The Latvia's taxation system is affected by both the Latvian legislation and the requirements laid down by the European Union. It can be described as average, because every tax payer contributes to the budget 30 % of his/her income on average. Besides, the Latvia's diverse system of tax rates, tax relief and allowances enables every tax payer to choose the optimum sector for their occupation and management of funds. The Republic of Latvia has the lowest effective (average) tax rate in the European Union. There are several areas of trade business with individual tax privileges – payments that are lower by 80 % to 100 %: for example, Liepāja and Rēzekne have special economic zones, and free ports of Riga and Ventspils can grant tax relief.

The tax principles are laid down by the law On Taxes and Fees. Taxes are administered by the State Revenue Service (SRS), and they are classified as direct and indirect taxes. Indirect taxes are taxes that are not directly deducted from income and that are levied on goods and services. In their turn, the direct taxes are taxes that are levied on all taxable income of natural persons 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.