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					                 LATVIA
ADMINISTRATIVE BARRIERS TO INVESTMENT




                  April 1999




      Foreign Investment Advisory Service
              a joint service of the
       International Finance Corporation
                        and
                The World Bank
         At the request of the Minister of Finance of Latvia, the Foreign Investment Advisory
Service (FIAS) has undertaken a study of administrative barriers to investment in the country.
The FIAS mission visited Latvia from October 13 to October 30, 1998, working closely with
the Investment Department of the Latvian Development Agency (LDA), which provided
invaluable assistance before, during, and after the mission, especially in verification of current
legislation and related facts. Various Government officials in Latvia, as well as EU officials,
investors, lawyers, accountants, and real estate agents, extended full support to the mission in
providing valuable information.

       A draft version of the report was sent to the Government at the end of December, 1998,
and a seminar was held to discuss the report on January 27, 1999, in Riga. The seminar was
attended by many officials of the Government of Latvia, including the Prime Minister and the
Minister of Economy. It was also attended by many representatives of domestic and foreign
investors. Subsequently, the LDA collected feedback from many Government agencies and
passed it to FIAS. We have incorporated the relevant feedback in the final report.

        The mission was co-financed by FIAS, EU Phare, and the LDA. FIAS is responsible
for any remaining errors, and is solely responsible for the analysis and recommendations
contained in this report. The views of FIAS are not necessarily shared by EU Phare, the
Government of Latvia or any of its agencies involved in the mission.
                                                                    TABLE OF CONTENTS




ACRONYMS AND ABBREVIATIONS..................................................................................... VI

EXECUTIVE SUMMARY......................................................................................................... VII

CHAPTER I INTRODUCTION ...................................................................................................1
   A.        FRAMEWORK OF THE REPORT ......................................................................................................................................1
   B.        CURRENT INVESTMENT ENVIRONMENT AND PERFORMANCE .................................................................................2
   C.        LATVIAN INVESTMENT PROCEDURES AND EU REQUIREMENTS.............................................................................5
CHAPTER II EMPLOYING.........................................................................................................8
   A.    FOREIGN INVESTOR ENTRY ..........................................................................................................................................8
        1. Visas .......................................................................................................................................................................... 8
        2. Approval of Invitation of Employment ................................................................................................................ 9
        3. Residence Permit...................................................................................................................................................10
        4. Work Permit ...........................................................................................................................................................13
        5. Analysis...................................................................................................................................................................13
        6. Recommendations.................................................................................................................................................15
   B.    EXPATRIATE LABOR ....................................................................................................................................................16
      1.   Approval of Invitation of Employment ..............................................................................................................16
      2.   Residence Permit...................................................................................................................................................17
      3.   Work Permit ...........................................................................................................................................................18
      4.   Analysis...................................................................................................................................................................18
      5.   Recommendations.................................................................................................................................................21
   C.    LOCAL LABOR...............................................................................................................................................................21
      1.   Trade Unions .........................................................................................................................................................22
      2.   Strikes......................................................................................................................................................................22
      3.   Wages and Benefits...............................................................................................................................................22
      4.   Hours of Work........................................................................................................................................................22
      5.   Employment Contracts.........................................................................................................................................24
      6.   Termination of an Employment Contract .........................................................................................................24
      7.   Dismissal Allowance ............................................................................................................................................24
      8.   Worker Safety Law................................................................................................................................................25
      9.   Analysis...................................................................................................................................................................26
      10. Recommendations.................................................................................................................................................26

CHAPTER III REPORTING.......................................................................................................27
   A.        COMPANY INCORPORATION .......................................................................................................................................27
        1.     Overview.................................................................................................................................................................27
        2.     Procedures .............................................................................................................................................................28
        3.     Analysis...................................................................................................................................................................30
        4.     Recommendations.................................................................................................................................................32
   B.        THE TAXATION SYSTEM IN LATVIA ..........................................................................................................................33
        1.     Corporate Income Tax .........................................................................................................................................34
        2.     VAT ..........................................................................................................................................................................35
        3.     Social Insurance....................................................................................................................................................36
        4.     Tax Treaties............................................................................................................................................................36
        5.     Audits and Inspections.........................................................................................................................................37
        6.     Analysis...................................................................................................................................................................38
        7.     Recommendations.................................................................................................................................................40



                                                                                            iii
   C.      LOCAL A UTHORITY REGISTRATION ..........................................................................................................................41
   D.      INTELLECTUAL PROPERTY RIGHTS............................................................................................................................41
   E.      SPECIALIZED LICENSES ...............................................................................................................................................42
        1.    Transportation Licenses ......................................................................................................................................43
        2.    Excise Goods..........................................................................................................................................................44
        3.    Pharmaceuticals....................................................................................................................................................45
CHAPTER IV LOCATING ........................................................................................................47
   A.    IDENTIFYING REAL ESTATE........................................................................................................................................47
        1.  Restitution of Land................................................................................................................................................47
        2.  Cadastre Registry .................................................................................................................................................48
        3.  Survey......................................................................................................................................................................49
        4.  State Valuation......................................................................................................................................................49
        5.  Registration in Land Book ...................................................................................................................................50
   B.    PURCHASING OR LEASING REAL ESTATE .................................................................................................................51
      1.    Municipal Right of First Refusal ........................................................................................................................52
      2.    Permission from Head of Municipal Council (for some Foreign Investors) ..............................................52
      3.    Valuation ................................................................................................................................................................53
      4.    Transfer Taxes and Real Estate Taxes ..............................................................................................................54
      5.    Analysis...................................................................................................................................................................54
      6.    Recommendations.................................................................................................................................................57
      C.    Construction Permits............................................................................................................................................57
      1.    Preliminary Approval: Application for Construction, Terms of Reference of Architecture and
      Planning............................................................................................................................................................................58
   2.    COORDINATION OF THE DRAFT (SKETCH) PROJECT ...............................................................................................60
   3.    THE APPROVAL AND A CCEPTANCE OF CONSTRUCTION PROJECTS......................................................................60
      4.    Utilities ...................................................................................................................................................................62
      5.    Building Permit .....................................................................................................................................................65
      5.    Inspections .............................................................................................................................................................66
      6.    Worker Safety Approval.......................................................................................................................................66
      7.    Environmental Approval......................................................................................................................................67
      8.    Analysis...................................................................................................................................................................68
      9.    Recommendations.................................................................................................................................................72
CHAPTER V OPERATING........................................................................................................74
   A.        IMPORT /EXPORT PROCEDURES ..................................................................................................................................74
        1.     Exemptions from Taxes and Duties....................................................................................................................75
        2.     Security for Pre-clearance and Performance of Customs Procedures........................................................76
        3.     Free Zones..............................................................................................................................................................76
        4.     Import Licensing ...................................................................................................................................................78
        5.     Export Licensing...................................................................................................................................................78
        6.     Customs Procedures at Border Crossings........................................................................................................78
        7.     Procedures at the Free Port of Riga..................................................................................................................81
        8.     Analysis...................................................................................................................................................................82
        9.     Recommendations.................................................................................................................................................85
   B.        FOREIGN EXCHANGE CONTROL.................................................................................................................................86
        1.     Issues .......................................................................................................................................................................86
        2.     Recommendations.................................................................................................................................................86
   C.        STATE LANGUAGE ........................................................................................................................................................86
        1.     Language Laws......................................................................................................................................................86
        2.     Inspections .............................................................................................................................................................87
        3.     Analysis ..................................................................................................................................................................87
        4.     Recommendations.................................................................................................................................................89




                                                                                            iv
D.        OTHER INSPECTIONS....................................................................................................................................................89
     1.     Types of Inspection...............................................................................................................................................89
     2.     Analysis...................................................................................................................................................................89
     3.     Recommendations.................................................................................................................................................90




                                                                                        v
                              ACRONYMS AND ABBREVIATIONS



CIF............................. Cost, Insurance and Freight
CMIB ......................... Citizen and Migration Issues Board
CUI ............................ Canadian Urban Institute
EC .............................. European Community
EIA............................. Environment Impact Assessments
EU.............................. European Union
GDI ............................ Gross Domestic Investment
GDP ........................... Gross Domestic Product
GDS ........................... Gross Domestic Savings
LCC ........................... Latvian Chamber of Commerce
LDA........................... Latvian Development Agency
LLC............................ Limited Liability Company
LVL, Ls...................... Latvian Lats
OECD ........................ Organization for Economic Cooperation Development
SAD ........................... Single Administrative Document
SES ............................ State Employment Service
SIA............................. Sabriedriba (limited liability company)
SLS ............................ State Land Service
SRS ............................ State Revenue Service
TOR ........................... Terms of Reference
TRIPS ........................ Trade Related Aspects of Intellectual Property Rights
VAT........................... Value Added Tax
WIPO......................... World Intellectual Property Organization
WTO .......................... World Trade Organization


1 LVL = approximately US$ 1.70




                                                   vi
                                   EXECUTIVE SUMMARY




i.      The Government of Latvia has progressed very rapidly with its ambitious reform
agenda. On-going legislative reform, at least in the commercial sphere, has generally been well
thought out and thorough, and associated regulatory reform has also made considerable
progress. Investors from OECD nations (both in the EU and outside), as well as EU officials,
agreed that Latvia's legal framework for investment is largely sound. Although Latvia is still in
the category of the "second wave" of countries expecting to join the European Union, it is
recognized as a front-runner within that category.

ii.      However, the more detailed regulatory regime associated with Latvia's commercial
legislation, although off to a good start, is still under development. Since the regulatory regime
is much more detailed than the legal framework, it is likely to take several more years before
Latvia's regulatory reform might be judged complete. In the mean time, daily life goes on, and
Government officials must often implement policy without detailed guidelines or training. In
this context, it is not surprising that most investors complain about inconsistency in the
implementation of the legal framework for investment. However, in a recent international
survey prepared for the World Bank, the uncertainty of Latvia's enforcement of the regulatory
regime was rated quite negative, even in comparison with other transition economies. The need
to improve consistency deserves the urgent attention of Government policy makers because, at
the end of the day, both investment decisions and the EU accession decision will be made on
the basis of Latvia's implementation of its policy and legal framework.

Inconsistent implementation and interpretation of laws and regulations

iii.    During the course of the FIAS mission, the problem of inconsistent implementation and
interpretation of laws and regulations was a recurring theme. Such inconsistency, in turn, can
give rise both to discrimination between different types of investors (foreign/domestic,
large/small) and to corruption. Even where corruption is not an issue, and even if two differing
interpretations are both "reasonable", investors often can not tolerate an outcome that treats
competing companies differently. A firm that is treated more harshly by the tax authorities
than another firm faces obstacles and costs that the other firm avoids. A firm whose imports
are held up at the border is seriously disadvantaged relative to a rival whose imports clear
customs expeditiously. A start-up enterprise whose construction permits are delayed may
suffer if a competitor enjoys a head-start. For this reason, inconsistency can NOT be dismissed
as a "minor" problem.

iv.     Latvia's decentralized governmental structure, in particular, makes it likely that different
municipalities will interpret and implement national law in different ways. The Government of
Latvia has attempted to mitigate this problem by giving policy makers at the ministerial level
the responsibility for developing implementation procedures, guidelines, and standard forms.
However, this can create new problems, because officials who are responsible for carrying out
policies, laws, and regulations -- not to mention representatives of the public who are affected
by them -- are rarely involved in that process.


