Investment Account Tax Regime: Overview and Key Aspects - Nodokļu un juridiskās konsultācijas

Important to Know About Opening and Notifying the SRS About an Investment Account
If you open an investment account at a bank in Latvia, you do not need to notify the State Revenue Service (SRS) yourself, as the bank reports this to the SRS in accordance with the Account Register Law. Similarly, if the account is opened with a Latvian investment brokerage firm or a branch of a foreign investment service provider in Latvia, the service provider will report the account to the SRS by the end of the tax year.
However, if you open an investment account abroad and want to grant it investment account status, you must notify the SRS yourself under the Personal Income Tax Law. This notification must be submitted within the calendar year, stating that the account has been assigned investment account status. If such a notification is not submitted, the SRS will treat any profit-making transaction as reportable income. If this income is not declared, late payment interest may be charged.

What is an Investment Account?
An investment account is a special type of account where funds are accumulated and managed for investment in financial instruments such as shares, bonds, investment funds, etc. Profit from the sale of financial instruments within such an account is not taxed until the funds withdrawn exceed the amount deposited.

How is Income from an Investment Account Taxed?
Transactions with financial instruments that result in gains or losses can be made under the investment account regime. However, capital gains tax is applied only when the amount withdrawn from the account exceeds the deposited amount. The portion exceeding the deposited amount is treated as income and is subject to a 25.5% personal income tax, which must be declared in the annual income return. This excess amount is reduced by:

Dividends and interest income already taxed within the account or linked accounts. If only partially taxed, it is reduced proportionally.
Income from securities issued by Latvian, EU, or EEA states and municipalities.

Withdrawals and Their Tax Impact
Withdrawals include:

Any withdrawal from the investment or related accounts (e.g., third-party claims).
Disposal of the investment account.
Transfers of financial instruments between accounts.
Use of funds for non-permitted transactions.

Why Can a Tax Arise When Transferring Between Two Investment Accounts?
Although the investment account system defers tax until actual withdrawal, transferring financial instruments between accounts may trigger tax if the total value of transferred assets exceeds the original deposit. Since each account is treated independently, such excess is considered taxable income.

Example

€100 is deposited into Investment Account A.
The investment grows to €108.
These assets are transferred to Account B.
SRS will consider that €108 was “withdrawn” from Account A, and the €8 gain is taxed as income.

Author’s Opinion
Since the account owner does not physically withdraw funds and continues investment activity, the application of this rule should be reviewed. Transfers between accounts without personal use should not automatically create tax liability.

Conclusion
It is reasonable to revise the rule to ensure that transfers of financial instruments between investment accounts do not create tax obligations unless funds are actually withdrawn. This would avoid unnecessary administrative burdens and preserve the principle of the investment account regime.

Why Is This Methodology Applied?
The SRS uses this method to:

Prevent artificial increase of deposits to avoid taxes.
Ensure transparency, treating each investment account as a separate unit.
Limit profit manipulation through account transfers.

Should You Avoid Transfers Between Investment Accounts?
No, transfers are allowed, but:

Track deposits and withdrawals.
No tax applies if the value transferred does not exceed the deposit.
Profit transfers (exceeding deposit) are taxable.
Strategically plan account changes.
Consult an accountant or INNOVATOR tax advisor before transferring.