Selling Latvia

Ingrīda Zujāne, 2AT2

Since economic situation and welfare in Latvia in a great respect depends on foreign capital investment especially in spheres with a high value added (such as energy, transport and communications), it is vital to improve the business and legal environment here, in Latvia. We have gone a long way since 1990, and have made a great progress but still there are lot of things to do. What are these things? Is Latvia attractive for foreign investors? In my report I will try to answer this question and give advantages and disadvantages of investing in Latvia.

Foreign direct investment is long-term investment in the equity capital of a company engaging in entrepreneurial activity in the Republic of Latvia. Latvia has adopted various laws in order to promote and protect foreign direct investment and to encourage the inflow of foreign capital into Latvia. The liberal Law on Foreign Investment (adopted in November 5, 1991 and subsequently amended) provides that foreign investors have the same rights and duties as natural and legal persons of Latvia. For the most part, ownership in various industries is unrestricted by Latvian law. A foreign enterprise may also be the sole founder of a Latvian-registered enterprise, such as a limited liability company, joint stock company or representative office.

In addition, there are other positive aspects of investing in Latvia, such as:

1)      In Latvia, corporate income tax is comparably low (25 per cent), which places us in a more attractive position than other states, e.g. in Finland where corporate income tax is 49 per cent, in the USA – 38 per cent, in Estonia – 26 per cent but in Germany – 56.5 per cent.

2)      The tax law permits substantial depreciation rates on fixed assets and allows losses to be transferred from year to year within a 5-year period.

3)      Due to the cheap but qualified workforce (in 1999, almost 90 thousand students study in 33 colleges and universities on Latvia), expenditures of production goods in Latvia are lower than in more developed countries in Europe and America. Generally, academical and theoretical education and education in IT field is recognised as the most qualitative one.

4)      Advantageous geographic situation – a strategic hub status between the European Union and Russia and other states of the former USSR. Good transport access – both by railroads and by sea. The ports of Riga, Ventspils and Liepaja meet the requirements of modern haulage of goods. Foreign companies may benefit from producing in Latvia and then selling further to the East.

5)      Today, the political situation in Latvia has become quite stable, so there are no political threats to foreign investments. In this respect, the business environment in Latvia is much more healthy than in many other countries, e.g. Russia, Byelorussia, the Balkans, or other states, which got their independence recently.

6)      As Latvia is going to enter the European Union, it is harmonising its legislation according to the one of the EU, which facilitates investing and business in Latvia for Western partners, since Latvia has much business with Germany and Scandinavian countries.

7)      The prices of immovable property are very low in Latvia; that is why foreign companies willingly purchase buildings and plots.

8)      Foreign investors may freely import and export capital, no permits needed, namely they may:

• repatriate their profits, provided all applicable taxes have been paid.
• repatriate their investment, provided all obligations to creditors have been settled.

Unfortunately I cannot put a dot here because apart from advantages the investment environment in Latvia has as many disadvantages.

1)      The legislation is still full of contradictions, undigested and gappy, there are many spheres not regulated by lows. The opinion poll of the Latvian Development Agency shows that 49.2 per cent of all respondents thinks that the information given by the government institutions is not accessible and its quality is unsatisfactory.

2)      Immigration department is one of the first institutions a foreigner in Latvia has to contact. Unfortunately, 81.3 per cent of foreign entrepreneurs think than immigration procedures are complicated or very complicated, moreover – more than half consider than officials in immigration department are unhelpful and it is difficult to collaborate with them. More than 80 per cent immigration and work permission regulations consider being blurry and very embarrassing. 

3)      Rather big bribery exists and, although this issue is widely discussed in negotiations in different levels, the government still has not succeeded in fighting it.

4)      The other negative aspect is a leftover from the communism – red tape. One has to fill in tens of papers and has to got an unnecessary amount of quests and leaves before any activity. According to The Latvian Development Agency, the process of purchasing and registering a plot takes from 30 up to 60 days but to affirm a construction plan one has to attend one and more different municipal and government offices up to/more than 6 times each. As you understand, it diminishes the effectiveness and willingness to have business with Latvia.

In order to attract more local and foreign investments, in February 2000, The Cabinet of Ministers has adopted The Action Plan To Improve the Business Environment that contains more than 50 specific actions to tackle problems existing in the following areas of business activity, e.g.:

            1.         development of a skilled labour force;

2.      tax policy and administration;

3.            transport infrastructure / border crossing / customs;

4.            reduction and elimination of corruption and crime;

5.            finance issues (availability of long-term credit resources in lats);

6.            administrative barriers to business.

Each action designates a deadline, the institution responsibilities and the civil servant responsibilities.

Despite its drawbacks, Latvia is catching up the western countries and the investment environment here is improving year by year so it is far-sightedly to invest in Latvian enterprises already now. Investment in your future will certainly pay back with interest!