                                                vii
v.      Interestingly, the basic start-up process for most businesses in Latvia seems to be
relatively clear-cut and consistent. Business registration procedures are quite transparent and
straightforward. Most registration procedures (e.g., enterprise registry, tax registry, land
registry) are available in two tracks – a normal track, for a relatively low fee, and an expedited
track, for a fee two to ten times the normal fee. The problem of “inconsistent treatment ” tends
to be worse after a business has registered, when it faces visits from a great variety of
inspectors: tax inspectors, fire inspectors, sanitation inspectors, labor inspectors, language
inspectors, immigration police, etc. There were many complaints from investors about
inspectors who might visit a business during construction or after starting operation and were
described as “looking for infractions.”

vi.      Tax inspection can be particularly onerous. It is possible for the State Revenue Service
effectively to shut down a business over a technical violation in tax reporting by denying it the
"tax clearance certificates" needed for importation, real estate transactions, hiring of expatriate
labor, and other activities, during a lengthy appeals process. A language inspector may visit a
retail establishment and assess a fine for an advertisement that is not in Latvian (or contains a
grammatical error). The former is a serious threat to a business, the latter is a nuisance, and
there is a full range of experiences in between. Large businesses say they are visited by one
Government inspector or another, on average, about once per day.

Lack of Recourse

vii.     There are few avenues for recourse for investors if they find themselves in dispute with
the Government. There is no Ombudsman to whom one can complain about inconsistent
treatment or unfairness by governmental or municipal officials. The LDA can often serve as a
useful interlocutor, but has no official authority over other agencies of Government. Most
ministries have their own appeals mechanism, but most investors interviewed by FIAS find
these procedures inadequate. There are numerous examples of investors taking the
Government to court and winning, but this is a slow, expensive, and uncertain course, so that
investors only resort to it for major cases, while the many "nuisance" cases build up and take
their toll on an enterprise.

Immigration

viii.   Probably the biggest single hurdle facing foreign investors during the start-up process is
immigration. Immigration procedures for investors from some countries (mostly those outside
the OECD) are slow and cumbersome, with requirements for excessive documentation.
Unfortunately, a foreign investor from any country who wishes to retain full control over his
enterprise can not legally do much more than register the business until he gets a work permit.
Investors are required to complete State Employment Service processes for a work permit
(which may involve delays up to six months), theoretically before they undertake any
transactions or commitments on behalf of their company. Failure to do so could lead to an
investor being arrested and being declared persona non- grata, which has actually happened
more than once. It is fairly unique in the community of transition and developing nations for
police to arrest foreign investors -- which Latvia says it wants more of -- for minor technical
violations of an immigration statute.



                                                viii
EU Accession

ix.     Latvia's desire to join the EU is an important motivation for reform, and is welcomed by
most (though by no means all) foreign investors. In fact, although the EU is largely satisfied
with the basic commercial legal framework in place in Latvia, they have barely begun their
examination of the associated lower-level regulations. Once they are finished with that
exercise, the EU will turn its attention to the actual implementation of the approved laws and
regulations. Moreover, the EU is also concerned about the political development (e.g., rule of
law) and overall economic conditions (e.g., the capacity to cope with competitive pressures and
market forces within the union), which also covers judicial and administrative capacity.

x.     Although some investors prefer a relatively unregulated environment (or even an
environment where officials can be bribed to bend the rules), the clear majority of reputable
investors from OECD nations are calling for exactly the same changes that the EU is looking
for: consistent implementation of a clear legal and regulatory framework.

Recommendations

xi.    The need to improve consistency of implementation of the policy, legal and regulatory
framework should now be a high priority for the Government of Latvia. There are a number of
ways to go about this, as listed below:

       •   The positive examples of agencies with clear, well publicized guidelines and
           procedures (such as the Enterprise Registry and the Land Book) should be
           replicated in all Government agencies that interact with business.

       •   As policy makers at the ministerial level work on the development of detailed
           implementing regulations, guidelines, procedures, and forms, they should
           regularly solicit input and suggestions from representative samples both of the
           lower-level officials who will be responsible for day-to-day implementation,
           and from the public at large, who will be affected by them. In particular, for
           regulations affecting the business community, feedback and input should be
           sought from the LDA, the Latvian Chamber of Commerce, foreign investors'
           Chambers, and other business groupings.

       •   In addition to laws and regulations, which are already publicly available,
           ministerial guidelines, directives, and internal rulings should be made
           available to the public on a regular basis.

       •   The Ministry of Finance, in particular, should make a concerted effort to
           provide advance rulings to tax payers who request it, and to publicize those
           rulings. Other guidelines for State Revenue Service inspectors should be
           publicized as they are developed.

       •   Government inspectors (including tax inspectors) should be required to write
           reports on all site visits, describing what was inspected, what was the status of


                                               ix
           whatever was inspected, whether or not there were violations (citing the
           relevant legal or regulatory criteria), and what action was taken. These reports
           should be available to the business that was the subject of the inspection. The
           right of the person or company being inspected to see the inspection report
           should be well publicized.

       •   The site visit reports should be subject to regular review and evaluation to find
           evidence of inconsistent treatment, unusual patterns, and unnecessary
           inspections.

       •   As a rule of thumb, Government Ministries and agencies should operate on
           the basis of precedent. If an earlier decision or series of decisions was found
           to be faulty, new guidelines should be developed. However, retroactive action
           against firms should generally be avoided.

       •   An Office of Ombudsman should be established to mediate, on behalf of
           private citizens and companies, in cases where they are subject to conflicting
           requirements between two or more Government agencies (e.g., the
           Immigration Service and the State Employment Service regarding work
           permits or the national level and municipal level Language Inspectorate.)

       •   Immigration police should be allowed to issue warnings or to assess fines for
           technical violations of immigration law, but should not be allowed to arrest
           expatriate investors or workers unless there is actual criminal conduct.

       •   The Government of Latvia should investigate measures to mitigate the power
           of the State Revenue Service over legitimate business enterprises, and to
           develop a more business-friendly tax regime, with an emphasis on voluntary
           compliance wherever feasible. Possibilities to consider include the following:

              -   Forming an independent tax appeal tribunal to hear disputes over tax
                  assessments. Such a tribunal could be composed of qualified
                  professionals (accountants, lawyers, professors, judges, etc.) in
                  addition to SRS tax officials, with the former group in the majority;
                  and/or

              -   Abolishing or reducing the need for businesses to produce a tax
                  clearance certificate for importation, for real estate transactions, and to
                  employ expatriate labor.


xii.   The main text of the report also provides more specific recommendations on
immigration and employment, registration procedures, licensing, access to land and
construction permits, on-going reporting requirements, and inspection procedures.




                                                x
xiii.   Some of the most important recommendations include the following:

        •   An investor (i.e., the principle owner/director of a company or subsidiary)
            should not normally be subject to a work permit. If the Government feels that
            a work permit adds value, then the process of authorizing the work permit and
            authorization of the letter of invitation for employment in Latvia should be
            combined into a single process.

        •   Investors should be given limited rights to conduct business once an
            application for residency has been submitted. This will ensure that the review
            of the application will not act as a bottleneck to an investment.

        •   It is recommended that the Enterprise Registry continue to work with the State
            Revenue Service to find technological solutions to end the overlapping
            registration processes. Further, it is recommended that the Enterprise Registry
            continue to reduce the time associated with “normal” registration applications.
            They should set themselves the goal of processing all registration applications
            within three working days by end 1999 and consider a goal of one day by
            2001.

        •   It is recommended that the Government of Latvia eliminate its current
            restrictions against foreign ownership in the timber industry.

        •   Since there does not seem to be a compelling reason to maintain the
            municipalities' right of first refusal on real estate transactions, and it is anyway
            being circumvented with increasing frequency, FIAS recommends that it be
            eliminated.

        •   Similarly, the requirement for certain foreign investors to obtain the
            permission of the Head of the Municipal Council in order to buy land is
            largely unnecessary and ineffective in protecting the concerns of the Latvian
            Government and citizens. FIAS recommends that it also be eliminated.

        •   Establish a simplified process for site-specific changes to the Municipal
            Master Plan (zoning variance).

        •   The inconsistency of border post procedures for import and export of goods
            should be addressed as a matter of urgency. This inconsistency can lead to
            delays in shipping and creates opportunities for corruption. It is
            recommended that Customs develop and publish clear guidelines, and create a
            fast-track system for receiving and acting upon complaints and appeals.

xiv.    Next Steps: After FIAS submitted the draft version of this report to the Government of
Latvia, the Government invited the FIAS team to participate in a seminar with the main
stakeholders to discuss the draft. The seminar was held in Riga on 27 January, 1999. Both the
Prime Minister and the Minister of Economy addressed the seminar. Most relevant Government
agencies participated, as did representatives from the Latvian Chamber of Commerce and the


                                                  xi
main foreign chambers of commerce. After the seminar, the Prime Minister signed an
Executive Order to form a Working Group to prioritize among the recommendations of the
report and to develop an action plan for reform. 1

xv.    The Working Group is composed of senior technocrats from the key Government
agencies that interact with investors, and representatives of major investor groups in the
country, with the LDA serving as the secretariat. The Prime Minister’s initiative in forming the
Working Group is evidence of the seriousness of the Government’s intentions. The formation
of the Working Group has also been described as a major step forward in improving the
dialogue between the investor community and Government institutions and between different
government institutions.

xvi.    The Working Group began functioning within one month of the seminar, identified the
highest priority issues, formed sub-groups to develop reform proposals, and are planning to
present an Action Plan for Government consideration in May 1999. The Action Plan is
expected to include a range of legal, regulatory and procedural reforms designed to streamline
and simplify the investment process, and to improve transparency and consistency in
interactions between the Government and investors. The Action Plan will also identify areas
where further technical assistance or other outside support will be required.




1
    See Annex 1 for a copy of the Prime Minister's Order.


                                                            xii
                                          CHAPTER I


                                       INTRODUCTION



1.      At the request of the Minister of Finance and the Latvian Development Agency (LDA),
the Foreign Investment Advisory Service (FIAS) has prepared a study of administrative barriers
to investment.

2.     The purpose of the study is four-fold:

       •    To develop a comprehensive guide to investment procedures as of October
            1998, providing step-by-step details of all the application requirements an
            investor must fulfil to become fully operational;

       •    To identify existing bottlenecks and inefficiencies, and to make
            recommendations on how best to streamline them, taking into account Latvia's
            regulatory requirements for accession to the European Union (EU);

       •    To analyze other factors affecting investment decisions that may result from
            the legislative environment;

       •    To compare Latvia with other countries that compete for investment.

3.      Like many other transition economies, Latvia's reform program has been progressing
very rapidly. Therefore, the portions of the report that function as an "investment guide" are
likely to be out of date in a relatively short frame of time. Unlike similar "investment guides"
prepared for many developing countries, which represent a snapshot in time and a motivation
for reform, this report must be much more forward-looking, and is intended to assist the
Government of Latvia in prioritizing its ambitious reform agenda.

4.     The rest of this introductory chapter presents the framework for analysis for this report,
an overview of the current investment environment and performance, and a description of the
framework for reform in Latvia, which is driven largely by the EU accession process.


       A.      Framework of the Report


5.    The model for analysis of administrative barriers to investment is comprised of a
number of core processes divided into 4 process groups, which include the following:

       •    Employment issues, including temporary and permanent residency work
            permits for foreign investors and expatriates, and labor relations (examined in
            Chapter II);


                                                1
          •    Reporting to government, including business registration, statistical reporting,
               and tax registration and reporting (Chapter III); and

          •    Locating issues, including purchasing land, transferring deeds, developing
               land, obtaining environmental approvals, and hooking up utilities (Chapter IV;

          •    Operating, which includes importing, exporting, profit repatriation, and
               various inspections (Chapter V).

6.      The first step of the process component of the report is to document, in as much detail
as possible, the various steps required to establish a new business and to begin operations in
full compliance with existing laws and regulations. The licenses or approvals required, their
application procedures, and criteria for qualification are all detailed. The fees or processing
payments are noted, as are typical processing times for each step. In most cases these are
average processing times reported by the agencies for projects with no unusual characteristics
or problems. Actual processing times encountered by firms may often be significantly longer.
The Annex to this report contains copies of all the principal forms required for each step at
each agency. Figure 1, below, provides an overview of all the agencies a greenfield investor
must interact with.

7.      Process components are followed by an analysis in which policy and procedural issues
are identified and discussed, and recommendations for streamlining are made where
appropriate. Recommendations are based on the objectives of simplifying application
procedures for investors while enhancing the ability of government to screen key information
properly, and to fulfil requirements for accession to the EU.


