by offering the payment before the action for setting aside the contract has been made;
  7. the lessor has an unforeseen need to use the property himself or herself;
  8. the lessee damages the property by using it improperly or contrary to the provisions of the lease agreement;
  9. the leased real estate requires immediate and such extensive repairs that render it impossible to continue the agreement; moreover, the lessee may not in such case claim any compensation for losses; but if the repairs were not necessary, the lessee has the right to claim compensation for all the losses; or
  10. the lessee has sub-leased the leased real estate without the consent of the lessor.
  11. A lessee may require revocation of the contract (via court) without the consent of the lessor:
  12. if the lessor delays the transfer of the real estate for so long that the lessee is no more interested in using it;
  13. if the lessor does not make the necessary repairs to the real estate, or if the real estate is discovered to have such faults or defects as prevent from the possibility of its full use or at least to a significant extent hinder its use, and which cannot be remedied;
  14. characteristics of the object of the lease are harmful to health.

In all cases where one party has the right to withdraw from the lease agreement, such party shall notify the other party of its intention so as to provide the necessary time for the lessor to accept the real estate, or for the lessee to vacate the real estate. In no case, however, shall the lessor arbitrarily evict the lessee, even though such right may have been agreed to in the lease agreement. A person who fails to comply with these provisions shall compensate for all the losses of the other party.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - Lease deposits are permissible. It is a common practice for lessors to use lease deposits to secure the performance of lease agreements by lessees.

Surety - technically sureties may be used in real estate transactions. However, it is not common.

Warranty - bank warranties may be exercised for commercial leases.

Rent deposit/bank guarantee - the rent deposit/bank guarantee is not mandatory required by the law for the commercial lease contracts. However, most frequently the rent deposit is used by the lessors as a security for the compliance of the lessee with the lease agreement.

 

Taxes

Taxes

On sale/acquisition of real estate - profit gained by a natural person from the real estate upon its alienation (sale) is subject to capital gain tax the rate of which is 15 percent. Non-resident companies are taxed with 2% income tax from the income gained from the sale of the real estate located in Latvia. Non-resident’s income from the alienation of the real estate located in Latvia is considered to be also such income that is gained from the alienation of the shares in a Latvian or foreign company if during the year of alienation or the immediately previous year more than 50 percent of such company’s activities have been the real estate located in Latvia. For further reference please see the section on Income tax.

For the alienation of the property according to the agreement or on the grounds of court decision the stamp duty is 2 percent from the value of the real property, but not more than EUR 42,686.15. For the donation of the real property the stamp duty payable is 3 percent from the value of the real property, but not more than EUR 71,143.59. For the inclusion of the real property in the share capital of a capital company the stamp duty is 1 percent from the value of the property to be included in the share capital. In other cases the state duty would be EUR 28.46.

Immovable property tax - the items that are subject to real estate tax are those located in Latvia and which cannot be moved from one place to another without causing structural damage (i.e., land and buildings). The tax is paid by Latvian and foreign natural and legal entities, and the groups formed from these entities on a contract basis or their representatives, who own or legally hold the real estate.

The rate of real estate tax is from 0.2 - 3 percent of the cadastral value of the property according to local regulations. The cadastral value is defined by the State Land Service, whereas the amount of the tax payable is defined by the municipality where the real estate is located according to the law.

The taxation period is a calendar year. Real estate tax is payable once in a quarter by quarter amounts (1/4 of the yearly payment) – not later than 31 March, 15 May, 15 August and 15 November. The tax can be likewise paid once in a year as an advance payment.

Real estate tax is payable starting from the next taxation year after obtaining the ownership or legal holding of the real estate, and likewise the obligation to pay real estate tax terminates starting from the next taxation year after the termination of the ownership or legal holding of the property (exceptions may apply).

Real estate tax is paid in the budget of that republic city or rural area (municipality) in the administrative territory of which the property is located.

Income tax

Natural persons

The taxable income of residents includes the income from the lease and sublease of the real estate as well as from the alienation of the real estate (few exceptions apply). Natural persons are also required to pay income tax for the income gained from their commercial activities (real estate management is likewise considered as such).

If on the day of alienation the real estate is used as a fixed asset in commercial activity of a tax payer, the income from the alienation is taken into account when determining the income from commercial activities. If the purpose of the use of the real property is an agricultural land, the income gained from its alienation is non-taxable, if the receiver of the property is a company, individual merchant or a farm registered by the Registry of Enterprises or a merchant registered by the State Revenue Service and at least half of the receiver’s income is from agriculture (but not less than EUR 2,845.74 a year) or the receiver obtains support from the European Agricultural Guidance and Guarantee Fund.

The taxable income of non-residents – natural persons - is the income from the use and lease of the real estate located in Latvia as well as income from the alienation of such real estate and the income gained from the elaboration of the real estate by the lessee during the lease of the property belonging to the non-resident. As the non-resident’s income from the alienation of the real estate is considered to be also such income that is gained from the alienation of the shares in a Latvian or foreign company if during the year of alienation or the immediately previous year more than 50 percent of such company’s assets have been the real estate located in Latvia.

General income tax rate for commercial activities is 25 percent.

Legal entities (companies)

Company income tax is paid by residents, non-residents and the permanent representative offices of the non-residents.

Company income tax rate is 15 percent from the income gained from commercial activities in Latvia and abroad for residents and the permanent representative offices. Regarding non-residents taxable is income gained in Latvia from economic activity or related activity. Tax shall be deducted from payments as are paid by residents and permanent representations to non-residents if personal income tax has not been deducted from such payments before. Tax rates may vary depending on the type of activity.

Taxation period is a financial year of the company.

The income tax of 15 percent is deducted from payments made to the low-tax or tax-free countries or territories stipulated by the regulations of the Cabinet of Ministers.

Land tax - the common real estate tax as described above is applicable.

Lease tax - no specific lease taxes exist. Natural/legal entities are only taxed with the income tax for the income gained through the lease of the real estate within the scope of their commercial activity.

Local tax – generally additional local taxes do not exist.

Mortgage - there is a state (stamp) duty for the registration of mortgage on the real estate. Stamp duty for the registration of a mortgage in the Land Register is set at the rate of 0.1 percent from the sum of the loan as according to the loan agreement, but not more than EUR 1,422.87.

Other taxes - state (stamp) duties are payable for a number of transactions, including for registration of title and mortgage on the real estate in the Land Register. For further reference please see the section on mortgage and on sale/acquisition of real estate.

Property lease tax - no specific lease taxes exist. For further reference please see the section on lease tax.

Value added tax - transactions that are taxable by value added tax (VAT) include the first sale of the unutilised real estate (for example, a newly constructed building or structure, a building or structure after renovation, reconstruction or restoration works, a construction in progress etc.) and the sale of the land for construction. The VAT is also applied to the lease of the real estate.

The VAT rate is 21 percent.

The taxation period is either 1 month, 3 months or 6 months depending on the total sum of the transactions carried out in the pre-taxation year or on the territory of carrying out the transactions (i.e., whether in the country of merchant’s general place of business or in another EU member state).

The following persons can be registered in the VAT Payers’ Register of the State Revenue Services: 1) natural entities, 2) legal entities, 3) partnerships, 4) authorised representative of a group of persons carrying out economic activities on the grounds of agreement, 5) VAT groups; 6) a fiscal representative, 7) persons from other EU member states or non EU member states and their authorized representative in Latvia.

Information provided by Eversheds Bitans