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Successfully investing in Latvia

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last updated on 19 May 2021 | reading time approx. 4 minutes

 

 

 

How do you assess the current economic situation in Latvia?

As is the case for many other countries around the world, Latvia faced a difficult year in 2020 due to the spread of the Covid-19 virus. However, after a slight dip at the beginning of last year, the economy has slowly but steadily been on the path of recovery. Although the uncertainty of the progress of the virus made it difficult for investors to make decisions, the wide availability of financial support in the form of grants and other support mechanisms from the state helped to mitigate the negative effects of the restrictions that were put in place to contain the spread of the virus and stabilise the economy. Even though GDP in Latvia fell by 8.9 per cent in 2020, it was still above the average rate in the EU, where GDP fell on average by 11.7 per cent. If the vaccination roll-out continues according to plan, it has been forecast that the restrictions will be significantly eased in the second half of 2021, giving the economy a significant boost and opening up new possibilities for new and existing investors alike.

 

How would you describe the investment climate in Latvia? Which sectors offer the largest potential?

Foreign investments have been vital for the growth of the economy of Latvia. Its highly skilled workforce and geographic position are among the things that have made Latvia attractive to foreign investors. The latest “Doing Business” report by the World Bank ranks Latvia 6th among EU member states in terms of ease of doing business and in 19th place overall.

According to data from the Investment and Development Agency of Latvia, in the first three quarters of 2020 new investments amounted to at least 204 million Euro, which is the highest number in the last 7 years. The main fields of foreign investment were the financial and insurance sector, the manufacturing industry, as well as information and communication services.

Even though a slight decline in the production capacity utilisation rate was observed due to the global pandemic, it is expected that investments will rise again once the realisation of the Rail Baltic project commences, and funds from the Recovery and Resilience Facility of the EU have been made available. One of the Ministry of the Economy of Latvia’s priorities within this program is to support the development and digitalization of new products. Furthermore, in order to attract local and foreign investors, the ministry plans to create a so-called “green corridor” to ease the administrative and bureaucratic processes.

The Ministry of the Economy has also identified five areas that require improvement to advance the business environment in Latvia:

  • the strengthening of justice,
  • development of customer-oriented public administration,
  • the digitalisation of public services and manufacturing,
  • the accessibility of the business environment, and
  • increasing the competitiveness of the tax system.


The sectors most appealing to foreign investors are forecast to be centered around the information technology sector, such as digital innovations, manufacturing and scientific research.

 

What challenges do German companies face during their business ventures into Latvia?

Foreign investors have to take into account various challenges when starting operations in Latvia, including:

  • the small size of the Latvian market;
  • frequent changes in tax legislation;
  • low investment in research;
  • widespread corruption problems and the shadow economy.


While corruption and the shadow economy are long standing problems that Latvia continues to face, the government has taken significant steps in fighting against them by establishing the Economic Affairs Court, which began operating in March 2021. The aim is to speed up the process of the investigation of financial crimes, as well as proceedings in various important matters relating to company law, and disputes regarding the compensation of damages that have been caused by violations of competition law. The Economic Affairs Court also has jurisdiction over disputes between investors from other EU countries and Republic of Latvia concerning bilateral agreements on investment protection.

Recent amendments to the Law on Prevention of Money Laundering and Terrorism and Proliferation Financing have led to the stricter control of entities registered in Latvia. Namely, all entities registered with the Enterprise Register of the Republic of Latvia, including branches of foreign entities, must reveal information on their ultimate beneficial owners, including the provision of documentation that supports statements made to the Register. The same right has been vigorously exercised by the banks in Latvia as well. Such requirements are not necessarily unique to Latvia however, as Latvian law has been amended according to the provision of the AML directive of the EU, and such requirements have also been implemented across all other EU member states.

In recent years, there have been frequent changes made to tax legislation in Latvia, which, due to the volatility of the tax regime, may appear to be a threat, but these changes have only benefited entrepreneurs by relieving the tax burden and improving cooperation with the State Revenue Service. In order to help businesses to navigate this dynamic situation, foreign investors are supported by competent local consultants who speak several foreign languages, including German. By investing in Latvia, German companies can begin to open up the entire market of the Baltic region.

 

Why should companies choose to enter/remain in the Latvian market?

One of the main attractions of the Latvian market is its convenient geographical location. Latvia sits in the middle of the three Baltic states and borders Russia and Belarus in the east. Furthermore, the Baltic Sea has long facilitated trading relationships with the Scandinavian states. Therefore, due to its location and well-developed infrastructure Latvia offers a prime position for companies carrying out operations within Europe, as well as further East.

Furthermore, Latvia has been an EU member state since 2004, which has provided it a certain level of security and stability. In 2014, Latvia also joined the single currency area by adopting the Euro, which has led to various benefits, e.g., the elimination of costs associated with currency conversion, which, in turn, has made the process of doing business easier.

Five Special Economic Zones have been established in Latvia, namely Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Rezekne Special Economic Zone and Latgale Special Economic Zone. They all offer business incentives, such as various tax benefits.

Latvia’s other benefits include its highly skilled workforce and its plentitude of natural resources.

 

In your opinion, how will Latvia develop?

As a relatively small country, the development of Latvia is closely linked to export opportunities. Therefore, economic growth will go hand in hand with the recovery of the economies of its trading partners and overall global events. Even though the recent pandemic has created a level of uncertainty about the future, the quick response of the Latvian government has stabilised the economy. Moreover, the value of exported goods from Latvia in 2020 reached 13.19 billion Euro, which is a record high. Therefore, Latvia is not only in a position to overcome the challenges caused by the pandemic but to experience a rapid growth of its economy in the following years.

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Jens-Christian Pastille

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