          B.       Current Investment Environment and Performance


8.      The Government of Latvia has progressed very rapidly with its ambitious reform
agenda. On-going legislative reform has been well thought out and thorough, and regulatory
reform has also made considerable progress. Although Latvia is still in the category of the
"second wave" of countries expecting to join the European Union, it is recognized as a front-
runner within that category, and may even, with continuing effort, catch up with the "first
wave" group. Investors from OECD nations (both in the EU and outside), as well as EU
officials, agreed that Latvia's legal framework for investment is largely sound.

9.     Gross domestic investment in Latvia was about 21% of GDP in 1995 and 19% in 1996,
and gross domestic saving was about 16% of GDP in 1995 and 10 % in 1996. By comparison,
Hungary's GDI was 27% and GDS was 26% of GDP in 1997. 2 Much of the gap in Latvia has
been made up by foreign investment. FDI into Latvia has been quite strong, growing from
about 3 percent of GDP in 1994 and 1995 to over 7 percent in 1996. Preliminary estimates for
1997 suggest that it was about 7 percent of GDP, but may have dropped back somewhat in


2
    World Bank World Development Report, 1998/99, Table 13, Structure of Demand.


                                                      2
Figure 1: Company Establishment in Latvia




                                            3
1998.3 These figures compare quite favorably internationally, including strongly performing
countries such as Hungary, the Czech Republic, and Estonia.

10.     However, as has been seen in many other transition economies, most of this investment
is associated with the privatization program, which will soon come to an end. Attracting
greenfield investment has proven, in all the transition economies, to be more of a challenge.

11.     Greenfield investment is particularly sensitive to administrative barriers. A recent
survey of investors in 74 countries, prepared for the World Bank's 1997 World Development
Report, indicated a few areas where the Government of Latvia should probably devote
attention. Although Latvia's legal framework for business was judged to be relatively good,
survey participants rated Latvia harshly in a few specific areas: retroactive changes in
regulations that are important for business operations, corruption, and tax structure and
regulations. Interestingly, government regulations per se were not cited as a major problem,
but the survey singled out "general uncertainty on costs of regulations" and "uncertain costs of
compliance" of regulations as significant problems. 4

12.      In the same survey, although Latvia scored relatively well on a question about
recourse, 5 investors interviewed by FIAS expressed dissatisfaction with the appeals procedures
established in most Government ministries and agencies (see, for example, Chapter 5). They
felt that these appeals bodies were usually biased in favor of the Government agency and
against the investor.

13.     Subsequent surveys have, however, provided evidence for improvement, at least in
some areas. For example, in the Heritage Foundation 1999 Index of Economic Freedom,
Latvia is ranked as the third highest in economic freedom among the transition economies,
behind the Czech Republic and Estonia, but ahead of Hungary and Poland. In particular, Latvia
scores relatively well in the areas of trade, foreign investment, and taxation. However, its
scores were less favorable in the areas of government intervention, property rights, and
regulation. 6

14.     Chapters II through V of this report present details of the regulations of most concern to
investors, and highlight the differences between regulations and administrative procedures that
are relatively straightforward and transparent, and those that are vague and prone to differing
interpretations and inconsistent implementation.




3
  IMF International Financial Statistics, 1998, 1999.
4
  Brunetti, Aymo and Beatrice Weder, 1997, "Survey Research on Economic Development,"
http://www.unibas/ch/wwz/wifor/survey/
5
  "If a government agent acts against the rules I can usually go to another official or to his superior and get the
correct treatment." (ibid, question no. 18).
6
  http://www.heritage.org/index.


                                                           4
       C.      Latvian Investment Procedures and EU Requirements


15.     Since Latvia regained its independence in 1991 it has aimed at becoming a member of
the European Union. An application for membership was formally submitted in 1995. In
response to the application, the EU Commission presented its opinion regarding the application
in July 1997 (the "Agenda 2000"). In the Agenda 2000 the Commission stated that
negotiations for accession to the EU should be opened with Latvia as soon as it has made
sufficient progress in satisfying the conditions of membership that had been earlier defined by
the European Council (The "Copenhagen Criteria").

16.      The Copenhagen Criteria require, inter alia, that the candidate country has achieved
stability of institutions guaranteeing democracy, the rule of law, a functioning market economy
and the ability to take on the obligations of me mbership to the EU.

17.     Latvia's present legal rights and obligations vis-a-vis the EU is stipulated in the so
called European Agreement which entered into force on 1 February 1998. It is considered of
vital importance for Latvia's gradual integration with the EU.

18.     While the European Agreement remains the basis for Latvia's relations to the EU, an
"Accession Partnership" has also been adopted as a key feature for the enhanced pre-accession
strategy mobilizing all forms of assistance to Latvia within a single framework. The Accession
Partnership includes the objectives set out in Agenda 2000 (which included a summary
checklist of the issues - or criteria - which Latvia will have to address).

19.     Moreover, the EU is providing economic and technical assistance to Latvia (the "Phare
Programme"- allocation for the period 1995-1997 has totaled 112 million ECU). The
assistance is conditional on respect by Latvia of its commitment under the Europe Agreement,
further steps towards satisfying the Copenhagen Criteria and the progress in implementing the
Accession Partnership. The pre-accession aid from the EU will be increased substantially from
the year 2000.

20.      In March 1998 Latvia presented a National Program for the Adoption of the Acquis
("Acquis" means the "Acquis communautaire" - the legal and institutional framework by means
of which the European Union puts into effect its objectives). The National Program describes
in more detail the actions needed to reach the objectives set out in the Accession Partnership. It
should be noted that the task of implementing the whole Acquis is judged to be insurmountable
in the short term. The National Program represents a good basis for setting priorities. It would
neither be practically nor financially possible to adopt the whole framework down to the last
detail. Instead Latvia shall approximate its legislation to a number of chosen key EC directives.

21.     Just to give some idea of the approximation process, the number of pages of priority EC
directives (the ones which are supposed to be implemented during 1998 and 1999 according to
the National Program) that are being translated into Latvian is estimated to total some 12,000
pages. And this is only the first step.




                                                5
22.      For Latvia to become a full member of the EU, it must in principle adapt its legislation
to all sources of EU law, i.e. to the different treaty provisions, to EC Regulations, to all
directives as well as to the case law of the EC Court of Justice. However, as most treaty
provisions and EC regulations have general application, and are binding in their entirety as well
as directly applicable in all Member States, they do not have to be incorporated into national
law to be validly invoked. Therefore Latvia - in principle - need not specifically deal with the
implementation of EC Regulations, only EC Directives. Still, it is naturally necessary that a
framework for the practical implementation of the Regulations exists.

23.     The "core" of the Community Law is the establishment of the internal market, the so-
called "four fundamental freedoms", e.g. the free movement of goods, persons, services and
capital, as well as the principle of equal treatment (the prohibition against discrimination on
grounds of nationality). In the case law of the EC Court of Justice, this prohibition against
discrimination on grounds of nationality has been interpreted as covering not only provisions
that are directly discriminatory, but also provisions, practices etc. that are indirectly
discriminatory. This notion covers all provisions, practices etc. which in any way are less
favorable to foreigners or in some way or another easier to comply with for nationals than for
foreigners. Thus, the prohibitions have a very wide scope of application. Still, in certain
circumstances, even discriminatory provisions or practices can be justified, notably on grounds
of public policy, public security or public health.

24.     Thus, the work facing Latvia to become a full member of the EU is enormous. In former
accession cases, the adoption of the Acquis has for obvious reasons not been such a difficult
task as the one facing Latvia and other transition economies.

25.    In response to the National Program the Commission has declared that the program
needs to go further in covering the Acquis in some areas e.g. regarding free movement of
goods, social policy, environment, transport, telecommunications and consumer protection.

26.     In November 1998 the EC Commission issued its first regular report on Latvia's
progress towards accession and, in particular, the rate at which it is adopting the relevant part of
the Acquis (the "Commission Report"). The Commission Report focuses on the short term
objectives set out in the Accession Partnership. As far as the cond itions for foreign direct
investments are concerned, certain of the Commission's remarks will be briefly commented
upon in this chapter and elsewhere in this report in conjunction with specific issues of interest.

27.     According to the Commission Report, it is difficult at this stage to make an overall
assessment of the effectiveness of the reforms and of the institutions created recently. The
Commission appreciates the steady progress, but concludes that there are remaining gaps in the
regulatory and supervisory framework which must be filled, especially in the financial sector.
Also, the legal environment for enterprises needs to be simplified.

28.     Thus, the Commission states that further efforts are needed to streamline the public
administration, to retain qualified staff and to improve the budgetary mechanism and internal
audit system within each ministry.




                                                 6
29.     The Commission Report also states that the effective implementation and enforcement
of "the four freedoms" i.e.; free movement of goods, persons, services and capital, requires not
only compliance with such important principles as non-discrimination or mutual recognition of
national legislation, but also the effective application of common rules, such as those designed
for safety, environmental or consumer protection, and effective measures of redress. "The same
principles apply to certain common rules, for example in the areas of public procurement,
intellectual property and data protection, which are important in shaping the general framework
within which the economies operate."

30.    Corruption remains a serious issue. The Commission Report notes that the Government
of Latvia has initiated several measures, including the following:

       •   The establishment in September 1997 of a council for the prevention of
           corruption;

       •   The adoption in January 1998 of a national program of short term measures
           for prevention, education and enforcement (partially implemented);

       •   The adoption in March 1998 of a law on money laundering; and

       •   New provisions on the protection of witnesses and crime victims in existing
           laws.

31.   The Commission notes that it is still too early to assess the effectiveness of these
measures, and declares that it will be following the situation closely.

32.     Other, more specific findings of the Commission Report are highlighted in the relevant
sections of this report. The recommendations contained in this report are designed to facilitate
Latvia's accession to the EU, focussing on aspects of the accession that may affect investment
procedures. This report is intended, among other things, to provide the investors’ perspective
on regulations affecting investment, and to assist in prioritizing some aspects of regulatory
reform pertaining to investment.




                                                7
                                                 CHAPTER II

                                                EMPLOYING




33.   This chapter focuses on the procedures necessary to gain entry into Latvia and to
employ expatriate and local labor.


        A.       Foreign Investor Entry

                 1.       Visas

34.     All foreign nationals must obtain entrance visas to enter Latvia, unless otherwise stated
in international agreements (see Annex 2.1 for details). Visas may be issued by Latvian
diplomatic representations and consulates abroad or by the Citizenship and Migration Issues
Board (CMIB) in Riga International Airport. 7 Consular applications will be processed within
10 working days (24 hours for a double fee). If a Consular decision requires approval by the
CMIB, the reply requires up to one month. CMIB processing in Riga is immediate, and visas
are valid for up to 10 days. Citizens from many countries, including the Baltic countries and
the majority of OECD countries, may stay in Latvia up to 90 days per year without a visa (also
refer to Annex 2.1). A copy of the form for an Entry Visa is presented in Annex 2.2.

35.     Types of visas available in Latvia include:

        •    Private visas (single and multiple entry) which are valid for a stay of up to
             three months (within one year of issue), to be used for private visits, business
             trips, medical treatment, work contracts, training or scientific work, carrying
             of road cargo, or tourism.

        •    Transit visas, which are multiple entry visas with a term of validity of 48
             hours up to one year, may be used to travel through the territory of Latvia and
             receive or deliver cargo as well as other purposes.

        •    Emergency visas, which are valid up to 7 days, may be obtained for
             emergency, health or humanitarian reasons.

        •    Diplomatic and service visas, which are valid up to 3 years, may be obtained
             by persons on official missions or those who enjoy diplomatic immunity.

        •    Special visas, which are valid up to 1 year, may be used by business people,
             scholars, and persons arriving to assist the state of Latvia or a Latvian

7
 Only available to citizens of countries who are not required to file an invitation approved by the CMIB (see
Annex 2.1).


