Recently reported figures by Lursoft Ltd show that in Latvia number of newly established enterprises grew by 28.39% versus 2009. Seems pretty good results, especially during recession. But what is is behind those figures?
On 9 August 2010 the micro-enterprise tax law was adopted and since September 1st companies could be registered as micro-enterprise. But existing companies will be able to transform to micro-enterprise from 1st of January of 2011.
The fact that for openning new company it is needed just 1 LVL and not more than 5 persons employed opened new way for existing companies to restructure and reduce costs. How it works? Staff is laid off and asked to form a small enterprise. Usually this is "non-core staff" - guards, cleaners, etc. New enterprise then sign a contract with the former employer for providing services (cleaning, guarding, etc.). In turn, micro-company is paying only 9% of corporate tax (whic is eaqueal to contribution to national insurance of the employee 9%) and previous employer saves on contribution to national insurance - 24.09%.
Off course, some part of saved 24% can be paid to new partner company as a motivation, but I doubt it happens. And the fact that Latvian goverment all the time tends to reduce contribution to pensions, only decrease trust in social contribution, and forces employees to agreeon micro-enterprise scheme. We will see how many enterprises will be transformed from 1st of January 2011 to micro-enterprise type. But it is clear that contribution to national insurance will decrease further.
New micro-enterprise tax is a benefit only for non-trading companies with small turnover. Where the biggest income come from human minds.
ReplyDeleteAdditionally, I think some young professionals after working abroad just don't want to work for somebody in Latvia, knowing management experience and style in most of the local companies. They might prefer to try their own business.
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