Saeima Removes the Cap of the Social Insurance Payments
- Latvia
- 09/01/2008
- Raidla Lejins & Norcous
On 19 June 2008, the Latvian Parliament (Saeima) amended the Law on State Social Insurance, making a number of important changes in the regime of social insurance in Latvia, including temporary removal of the limitation on the maximum amount of taxable income subject to social security payments and changes in the social security payment deductions. The amendments as a whole came into force on 23 July 2008, however, a number of provisions affecting the tax burden of the social security payments obligors will come info effect only as of 1 January 2009.
The most important amendment to the Law on State Social Insurance is the temporary removal of the limitation of the maximum income subject to state insurance payments. The limitation was introduced in 1997 and since then its amount for each subsequent tax year was determined by the Cabinet of Ministers. In the tax year 2008 the maximum amount of the annual income subject to the state social insurance payments was LVL 29 600 (approx. EUR 42 000). Thus, it meant that the annual taxable income exceeding LVL 29 600 was not subject to social insurance payments. This allowed reduce the tax of the medium to high-salaried employees. According to the new amendments, the cap on the maximum amount of income subject to state social insurance payments will not be applied in the period from 1 January 2009 until 31 December 2013.
The current rate of social insurance contributions ranges from 28.02% to 33.09% of the taxable income depending on the legal status of the taxpayer. The tax burden is split between the employee and the employer so that the employee has to pay 9% of the social security payments, while the employer pays the rest. According to the Law on the State Social Insurance, the income subject to social security payments includes all employment related income before income tax and any tax deductions. As such, the social security payments tax base includes not only the salary but also the fringe benefits, work-related travel costs in excess of the rates approved by the Cabinet of Ministers of Latvia, income from personnel shares, stock-options and other similar items.
The social security payments are payable in Latvia both by the Latvian residents and the foreign expatriates employed in Latvia, including the foreign nationals serving as the members of the Boards or Directors (Management Boards) or Supervisory Councils of the companies registered in Latvia, and other persons having procuration rights (registered signature rights) in companies registered in Latvia, except if these persons are covered by the Regulation (EEC) No 1408/71 of the Council of 14 June 1971 on the application of social security schemes to employed persons and their families moving within the Community and by virtue thereof are subject to social security regime of another EU Member State.
Among the other changes made to the Law on State Social Insurance, Saeima has doubled the percentage of the non-taxable contributions to the licensed pension funds and accrual life insurance schemes than can be deducted from the social security payments tax base before the tax. Thus, as of 1 January 2009 contributions made by the employer for the benefit of employee to licensed pension plans and insurance premiums paid by the employer in respect of an employee to accrual life insurance schemes will be deductible from the tax base of the social security payments subject to maximum amount of the deduction not exceeding 20% of the employee’s gross taxable income in the current tax year.