                                                        8
             municipality. 7 In general, a special-visa applicant entering Latvia for
             commercial purposes must supply a document certifying that the applicant has
             a permanent co-operative relationship with a Latvian enterprise or that he or
             she is a founder or member of a Latvian business entity. To obtain a special
             visa, an applicant must present the following (if the applicant obtaining the
             visa is planning to conduct commercial activity):
                 • Completed application form
                 • Copy of title page of passport, plus pages with Latvian visas or
                     entrance seals
                 • 1 photo
                 • an official letter of invitation to conduct concrete activities on projects
                     or an application from a legal entity stating the necessity of the special
                     visa
                 • In the case of paid employment, a work permit from the State
                     Employment Service.

         •   Fees for the special visa are as follows: 100 Ls (for 3 days), 85 Ls (for 10 days), 70
             Ls (for between 10 and 15 days) and 50 Ls (over 15 days).

36.      In order for an entrepreneur to establish himself in Latvia, there is a three step process:

         •   After registering the business, the investor (if not the sole owner of the
             business) must have the business invite him to be employed. This invitation
             must be approved by the State Employment Service;

         •   The investor brings the approved invitation to the CMIB to obtain a Residence
             Permit;

         •   Upon receipt of the Residence Permit, the investor returns to the State
             Employment Service to obtain a work permit.

37.      This process is detailed below.

                  2.       Approval of Invitation of Employment

38.    After completing the company registration process and registering for taxes with the
State Revenue Service, the company must invite the investor to be employed. 8 This invitation
must be made by someone else in the company who has the right of signature.

39.     This step is not necessary if the investor does not wish to participate in the operations of
the business. The test for this is that the investor must not be a company signatory. In this case,
the investor may not take on any activities other than supervising and consulting. In this case,


8
  No invitation is necessary if the person is the manager of the representative office, is the owner or shareholder of
a company registered in Latvia without signatory rights, or is an employee of a foreign company sent to Latvia on
a business trip.


                                                          9
the State Employment Service must issue a “no objection” in order for the investor to get a
residence permit.

40.   The invitation is brought to the nearest regional office of the State Employment Service.
A complete application (see Annex 2.3) includes:

       •   An application letter justifying the need to employ the person
       •   The work invitation
       •   A notarised copy of the documents certifying the qualifications of the investor
           or employee
       •   A copy of the employment contract (not yet signed)
       •   A clearance certificate from the State Revenue Service indicating that the
           company owes no taxes
       •   A notarised copy of a professional license, in the event a license is necessary
           for the type of work the applicant will be employed in
       •   A duly authorised copies of the employer’s registration certificate and charter
       •   A reference issued by the foreign employer stating the applicant’s work
           experience of the last two years, if the applicant wants to work as the manager
           of the company or as a head of division of the company.

41.     According to officials at the State Employment Service, the submission of a letter of
invitation for an investor and subsequent approval primarily represents a formality. By law, the
State Employment Service is required to reply within 15 days of a complete submission. The
State Employment Services states that it frequently is done in 5 days or less.

42.   The fee is calculated by formula and ranges between the State fixed minimum monthly
wage and 20 times the minimum wage.

               3.     Residence Permit

43.     Foreign nationals must obtain a residence permit to reside in Latvia longer than three
months, except for holders of special and diplomatic visas. An application for a residence
permit may be submitted either in Latvia at the Latvian CMIB or any consular or diplomatic
representative office of Latvia abroad (see Annex 2.4). It is often more efficient to apply
locally rather than through the Consular offices.

44.     In order for the investor to obtain a residence permit, he must submit the approved
invitation along with the following documentation for each family member who wishes to be
resident:

       •   Completed application form
       •   An invitation of employment authorized by the State Employment Service or, in the
           case of a sole founder of an enterprise, a letter signed by the Registry of Enterprises
           confirming the investment
       •   Copy of the passport or other valid travel document recognized in Latvia
       •   Two pictures



                                               10
       •   Medical report on health condition
       •   Police certificate reflecting no criminal record
       •   Copy of valid health insurance policy
       •   Contract of employment (if applicable)
       •   Information regarding the place of residence
       •   Document certifying that the person has been demobilized, if he/she has
           served in military service
       •   Reference of the Register of Enterprises on founders, directors, and executives
           with signatory rights

45.    For dependents, the following additional documents are necessary:

       •   A copy of the marriage certificate
       •   A copy of the passport of the spouse
       •   Children’s birth certificates

46.     Documentation may be submitted in English, Latvian, German, or Russian.
Submissions are made to a regional CMIB office. By law, the Residence Permit must be issued
within 30 days of filing. The CMIB states the process is often done in less time. Permits are
issued by the CMIB in Riga. Investors collect their permit at their local regional office where
the fee is paid.

47.    A renewal of the Residence permit, usually annually, requires the submission of all of
the above documentation except for the police certificate and medical report.

48.     As of 1st January, 1999, the following changes in the Regulations on Residence Permits
are in force:

       •   Individuals from countries whose citizens do not need an officially approved
           invitation to enter Latvia will be eligible for a simplified procedure and will
           not have to submit the following documents (for list of countries, see Annex
           2.1):

           - health certificate – replaced with a declaration (as described below) stating
             that the applicant does not have the listed diseases;

           - criminal record – replaced with a declaration stating that the applicant has
             not been criminally convicted;

           - documents stating that the applicant’s legal means of income is not less
             than the Latvian minimum wage (as determined from time to time by the
             Cabinet of Ministers) – replaced with a declaration;

           - documents certifying as to domicile in Latvia – replaced with the
             applicant’s written statement as to his or her domicile; in case of any




                                               11
               changes in domicile the applicant has to report to the Citizenship and
               Migration Issues Board (CMIB);

           - document certifying that the person has been demobilised from ordinary
             military service – replaced with a declaration. If the person has served in
             the special forces the requirement is to submit a document certifying that
             he or she has been demobilised.

49.    Whereas before, one had to demonstrate the lack of a criminal record, now (for
applicants from approved countries) one must only declare. If the CMIB finds such a
declaration to be untrue, the residence permit may be voided, and an issue of deportation
ordered.

50.    The simplified procedure described above is applicable to all grounds for obtaining the
residence permit, providing the person is from an eligible country.

51.     Additional changes in the Regulations also affect the following grounds for obtaining
the residence permit:

       •   (Article 7.5. of the Regulations) If the applicant wants to receive the residence
           permit on the basis of entrepreneurial activity (as an investor, representative of
           an investor, duly authorized signatory), he or she has to submit additionally
           the following document:

           - a reference from the Enterprise Register stating information regarding the
             founders of the company and the company’s duly authorised signatories.

       •   (Article 7.9. of the Regulations) If the applicant wants to receive the residence
           permit on the basis of the representative office of a foreign institution or
           enterprise, he or she has to submit additionally the following document:

           - a reference from Enterprise Register stating information regarding the
             founders of the subsidiary or representative office and the company’s duly
             authorized signatories.

52.     The Regulations have been supplemented with an article defining and providing for a
“long business trip”. Article 7.13. provides that if the applicant who is an employee of the
foreign enterprise wants to receive a residence permit on the basis of a lengthy business trip
(longer than three months) the following additional documents have to be submitted:

       •   a letter from the employer stating the aim of the business trip and certifying
           that the respective applicant will not receive his or her wage on the territory of
           the Republic of Latvia;

       •   a duly certified copy of the registration certificate of the foreign enterprise.




                                                12
                 4.       Work Permit

53.    According to the State Employment Service, the issuance of a work permit for a foreign
investor upon successful completion of authorizing the Letter of Invitation and obtaining a
residence permit is a formality. In order to obtain a work permit, the applicant must submit a
passport (records are kept of the authorized Letter of Invitation).

54.    Within several days, the State Employment Service calculates the fee for the Work
Permit. The fee is deposited with a social insurance fund reserved for unemployment.

55.     State Employment Service representatives state that the work permit is usually issued
within two weeks.

                 5.       Analysis

56.     If the investor is not engaged in the day to day affairs of running his or her business, the
entry-related requirements are minimal. However, the entry process has been identified as
particularly troublesome for investors who are actively involved in their business but who do
not enjoy the privileges provided for in the new Regulation on Residence Permits. Further,
almost all investors are concerned about Latvia's methods of enforcement, which rank
unfavorably when compared with other investment sites around the world.

57.     The most significant complaint raised by investors is the legal right of the Government,
and the demonstrated willingness to exercise the right, to detain and declare persona non grata
investors who operate in violation of the Immigration regulations. Several stories were related
of investors led off in handcuffs by Immigration Police for violations. 9 This problem is
exacerbated by the lack of clarity in the investor entry process. Two types of cases were
frequently mentioned:

        •    Investors who have not yet received their work permits were arrested for
             sitting behind a desk as this constituted "work". 10

        •    Investors who changed their home address were expelled from the country for
             not informing CMIB.

58.     It is fairly unique in the community of transition and developing nations for police to
arrest foreign investors for technical violations of immigration laws. In most investor-friendly
countries, investors have at least limited rights, including signatory rights, during the start-up
phase, even before they have a residence permit. Administrative infractions of immigration
regulations by bona fide investors in most OECD countries (including the EU) are usually
handled with warnings or fines. Deportation is usually reserved for those engaged in fraud or
criminal conduct. This practice in Latvia can potentially pose a significant barrier to



9
 The Immigration Police are a separate branch of the Ministry of Interior and do not report to the CMIB.
10
  Regardless of whether they were committing the crime of signing papers before they are eligible to do so by
merit of their immigration status.


                                                       13
investment, as investors have repeatedly shown a willingness to relate stories of poor treatment
to other potential investors.

59.     Other complaints from investors included stories of CMIB delivering residence permits
up to 6 months after application, well outside the legislated 30 day period (such investors do
not feel that they have practical recourse, as they believe that appeals within the CMIB might
only lead to antagonism and worse treatment), unhelpful and sometimes rude officers, and
inconsistent applications of regulations.

60.     Investors pointed out the poor coordination between CMIB and the State Employment
Service. In fact, interviews with department directors uncovered inconsistencies in procedures.
For instance, CMIB states that it requires the State Employment Service to give an indication of
"No Objection" to an investor who does not intend to work in the country but requires a Special
Visa or Residence Permit to oversee the investment. However, the State Employment Service
replies that there is no such regulation. As a result of this poor coordination, investors
complained of being shuttled back and forth between the departments.

61.     Documentary requirements were also mentioned by investors to be particularly onerous.
This becomes a significant problem due to the short-term nature of the permits and the
requirements to renew them frequently. The requirement for all family members, including
children, each to complete a set of documents seems unnecessary. Other complaints about
documentation include:

       •   The requirement for police clearance is difficult to obtain for some
           nationalities, and is anyway easily forged by white-collar criminals throughout
           the world.

       •   The requirement that a health certificate come from the home country creates
           a burden on an investor already in the country.

62.    However, the changes introduced by the new Regulations on Residence Permits in 1999
will make this point moot for many investors, as a declaration will replace the actual
documentation. Nonetheless, these requirements will remain a burden for investors from many
countries.

63.    One director at the State Employment Service mentioned that an investor's invitation for
employment has never been rejected. However, the interaction with the Employment Service
does add significant time to the process (in total about 1 month, including preparation of the
necessary documents) without adding any apparent value.

64.     Even if Government of Latvia feels it necessary to continue involving the State
Employment Service in the Investor Entry Process, the fact that two interactions are required
seems redundant. The formality that the investor must separately acquire a work permit adds to
the amount of time the investor must spend establishing the business. It also adds another task
to the State Employment Service thereby decreasing their resources available for other tasks.




                                               14
65.      By law, an investor can not sign any documents (which effectively prohibits many vital
activities) until he or she receives the work permit. This is particularly problematic in that the
process can easily take two months and much longer. The impracticality of this is illustrated by
the number of investors prepared to risk arrest in Latvia in order to conduct business activities
that are allowed in most EU countries and Central Europe. The law does allow for an
authorized signatory (i.e., a Latvian resident) to sign on behalf of the investor. However, the
possibility to authorize a Latvian resident to sign on one's behalf begs the question: why is the
investor himself not allowed to sign in the first place? What harm is expected to come from a
foreign investor's signature that would not be there if the signature was that of a Latvian
resident? Furthermore, many businesspeople prefer to take full charge and responsibility for
their activities in a country and do not want to be forced to delegate responsibility to someone
they do not know very well.

