One of the main factors in promoting foreign investment in a country is the creation of legal provisions guaranteeing an equal footing for domestic and foreign investors. To achieve this, the Law On Foreign Investment in the Republic of Latvia has been in force since 1991 to regulate the application of national legislative norms to foreign investors.

Overseas investors can be assured that these investment provisions will not suddenly disap-pear. Their application is guaranteed by legal provisions which stipulate that, even if subsequent legislation worsens the conditions for foreign investment, legislative enactments that were in force at the time of the initial investments will continue to apply for a period of 10 years. Upon joining the European Union (EU), the principles of freedom of establishment and freedom to provide services also became applicable in Latvia.

Management of companies

Until the adoption of amendments to Latvian commercial law on 21 May, 2004, certain aspects of Latvian legislation encumbered foreign investors' ability to efficiently manage the Latvian companies in which they had invested.

One such provision required that at least half the members of a company's board of directors be resident in Latvia. This pre-supposes that a foreign investor, whose prior contact with his Latvian partners may have been slight, will have sufficient faith in those partners to entrust his newly acquired Latvian assets to their hands – a rare situation in practice. Recent amendments to commercial law have now thankfully rescinded residency requirement for members of a board of directors.

Foreign investors had also felt encumbered by Latvia's relatively complicated and poorly coordinated immigration and employment requirements, under which obtaining a work or residence permit involved a lengthy and complicated bureaucratic process. In joining the EU, Latvia has introduced new allowances in this sphere regarding citizens of the EU.

Real estate

Certain land purchase restrictions apply to the real estate market. Foreigners cannot purchase land in Latvia's border zone, the Riga bay coast area and other territories of national importance. From 2011, these restrictions will be abolished for all EU citizens. Until then, restrictions will continue to apply to these areas and certain agricultural and forest lands.

There are no restrictions on the purchase of land in rural areas for companies registered in Latvia, in which more than 50% of the capital is owned by Latvian citizens, persons from countries with whom Latvia has entered into international treaties on the promotion of mutual investments and security, or for public stock companies. There are no restrictions on the purchase of urban property for companies registered in Latvia where more than 50% of the capital is owned by a citizen of an EU member state.

General improvement of the business environment

Aside from the issues discussed above, Latvian legislation does not generally discriminate against foreign investors. Improving the foreign investment climate is, therefore, chiefly a question of improving the general business environment, which affects both domestic and foreign investors.

Currently, a new draft law on insolvency is being prepared. From the perspective of entrepreneurs, the most important revisions will be those combating the biased and malicious initiation of insolvency. More legal protection will be provided to companies in financial difficulty by curtailing the creditors' rights to require the determination of a company's insolvency.

Extensive measures have already been taken to this end. The administrative barriers necessary to register a company have been reduced by Latvia's new commercial law. Since 1 January this year, the country has applied a 15% corporate income tax rate, reduced from 22% in 2002. It also recently abolished the tax on dividends paid to a resident of the EU who has owned at least 25% of shares and voting rights in the Latvian company for a period of two years.

As tax evasion distorts the market and creates unfair competition, improvements to tax administration are essential. Existing tax legislation provides rigid penalties for certain violations, without allowing the tax authorities to consider mitigating circumstances in specific cases.

Often amendments have been made to tax laws and rates that make it difficult for a company to effectively plan its activity. To a certain extent this problem is a result of flaws in the Latvian taxation system, but it is also a result of the country's efforts to bring its legislation into line with EU requirements.

Raymond Slaidins is a partner at Klavins & Slaidins in Riga.