66.    The CMIB states that it is easier to apply for a residence permit from overseas.
However, in practice this is extremely difficult, due to the requirement of interaction with the
State Employment Service. In addition, the requirement for notarization in Latvia (as opposed
to acceptance of foreign notarization) adds considerably to the delay.

67.     Accession into the European Union will require changes to the current laws and
regulations. Article 44 of the Europe Agreements states that Latvia shall grant for the
establishment of Community companies a treatment that is no less favorable than that accorded
to its own companies or to companies of any third country, whichever is the better. A
Community company established in Latvia shall be entitled to bring employees who are
nationals of Community member states provided that such employees are key personnel.

68.    Also, all visa requirements concerning EU nationals will have to be abolished before
accession to the European Union (most have already been abolished).

               6.      Recommendations

69.     As a matter of urgency, Immigration Police in Latvia should be restricted to issuing
warnings and fines for administrative and technical violations of immigration regulations,
rather than detention orders and expulsion, which should be reserved for serious fraud or
criminal misconduct. This particular recommendation is critical for Latvia to maintain a
positive relationship with the investment community

70.    The Government of Latvia should eliminate the requirement that a foreign investor (the
owner or director of a foreign investment) interact with the State Employment Service to
authorize the letter of invitation, no matter which country the investor comes from. If the
Government feels that a work permit adds value, then the process of authorizing the work
permit and authorization of the letter of invitation should be combined into a single process.

71.     Investors should be given limited rights to conduct business (e.g., investment
formalities and business start-up procedures) once an application for residency has been
submitted. This will ensure that the review of the application by CMIB will not act as a
bottleneck to an investment.




                                               15
72.    The Government should consider reducing the documentary requirements for
applicants' dependents, particularly for children under the age of 12.

73.    In the event that the State Employment Service must remain as part of the process, it
should find a manner in which applications can be submitted and processed from overseas.
Clearly this will require some degree of coordination between the Department of Immigration
and the State Employment Service.


       B.      Expatriate Labor


74.     The process for bringing in expatriate labor is similar to the investor’s entry process, but
usually more elaborate. Foreign nationals who arrive to work for a period of up to six months
or in accordance with an employment contract must file the employer's invitation, which has
been approved by the State Employment Service to prove that Latvia lacks the skills being
brought into the country. The employer's invitation must be approved by the State
Employment Service. The approved invitation, along with other documents, is submitted to the
CMIB in order to obtain a Residence Permit. The expatriate then returns to State Employment
Service in order to obtain a Work Permit.

75.    This process is detailed below.

               1.      Approval of Invitation of Employment

76.     In order for a company to employ an expatriate, it must invite the prospective employee
to work for the firm. The letter of invitation is considered a legal document by which the issuer
of the invitation takes responsibility for the person invited from abroad. The invitation is
brought to the nearest regional office of the State Employment Service. A complete application
includes:

       •    An application form justifying the need to employ the employee
       •    A copy of the work invitation
       •    A notarised copy of the qualifications of the employee
       •    A copy of the employment contract
       •    A clearance certificate from the State Revenue Service indicating that the
            company owes no taxes
       •    A notarised copy of a professional license, in the event a license is required

77.     This application is primarily vetted for skills and qualifications, and existing
unemployment rolls. Regulations state that if a registered unemployed citizen of Latvia is
qualified for the position, the company will be offered that person before the invitation can be
authorized. Further, if the employer rejects two offers of unemployed Latvian citizens, the State
Employment Service may reject the invitation.

78.    By law, the State Employment Service is required to reply within 15 days of a complete
submission. The State Employment Services states that it frequently is done in 5 days or less.


                                                16
79.    The fee is calculated by formula and ranges between the State fixed minimum monthly
wage and 20 times the minimum wage. It is based on unemployment levels, minimum wage,
and the length of the contract.

              2.      Residence Permit

80.     Foreign nationals must obtain residence permits to reside in Latvia longer than three
months, except for holders of special and diplomatic visas. An application for a residence
permit may be submitted either at the Latvian Embassy of the foreign national’s home country
or in Latvia at the CMIB. It is often more efficient to apply locally rather than through the
Embassy.

81.     In order for the employee to obtain a residence permit, he must submit the approved
invitation along with the following documentation for each family member who wishes to be
resident:

       •   Completed application form
       •   An invitation of employment authorized by the State Employment Service
       •   Copy of the passport or other valid travel document
       •   Two pictures
       •   Medical report on health condition
       •   Police certificate reflecting no criminal record
       •   Copy of valid health insurance policy
       •   Contract of employment (in case the applicant wants to receive residence
           permit on the basis of the work in Latvia)
       •   Information regarding the place of residence
       •   Document certifying that the person has been demobilized, if he/she has served
           in military service
       •   Reference of the Register of Enterprises on founders, directors, and executives
           with signatory rights
       •   Reference of the State Revenue Service on payment of taxes by the entity

82.    For dependents, the following additional documents are necessary:

       •   A copy of the marriage certificate
       •   A copy of the passport of the spouse
       •   Children’s birth certificates

83.     Documentation may be submitted in English, Latvian, German, or Russian.
Submissions are made to a regional CMIB. By law, the Residence Permit must be issued
within 30 days of filing. The CMIB states the process is often done in less time. Permits are
issued by the CMIB in Riga. Employees collect their permit at their local regional office where
the fee is paid.

84.    A renewal of the Residence permit, usually annually, requires the submission of all of
the above documentation except for the police certificate and medical report.


                                              17
                3.           Work Permit

85.     A work permit is a document entitling the employer to employ under employment
contract or enterprise contract (as an orderer) a foreign national, independent of the motivation
of his legal entrance or residence status. The approval of an employer's invitation to work, for
the receipt of a temporary residence permit and the issue of a work permit, is the competence of
the State Employment Service. In order to obtain a work permit, the applicant must submit his
or her passport (records are kept of the authorized Letter of Invitation).

86.    Within several days, the State Employment Service calculates the fee for the Work
Permit (as described above in Section A.1). The fee is deposited with a social insurance fund
reserved for unemployment.

87.     State Employment Service representatives state that the work permit is usually issued
within two weeks.

                4.           Analysis

88.    The chart below illustrates the flow of documents for acquiring an employment permit
of expatriate employees (see Annex 2.5 for the required forms):



                                            Tax               Create and          Have
              Company                 Registration               send          employment
             Registration            with Revenue             employment      qualifications
                                        Service                invitation       notarized




           Obtain Clearance
                                           Submit               Collect       Obtain medical
            Certificate from
                                        invitation to        approval from        report
           Revenue Service
                                     Employment              Employment         regarding
           (regarding taxes
                                    Service Office             Service            health
              payments)




                                   Submit application
            Obtain Police                                                         Collect
                                     and required
             Certificate                                                     Residency Permit
                                   documentation to           Pay fees
             reflecting                                                       at local regional
                                    Department of
           criminal record                                                   Immigration office
                                     Immigration




              Pay fees             Submit application                            Employment Invitation Procedures
             (deposited              and required
                                                           Collect               Permanent Residency Procedures
             with Social           documentation to
                                                         work permit
             Insurance               Employment                                  Work Permit Procedures
                Fund)                  Service




                                                        18
89.    Investors describe this process as unwieldy and time-consuming. This process must
usually be completed on an annual basis, and in a firm that employs many expatriates, this can
consume a great deal of a human resource manager's time. Figure 2.1, below, presents the time
required in Latvia compared to other countries. Here it is clear that the lowest time for
processing of documents in Latvia compares favorably with competing investment sites.
However, there are often delays in Latvia that drag on significantly longer than in comparator
countries. The reasons for the delays deserve to be investigated more thoroughly.

90.     As do many other departments of labor, the State Employment Service offers
“qualified” unemployed personnel when an application is made to sponsor a foreign worker.
Failure to accept domestic applicants put forward by the SES may mean that the foreign
applicant will be rejected. This policy does not reflect the market realities that local labor is
considerably less expensive than equivalent foreign labor (often by a factor of 5 times) and that
a firm would prefer to hire local skills whenever possible. However, in a small country such as
Latvia, it is often impossible for a firm to find individuals with the necessary training,
experience, or qualifications, especially in fields such as management and marketing. Foreign
firms typically bring in expatriate personnel for these positions initially, train domestic
personnel, and replace the expatriates as soon as possible.

91.     Investors in Latvia also claim that the issuance of residence permits often exceeds the
30 days stipulated by law and may extend for several months. Immigration states that it is
aware of delays in the past, but that it has taken measures to correct them. However, employees
of one foreign firm interviewed mentioned that despite a 4-month wait, neither a residence
permit nor any official response (e.g., indicating the need for additional information) had been
issued. Investors referred frequently to long queues, unfriendly staff, and poor treatment by the
Department of Immigration.

92.     The length of work permits is a maximum of one year, which usually does not match
the length of a typical employment permit. This increases the paperwork burden for both the
investor and the government. Many other countries will routinely issue 2 - 3 year work
permits, if the employee's contract is that long.

93.     The three steps required seem to be unnecessary and are, in many countries, combined
into a single step. The analysis of invitations is common among nations around the world, but it
is unusual that this is separated from the step of issuing the work permit.

94.     Furthermore, many countries around the world have combined the work permit and
residence permit into a single work permit vetted by both Immigration and Labor departments.
In these cases, the investor has a single interaction with either of the two institutions that then
coordinates the issuance of the permit between them.




                                                19
Figure 2.1: Foreign Investor Entry/Country Comparisons




                                                         20
95.     A final consideration will be EU requirements in some areas related to employment of
expatriate labor, such as the supply of services. According to Article 52 in the Europe
Agreement, Latvia shall progressively take the necessary steps to allow the supply of services
in Latvia by Community companies or nationals. In step with this liberalization process, the
parties shall permit the temporary movement of natural persons providing the service, or who
are employed by the service provider as "key personnel", including natural persons who are
representatives of a Community company or national, and are seeking temporary entry for the
purpose of negotiating for the sale of services or entering into agreements to sell services for
that service provider, where those representatives will not be engaged in making direct sales to
the general public or in supplying services themselves.

               5.     Recommendations

96.     The work permit, authorization of letter of invitation and residence permit should be
combined into a single work permit that would be approved by both the State Employment
Service and the CMIB. Investors should be able to submit applications on behalf of the
expatriate workers in either of the two agencies, depending on the needs of the government.

97.     CMIB and the State Employment Service will have to be well coordinated in order for
this recommendation to be successful. One method is for one institution to approve the
application and submit to the second. Upon approval of the second, the work permit is issued.
However, a more successful model is to have a working level Immigrant Selection Committee,
comprised of Immigration officials and representatives of the State Employment Service, which
meets on a regular basis (e.g., weekly). Such a committee also has the benefit of bringing
economic government departments (such as the Ministry of the Economy and the Ministry of
Trade) into the decision making process. This committee would also promote transparency.

98.     The Government of Latvia should consider liberalizing its policy of requiring investors
to hired unemployed Latvians deemed "qualified" by the State Employment Service before
turning to expatriates, as investors already have a strong financial incentive to hire Latvians
rather than expatriates whenever possible. An alternative to consider would be the possibility of
guaranteeing all investors over a certain size that they can automatically have access to a
certain number of work permits for expatriates, subject only to minimal immigration screening.

99.    Work permits should be issued for a minimum two-year period (or less if the term of the
contract is less than two years), as described in Section A, above.


       C.      Local Labor


100. Under the Law on Employment, the State Employment Service is the institution
designated to implement the unified employment policy throughout the country.




                                               21
               1.     Trade Unions

101. The League of Free Trade Unions represents 30 major national sector and professional
trade unions (out of 117 registered at the Ministry of Justice). As of 1997, 266,681 workers
were represented by trade unions nationwide, of which the League of Free Trade Unions
represented 261,681. According to a representative of the League, approximately 30 percent
of all employees in Latvia belong to a trade union.

102. Except in cases of transgression of labor discipline and terms and conditions of the
labor contract, the employment contract of a union employee may not be cancelled without
union permission.

               2.     Strikes

103. Although trade unions have the right to announce strikes, these rights are exercised
extremely rarely. For a strike to be declared legal, judicial approval must be obtained (which
requires at least 6 months).

               3.     Wages and Benefits

104. The Cabinet of Ministers sets the minimum monthly wages that all employers must
secure their employees for work within the normal workweek (40 hours per week). Minimum
wage is now 50 Lats per month.

               4.     Hours of Work

105.   The normal workweek may not exceed 40 hours. Shortened workweeks apply to:

       •   Employees aged 16-18 (35 hours per week) and persons under the age of 16
           (24 hours per week);
       •   Employees working under unhealthy or difficult conditions (35 hours per
           week);
       •   Women with children under three years of age (35 hours per week).

106. Working overtime is permissible only upon the employee’s consent. Overtime may not
exceed four hours within two days in succession and 120 hours per year.

107. In compliance with Article 72 of the Labor Code, the length of annual vacation shall be
28 calendar days, excluding national holidays.

108. According to the Law on State Pensions the retirement age is 60. Women who have
reached the age of 55 and who have been insured for not less than 10 years are eligible to
receive their pension at age 55. The pension depends on the length of employment rather than
on wages. The actual pension is based on the basic pension, which is pegged to the average
wage in the national economy.




                                               22
109. The EU has adopted detailed rules concerning the organization of working time. For
example, Council Directive 93/104/EC of 23 November 1993 concerning certain aspects of the
organisation of working time grants the Community worker a right to daily, weekly and annual
periods of rest and adequate breaks as well as satisfactory health and safety conditions in his
working environment. It also contains provisions on a maximum limit on weekly working
hours, night work, health assessment, shift workers etc.

110. Specifically, Directive 93/104 states the following: Member States shall take the
measures necessary to ensure:

       •   that every worker is entitled to a minimum daily rest period of 11 consecutive
           hours per 24-hour period (Article 3);

       •   that, where the working day is longer than six hours, every worker is entitled
           to a rest break (the details shall be laid down in collective agreements or
           legislation - Article 4);

       •   that, per each seven-day period, every worker is entitled to a minimum
           uninterrupted rest period of 24 hours (in principle a Sunday) plus the 11 hours'
           daily rest referred to in Article 3 (Article 5);

       •   the period of weekly working time shall be limited by law;

       •   the average working time for each seven-day period, incl. overtime, does not
           exceed 48 hours (Article 6);

       •   that every worker is entitled to paid annual leave of at least four weeks;

       •   this leave may not be replaced by an allowance in lieu, except where the
           employment relationship is terminated (Article 7);

       •   normal hours of work for night workers shall not exceed an average of eight
           hours in any 24-hour period;

       •   night workers whose work involves special hazards or heavy physical or
           mental strain shall not work more than eight hours per 24 hours (Article 8);

       •   night workers are entitled to a free health assessment and shall be transferred
           to day work if suffering from health problems recognized as being connected
           with the night work (Article 9).

111. The directive does not affect Member States rights to apply laws that are more
favourable to the workers. It is possible to derogate from the Articles cited on account of the
specific characteristics of the activity concerned.




                                                23
               5.     Employment Contracts

112. Upon completion of an employment contract in writing, a work engagement may
commence. The contract must be drawn up in two copies, one for the employer and one for the
employee. According to the Labor Code, a contract must be concluded in writing, and may
require a probation period during which the employee’s suitability for the particular position is
tested. The probation may not exceed three months. If the probation results are unsatisfactory,
an employer may dismiss an employee without notification and without paying a dismissal
allowance. The employee has the right to submit the dismissal to the court for review.

113. If the employee continues to work after the expiration of the probation period, the
probation must be considered as having been successfully passed and termination of the
employment contract is permitted in compliance with set general procedures.

               6.     Termination of an Employment Contract

114. The basis for termination of an employment contract may include the following (further
details are contained in Annex 2.6):

       •   An agreement between parties.
       •   Expiration of the term, except in cases where labor relations actually continue
           and neither of the parties has demanded that these relations should cease.
       •   Employee intoxication at work.
       •   Employee has reached the pension age.
       •   Liquidation of enterprise.
       •   Reduction of staff.
       •   Incompetence.
       •   Violation of the law of the Republic of Latvia on concluding the employment
           contract or non-compliance of the employment contract with the law.

115. The employee is entitled to terminate the employment contract by notifying the
employer in writing one calendar month prior to the termination. Temporary disability to work
is not included in the term of notification. If the employee and employer come to a mutual
agreement, the employment contract may be terminated prior to the mentioned term.

               7.     Dismissal Allowance

116. The employee must be notified one month prior to termination, and be allotted a
dismissal allowance at the minimum amount of the average one month’s wages or at the
amount provided by the collective agreement or employment contract. The allowance is not
due in cases of temporary disability or if the employee is absent for more than four months in
succession (see Annex 2.6).

117. The minimal dismissal allowance shall be paid in the amount of six months' average
remuneration in one case only - when the employment contract does not comply with the
requirements of the acts of labor protection.



                                               24
               8.      Worker Safety Law

118. Latvia’s accession into the European Union will require Investors to comply with EU
regulations on Worker Safety. The EU regulation in this field is detailed. As an example,
Council Directive 89/391/EEC on the introduction of measures to encourage improvement in
the safety and health of workers at work, contains general principles concerning the prevention
of occupational risks, the protection of safety and health, the elimination of risk and accident
factors, the informing, consultation, balanced participation in accordance with national laws
and/or practices and training of workers and their representatives. It also includes general
guidelines for the implementation of the principles.

119. The directive applies to all sectors of activity, public and private. It is a framework-
directive that serves as a basis for more specific directives covering all the risks connected with
safety and health at the work place.

120.   So far, specific directives have been issued concerning, e.g.,:

       •   minimum safety and health requirements for the workplace;

       •   minimum safety and health requirements for the use of work equipment by
           workers at work;

       •   minimum health and safety requirements for the use by workers of personal
           protective equipment at the workplace;

       •   minimum health and safety requirements for the manual handling of loads
           where there is a risk particularly of back injury to workers;

       •   minimum safety and health requirements for work with display screen
           equipment;

       •   risks related to exposure to carcinogens at work;

       •   risks related to exposure to biological agents at work;

       •   minimum safety and health requirements at temporary or mobile construction
           sites;

       •   minimum requirements for the provision of safety and/or health signs at work;

       •   work of pregnant workers and workers who have recently given birth or are
           breastfeeding;
       •   minimum requirements for improving the safety and health protection of
           workers in the mineral- extracting industries through drilling;




                                                25
       •   minimum requirements for improving the safety and health protection of
           workers in surface and underground mineral-extracting industries;

       •   minimum safety and health requirements for work on board fishing vessels,
           protection of the health and safety of workers from the risks related to
           chemical agents at work.

121. Thus, the EU accession will eventually require Latvia to adopt very detailed and
comprehensive rules on the safety and health of workers.

122. The Ministry of Welfare is currently reviewing the existing legislation with the aim that
all the above mentioned EC directives should be transposed into Latvian legislation during
1999-2000 with the exception of the directives mentioned in the final three sub-paragraphs
above (concerning health protection of workers in the mineral extracting industries through
drilling; workers in surface and underground mineral extracting industries; work on board
fishing vessels and work risks related to chemical agents at work) which shall be transposed
into Latvian legislation before the end of 2001.

               9.      Analysis

123. Latvia's labor policies were not a source of complaint for investors interviewed during
the FIAS mission. However, many investors noted that adoption of many of the EU norms
regarding labor would probably raise total labor costs and therefore reduce, at the margin,
Latvia's relative attractiveness as an investment site. Firms from the U.S., for instance, are
accustomed to fewer paid vacation days, and even EU firms that locate in Latvia are often
motivated by the relatively inexpensive labor force (in terms of both wages/salaries and indirect
labor costs).

               10.     Recommendations

124. While Latvia's existing labor policies are generally adequate, the Government should
carefully consider the timing of additional reforms. New legislation that might tend to increase
labor costs significantly, even if it will be required for EU accession, could be held back until it
is actually necessary.




                                                 26
                                                CHAPTER III

                                                REPORTING



125. This section covers the business application and reporting procedures required of most
enterprises in Latvia, including business registration, income tax registration, VAT registration,
and obtaining investment incentives.


        A.       Company Incorporation

                 1.       Overview

126. The Entrepreneurship Act of September 26th , 1990 and the various amendments that
have followed over the past 8 years set the main principles guiding company incorporation in
Latvia. 11 The Act provides for the following types of commercial entities:

        •    Joint-stock company;
        •    Branch of foreign company;
        •    Limited-liability company;
        •    Individual enterprise, family or fishery farm;
        •    Company with additional liability;
        •    General partnership;
        •    Limited partnership.

127. The most common forms of companies in practice are limited-liability companies
(LLC) and joint-stock companies.

                          a.       The Limited Liability Company

128. The Limited-Liability Companies Act of January 1991 and subsequent amendments
thereof regulate LLC formation. The comprehensive, transparent legal form and easier
incorporation procedures make this a favorite type of incorporation. An LLC is a legal entity
which is separate and distinct from its shareholders, and which is capable of holding property,
to sue and to be sued. An LLC is capable of being transformed into a public Joint Stock
Company.

129. Minimum registered capital of an LLC is LVL 2000 (approximately US $ 3500). Within
fourteen days of signing the charter, the company’s executive body must submit a registration
application to the Enterprise Register. The name of a LLC company must include the
abbreviation ‘SIA’ (Sabriedriba).

11
  A new draft Commercial Code is expected to be considered by Parliament in 1999. It will supercede (but not
substantially change), inter alia, the Entrepreneurship Act, the Limited Liabilities Company Act, and the Joint
Stock Companies Act.


                                                       27
130. LLCs must set up a special reserve for unexpected liabilities. It is created by allocating
at least 5% of annual profit to this reserve account until it reaches one-third of authorized
capital. This process resumes as soon as reserves fall below one-third of the issued capital.


                              b.       Joint Stock Companies

131. The Joint-Stock Companies Act of June 24, 1993 regulates joint-stock company
formation in Latvia. These are usually established either because of the specific requirements
of the law (banks, insurance companies and other business must operate as such) or because it
is intended that the company’s shares will be publicly traded on the stock exchange.

                              c.       Branches of Foreign Companies

132. For business purposes, branches of foreign companies are treated as independent legal
entities and are subject to similar requirements as those for local companies. Limitations exist,
however, on the tax deductibility of certain expenses that are incurred in transactions with the
head office.

                              d.       Prohibitions on Foreign Ownership

133. For the most part, ownership of various industries is unrestricted by Latvian Law (see
Annex 3.1). However, there are cases of restrictions:

           •    Foreign investors may not control activities related to timber harvesting.
                Control, in this case, is defined as having controlling voting rights.
           •    Foreign investors may not own more than 49% of any company involved in
                gambling or lotteries.
           •    Foreign ownership of a broadcast media company may not exceed 49%.

                     2.       Procedures

134.       General procedures for setting up a company in Latvia include the following:

           •    Production of the incorporation documents.
           •    Approval and signature of the documents.
           •    Opening of the bank account. 12
           •    Settlement of the share capital.12
           •    Receipt of the reference from the bank.12
           •    Completion of the signatories’ cards, certified by a sworn notary.
           •    Payment of stamp duty (state fee):
                ⇒ 100 lats for limited-liability companies, 250 lats if equity capital exceeds
                    5000 lats;
                ⇒ 250 lats for a joint-stock company;
                ⇒ 100 lats for a representative office, registered as a legal entity;
12
     Does not refer to representative offices.


                                                      28
             ⇒ 20 lats for a representative office not registered as a legal entity, if the
               founder is a limited liability company.

         •   Submitting of documents to the State Enterprise Register.
         •   Registration in the Register of Enterprises (an independent institution under
             the auspices of the Ministry of Justice). This procedure normally requires 15
             days (3 days if twice the registration fee is paid). The application for
             registration must be submitted with the following documents:

             ⇒    Foundation agreement;
             ⇒    Charter;
             ⇒    Minutes of the founding meeting containing the signatories elected;
             ⇒    Bank statement to prove that the applicant is in possession of sufficient
                  funds to supply the capital for the founding of the company;
             ⇒    Document confirming address of the enterprise (this reference may be
                  issued by the entrepreneur, the manager of the house or premises, or it
                  may be supplied as a record in the passport or contract on lease of the
                  premises);
             ⇒    List of the persons at the business company who are entitled to attach their
                  signature (card of signatories);
             ⇒    Copy of the company founder’s passport or personal identification card (if
                  the founder is a natural person) or a certified copy of the registration
                  certificate and a copy of the articles of association (if the founder is a legal
                  entity registered abroad);13
             ⇒    List of capital shares (for limited liability companies), and if necessary,
                  the report on tangible investments.

135.     Representative offices must submit the following information to the Enterprise Register:

         •   The designation (name) of the foreign company.
         •   The country of residence of the company; the address, phone, telefax of the
             company.
         •   Rules governing the permanent representative office, indicating the motivation
             of founding the representative office, its status, operations, address, structure
             and the order of liquidation.
         •   A reference of competent institutions of the respective country confirming that
             the company is a legal resident of the respective country.
         •   Documents confirming the foreign company (articles of association, certificate
             of incorporation (registration).
         •   The name, surname, citizenship, address and a certified specimen of the
             signature of the head of the permanent representative office.
         •   A document confirming the address of the permanent representative office.


13
  The copies of articles of association and registration certificate must be certified by apostille or undergo a
procedure of authentication.


                                                          29
136. Companies must register with the SRS (tax authority) within 10 days of registering at
the Enterprise Registry.

137. A Chart of the Flow of Documents is presented below. Examples of the relevant forms
are presented in Annex 3.2.

                       Flow of Documents Needed for Enterprise Registry



 Production of
                                                  Approval and            Opening of
      the                Solicitation of
                                                  signature of             a bank
 incorporation           legal address
                                                   documents               account
   documents




                                                 Completion of
 Settlement of             Receipt of                 the                 Payment of
  the share              the reference            signatories'            stamp duty
    capital              from the bank               cards,                (state fee)
                                                    notarized


 Submitting of
                          Registration           Registration
 documents to
                            in the                 by tax
   the State
                          Register of             authority
  Enterprise
                          Enterprises              (SRS)
    Register




138. For companies that wish to register quickly (such as firms wishing to bid in
privatization auctions), the Enterprise Registry will expedite the process for a payment of
double the typical fee. Officials at the Registry state that a certificate can be issued within one
day if necessary.

                 3.    Analysis

139. Most investors interviewed suggested high levels of satisfaction with the Enterprise
Register. Investors felt the process was timely, transparent and effective. The Enterprise
Registry has made significant strides since opening its doors several years ago, and is now
moving towards complete computerization of its operations including the scanning of original
documents and internet access. Figure 3.1, which compares Latvia with other investment
locations, is presented below.




                                                 30
Figure 3.1 Registration/Country Comparisons




                                              31
140. The Enterprise Register states that it always registers businesses within 14 days – often
in less time. However, 14 days does not compare favorably with countries around the world
capable of completing the process normally in a single day. While investors are typically not
concerned by this, due to its relative importance, this step is the first one in the process. No
other steps can be taken until this is completed.

141. By offering an expediting service of a few days or less, the Enterprise Registry reflects
that it is possible for all documents to be completed in a matter of days. In fact, the expediting
may be slowing the process down for normal submissions. Operations management theory
suggests that processes move most quickly if nothing is expedited. The short history of the
Enterprise Register suggests that they will become increasingly effective at discharging their
duties of registering companies and maintaining records. Their ambitious technology initiatives
will put them on the cutting edge of national company registries around the world.

142. The Enterprise Registry notes that although some improvements are still expected, it
would not be possible to reduce the application processing time to, say, one day or less within
the next year in view of the technical and financial constraints of the Enterprise Register. The
complex volume and contents of documents and the requirements of regulatory enactments
prevent the Registry from offering expedited service to all applicants.

143. The only problem noted by investors concerned the lack of coordination between the
Enterprise Register and the State Revenue Service. The registration processes for the enterprise
and taxes are very similar and the information requirements overlap to a considerable degree.
The SRS and the Enterprise Registry have concluded a mutual agreement to ensure the quality
of the information of relevance to both institutions, but they have not come to any agreement to
combine the two registration processes. This issue arises again when changes are made to the
company which require separate communications with both the Enterprise Register and the
State Revenue Service. However, the SRS and the Enterprise Registry have concluded a
mutual agreement to ensure the quality of the information of relevance to both institutions.
This subject will be addressed in more depth under the Taxes section of this chapter.

144. Several foreign investors suggested that Latvia should reconsider its current restrictions
against foreign ownership. The Government of Latvia is concerned, for instance, that foreign
business would be inclined toward careless and uncontrolled utilization of Latvia's forest
resources. However, restrictions against foreign ownership are not difficult to circumvent (e.g.,
through domestic "front" organizations), and are generally ineffective at ensuring national
control over strategic resources. To the extent that such restrictions are intended to protect
domestic firms from competition, they tend to entrench inefficiency and stifle innovation.
Estonia, for example, has no such restrictions, and does not appear to be suffering from their
lack. This issue will have to be addressed during EU accession for EU firms, at a minimum.

               4.      Recommendations

145. It is recommended that the Enterprise Registry continue to work with the State Revenue
Service to find technological solutions to end the overlapping registration processes by
combining the information requirements of both institutions and instituting a single registration
process.


                                                32
146. Further, it is recommended that the Enterprise Registry continue to reduce the time
associated with “normal” registration applications, preferably by simplifying the registration
process itself. They should set themselves the goal of processing all registration applications
within three working days by end-1999 and consider a goal of one day by 2001. This more
ambitious goal would, however, require additional resources either through higher fees or
Government budgetary resources, and it would be possible only by changing the registration
process, e.g. by:

           •     introducing standard forms;
           •     exempting the Enterprise Register from the duty to check the lawfulness of
                 articles of association and the lawfulness of the election of officials;
           •     establishing scanning of registration documents;
           •     an automatic system of the recognition of information; and/or
           •     legal validation of electronic documents etc.

147. Finally, FIAS recommends that the Government of Latvia eliminate its current
restrictions against foreign ownership, particularly in the timber industry and insurance. It
would be best if the prohibitions were dropped for firms from all countries.


           B.         The Taxation System in Latvia


148. Companies face three primary types of taxation – Corporate Income Taxes, VAT, and
Social Taxes (in addition to property taxes, excise, and trade duties; see table below).
Registration is done at the nearest State Revenue Service District office (see Annex 3.3 for
examples of the relevant forms). In most cases, the investor will be assigned to an inspector on
the basis of the alphabetical listing of the company. All registrations, changes, and many other
interactions will take place between the investor and the assigned officer. There is a division of
“big taxpayers” that is handled by the central office of the SRS in Riga.



                                Tax                                                               Rate (%)
                      Corporate Income                                                               25
                      Personal Income                                                                25
                          Value-added                                                                18
                   State Social Insurance                                                          37.09*
              Real Estate (applied only to land)**                                                   1.5
          Property (applied to buildings and construction)**                                        .5-4
                              Excise                                                               10-100
                         Import Duties                                                              0-55
                         Export Duties                                                             0-100
*28.09% paid by the employer, 9% by the employee (commencing January 1 st, 2001, the social tax will be 33%, half paid by the employee).
**Commencing January 1 st, 2001, the real estate tax will be paid instead of property tax. The tax rate will be 1% of the assessed value of the
land (including buildings and unfinished buildings).



                                                                      33
149. Latvia’s statute of limitations on taxes runs three years, so the SRS states that it
attempts to audit all firms a minimum of every third year. Taxpayers are entitled to defer
payment of the appropriate taxes for a period of time from three months to three years subject
to prior approval by tax authorities. Duly unpaid taxes are subject to a late-payment fee of
0.05% per day behind schedule (0.1% per day for personal income tax and social tax). In
addition, the unpaid amount is increased by the refinancing rate (determined by the Bank of
Latvia, currently about 4% per year). Late payments and refinancing amounts are frozen when
the total of both equals the basic debt amount.

               1.      Corporate Income Tax

                       a.      Registration

150. Within ten days of registering a company, an investor must register with the nearest
district office of the State Revenue Service. A completed application will contain:

       •   Company Registration from the Enterprise Register.
       •   State Revenue Service Registration Form.
       •   Passports of directors (for foreign companies).
       •   Company Statutes (originals or notarized copies).
       •   Documents confirming the legal address of the company.

151. By law, the SRS must issue a registration within 10 days. According to officials of the
SRS, the process is often done in 2 to 3 days. The State Revenue Service issues a tax
identification number, which is largely comprised of the registration number, received from the
Enterprise Register, plus control digits.

152. In the event that a company changes its legal address, adds an additional branch or
location, changes its bank accounts, or makes any changes requiring changes at the enterprise
registry, then the investor is required to notify the State Revenue Service within ten days the
change. If the change of legal address is to another region of Latvia, SRS will conduct an audit
at the old location before the move is effective.

                       b.      Administration

153. The annual declaration of corporate income tax must be submitted simultaneously with
the annual report of the enterprise – not later than one month after the approval of the annual
report of the enterprise and not later than four months after the end of the reporting year. If the
total amount of the book value of the enterprise exceeds one million Ls, the net annual turnover
is at least 2.4 million Ls, and the average number of employees is at least 250 during the
reporting year, the declaration of the corporate income tax can be submitted not later than
within seven months of the end of the reporting year.

154. Companies must make tax advance payments by the 15th day of each month. In general
monthly advance payments (for the period from the first month of the taxation period until and




                                                34
including the month of filing the annual report, but no later than four months 14 after the
taxation year ends) are equal to one-twelfth of the tax calculated for the pre-taxation period
adjusted for inflation.

155. For the rest of the months, the monthly advance payment is the difference between the
tax amount of the pretaxation period (adjusted for inflation) and the amount of tax paid for the
time from the first month of the taxation period to the day of submission of the tax declaration
divided by the number of months left until the end of the taxation period.

156. Any balance of the tax due must be paid within 15 days after the date of submission of
the corporate income tax declaration.

                   2.       VAT

                            a.       Registration

157. Any company whose total taxable transactions over the previous twelve months reaches
10,000 Lats must register for VAT within one month. However, many companies register for
VAT at the same time as direct taxes for convenience.

158. Foreign persons that have not established a registered permanent representative office in
Latvia, and provide VAT-related inland services, must register at the State Revenue Service as
a VAT payer and pay the tax to the budget. If the foreign person has not been registered as a
VAT payer, the tax is paid by an intermediator or if there is no intermediator, by the recipient
of services.

159. The VAT registration is almost identical to Direct Taxes registration. Forms are
submitted to the officer in the district, assigned alphabetically to the company.

160. The registration number issued by the Department of VAT is identical to the Taxpayer
ID with the exception of the added letters “LV” indicating a VAT registration.

                            b.       Filing

161. VAT payments to the State budget for every month must be settled by the 15th day of
the following month. The annual VAT declaration for the preceding year is due on April 1st of
the following year.

                            c.       Refunds

162. VAT payers are entitled to VAT returns, starting with the day of registration in the list
of VAT payers. Manufacturers may request that VAT paid in excess be returned. The return
may be settled on a monthly basis. To receive the return, manufacturers must submit a written
request to the State Revenue Service.



14
     Seven months in the case of larger firms, as described in the previous paragraph.


                                                         35
163. The State Revenue Service returns VAT within 15 days after filing the request. Prior to
the return, the State Revenue Service checks the accuracy of the calculation of VAT paid in
excess. The VAT paid in excess may be channeled to cover other taxes, including customs
duties.

               3.      Social Insurance

                       a.      Registration

164. Registration of Social Insurance Payment is automatically undertaken at the time of
registration of the company for direct taxes. The Taxpayer identification is identical to that of
the direct taxes. The difference in the two is in the administration and inspections.

                       b.      Filing

165. Social insurance payments are filed by companies on a monthly basis at the State
Revenue Service. As of 1998, employers are responsible to pay taxes on 28% of employees’
wages. There is also a compulsory insurance against industrial accidents, the rate of which is
0.09% of employees' wages. Employees are responsible for 9% of wages, which are to be
withheld by the employer.

166. Social taxes are liable for audit by the same process as income tax and VAT as
described below.

               4.      Tax Treaties

167. The following table shows the withholding tax rates on dividends, interest rates and
royalties to treaty and non-treaty countries:




                                                36
                                  Dividend %          Interest %          Royalties %
             Canada                  5/15 b                10                    10
             Czech                   5/15 a                10                    10
             Denmark                 5/15 a                10                  5/10 d
             Finland                 5/15 a                10                  5/10 d
             Iceland                 5/15 a                10                  5/10 d
             Estonia                 0/15 c                 0                     0
             Lithuania               0/15 c                 0                     0
             Netherlands             5/15 a                10                  5/10 d
             Norway                  5/15 a                10                  5/10 d
             Poland                  5/15 a                10                    10
             Belarus                   10                  10                    10
             UK                      5/15 b                10                  5/10 d
             China                   5/10 a                10                    10
             Ukraine                 5/15 a                10                    10
             Sweden                  5/15 a                10                  5/10 d
             Germany                 5/15 a                10                  5/10 d
             Ireland                 5/15 a                10                  5/10 d
             Uzbekistan                10                  10                    10
             Non-Treaty                10                 5/10 f               5/15 e
            Sources: Legislation Review, LAA 1998; Ministry of Finance, 1999

       Notes:

       a) 5% of gross dividends if the company receiving dividends owns more than 25% of capital in
       the company paying dividends;
       b) 5% of gross dividends if the company receiving dividends owns at least 25% of voting rights
       in the company paying dividends;
       c) 0% applied if the company receiving dividends owns at least 25% of capital and voting rights
       in the company paying dividends;
       d) 5% applied to payments on the use of industrial, commercial or scientific equipment;
       e) 5% applied to payments on intellectual property. Not applicable to payments for copyright to
       literary works or pieces of art;
       f) 5% applied to interest payments paid by banks registered in Latvia to persons affiliated to
       them.

                5.      Audits and Inspections

168. The SRS carries out two types of Audits: planned and unplanned. Planned audits are
determined annually usually by a committee of inspectors and are based on a variety of factors
including timing of last audit, history of trouble with the SRS, and risk profile.




                                                     37
169. Unplanned audits are carried out by inspectors primarily for spot checks on cash
transactions to ensure proper techniques are utilized. The most common type of unplanned
audit is of shops which receive cash payments.

170. The district office responsible for the company conducts the physical audit – however, a
company that has multiple branches across the country will likely be audited by a variety of
different individuals from different regions.

171. All annual reports are subject to a mandatory audit. In the event that the company
exceeds two of the criteria listed below, the annual reports must be audited by a certified
auditor who has been duly elected by the shareholders:

       •   Total assets: LVL 100,000;
       •   Net turnover: LVL 200,000;
       •   Average number of employees in the reporting year: 25

172. In all other companies, an audit has to be performed by an audit commission or by an
auditor who has been elected by the shareholders in accordance with the state regulations on
the respective companies and the company’s charter.

173. Companies must submit a copy of the audited annual report, the management report, the
auditor’s report and the date on which the annual report was approved by the shareholders, to
the State Revenue Service, and to the Enterprise Register of the Republic of Latvia ( if
financing exceeds a certain amount) no later than one month after approval of the annual report,
and no later than three months after the end of the reporting year.

               6.      Analysis

174. Taxation is an area of particular concern to investors, for two main reasons. First, from
the point of view of investors, the State Revenue Service is often inconsistent in its application
of regulations. Second, the State Revenue Service has far-reaching powers of enforcement that
can be very threatening for most businesses. These two problems combined have created a
negative attitude on the part of the investment community.

175. Registration is generally not mentioned as problematic by investors (although several
interviewees noted the redundancy between Company and Tax registration, as noted above in
Section A). The only concern that the investors raised was the 10-day period during which time
investors must register to pay taxes, and/or register any changes. Most investors were
concerned about the aggressiveness with which the SRS often levies fines for being late. The
SRS states that it usually allows late registrations without collecting fines, given a proper
reason.

176. Many countries around the world tie tax registration to trading – that is to say that a
company must register to pay taxes within a set number of days of trading. Being that many
investors are not likely to trade within 90 days of registering a company, the 10-day rule seems
to be overly stringent. Alternatively, many countries around the world automatically register a
company to pay taxes upon interaction with the office of the company registry.


                                                38
177. Investors mentioned significant problems when interacting with the SRS on issues
related to the operation of the business, particularly situations for which there are no clear
regulations. Given the age of the tax code (only 5 years old), it is inevitable that situations will
arise that are undefined by the laws and regulations currently on the books. While the SRS is
making improvements to upgrade the rules and regulations, the conflicts that arise from cases
that are ambiguous is a significant source of investor complaint.

178. One of the investors’ concerns is the difficulty in obtaining binding opinions from the
SRS. Investors and auditing firms complain that the opinions themselves are often delayed
and/or ambiguous. Further, SRS inspectors are often uneven in their recognition of SRS
opinions. Cases are recorded of fines levied for tax reporting that had been approved via prior
opinion. SRS does have an appeal process via the head of the Service and the courts. However,
this process is lengthy at best. Investors questioned the objectivity and independence of the
SRS’s internal appeals process. Reportedly, however, many investors have won cases in court
against the SRS.

179. The problems are compounded by the SRS’s ability to debilitate a company’s
operations and its willingness to exercise such authority. Many interactions with Government
require the submission of a tax clearance certificate including importing, exporting, real estate
transactions, and employing expatriates. SRS and the investors do not agree about the need to
pay disputed sums during a dispute process. SRS states that it does not require the company to
pay fines and sums outstanding while a dispute is in progress.

180. However, investors noted cases in which an entire company’s operations were
essentially closed due to a dispute. SRS’s ability to seize bank accounts, block real estate
transactions, refuse work permits, and shut down importation has effectively crippled
operations. SRS notes that it realizes that such actions could harm a business economically and
make it even more difficult to pay back taxes. According to SRS, it only uses such capabilities
in extreme cases.

181. Other investors alleged that significant fines were assessed for minor and honest
mistakes such as using the wrong color form to file their tax returns, typing in the wrong tax
registration number, or mailing a return to the wrong tax office.

182. Since the preparation of the draft version of this report, the State Revenue Service notes
that within the framework of the SRS Modernization Project for 1998 – 2002 approved by the
World Bank, it is envisaged they will develop the following projects to help mitigate barriers to
investment:

       •   The rationalization of the structure of the organization;
       •   Strategic planning, funding and its use;
       •   Operations management;
       •   Personnel management;
       •   SRS internal control and the prevention of corruption;
       •   The registration of tax payers;
       •   The declaration and collection of taxes and the levy of tax debts;
       •   Audit and investigation;


                                                 39
       •   Customs operations;
       •   Tax assessment and appeal;
       •   Services to tax payers; and
       •   Information technology.

183. Further, with regard to enforcement, the SRS notes its agreement that it should not be
entitled to seize the bank accounts of a company without a court order. For example, in the
USA, an appeal suspends collection. If the revenue service wins the case in court, it levies in
compliance with the decision of the court. In some cases, however, the SRS may levy without
a court decision if capital flight is expected, and the resources targeted might disappear from
the country.

184. Currently, the SRS is working on the creation of an independent appeals institution
within the SRS Modernization Project. Simultaneously with the creation of the independent
appeals institution, the issue of tax courts (originally raised by the SRS in 1994) should be
addressed to resolve the appeals issue. According to the SRS, their main tasks in this area are:

       •   to create a 2 level (regional and central) appeals institution with highly
           qualified staff (accountants, economists, lawyers) who will be well paid to
           reduce corruption;
       •   to draft amendments to acts of legislation;
       •   to cooperate with the United States Internal Revenue Service and Department
           of Justice and specialists of the tax courts through development of training
           programs for SRS specialists and judges;
       •   to apply to the Ministry of Justice and the Ministry of Finance with a request
           to support the SRS proposal of the creation of a Tax Court.

               7.     Recommendations

185. It is understandable that disputes will arise from such a young tax code. It is also
expected that the SRS must be vigilant and firm about enforcing compliance. However, during
the intervening time of establishing its tax codes, the SRS should consider several steps that
could make itself more investor-friendly. Possibilities to consider include the following:

       •   The need for businesses to produce a tax clearance certificate for importation,
           for real estate transactions, and to employ expatriate labor could be reduced or
           abolished.

       •   An independent tax appeal tribunal, as envisioned by the SRS Modernization
           Project, could give investors an alternative route of appeal given the length of
           the process involving SRS management and the courts. Such a tribunal could
           be composed of qualified professionals (accountants, lawyers, professors,
           judges, etc.) as well as SRS tax officials, with the former group in the
           majority. Such a tribunal could be in a position to stop aggressive collection
           procedures and be able to return a business to operational status by blocking
           some of the tools SRS currently has at its disposal.


                                               40
       •    Strengthen advance rulings and “opinions”, so they are more reliable and
            improve consistency of implementation.

       •    It is recommended that the Tax Registry work with the Enterprise Registry to
            eliminate the overlapping tax registration process. Many countries, even
            without the use of computers, have effectively made the process of
            registration into one step. This consolidation can use the incoming technology
            in the SRS and the Enterprise Registry to make the registration electronic.
            Alternatively, it can be as simple as the system in South Africa in which the
            Company Registry hand-delivers copies of the registration documentation to
            the Tax Registry on a weekly basis.

            This streamlining would reduce the conflicts between investors and the tax
            registry, make it easier to register a business, and would ensure that all
            registered companies are automatically registered to pay taxes as well.

       •    Finally, it is recommended that the SRS follow the lead that its customs unit
            has taken of involving the private sector in the development and design of its
            regulations and procedures. Latvia has a good deal of talent in its private
            sector, who would be a good source of ideas. The private sector will provide
            input that could improve filing and interactions with the SRS. Previous
            country experience shows that this may increase the rate of collections.


       C.       Local Authority Registration


186. In recent legislation, municipalities are now prohibited from requiring entrepreneurs
and investors to register their business separately from the Enterprise Registry. Previously,
several municipalities, including Riga, required that investors obtain licenses every 6 months.
Investors now are not required to interact with municipalities for licenses except for specialized
licenses such as liquor and tobacco retail.


       D.       Intellectual Property Rights


187. Latvia is a member of the following international agreements effecting intellectual
property rights:

       •    The Paris Convention (since September 7, 1993);
       •    PCT (since September 7, 1993);
       •    WIPO (since January 21, 1993);
       •    The Madrid Agreement Concerning the International Registration of Marks
            (since January 1, 1995);




                                               41
       •    The Budapest Treaty on the International Recognition of the Deposit of
            Micro-organisms for the Purposes of Patent Procedure (since December 29,
            1994);
       •    The Nice Agreement Concerning the International Classification of Goods
            and Services for the purposes of the Registration of Marks (Since January 1,
            1995);
       •    The Bern Convention for the Protection of Literary and Artistic Works
            (decision by Cabinet to renew membership on April 18, 1995);
       •    The Rome Convention of 1961 for the Protection of Performers, Producers of
            Phonograms and Broadcasting Organizations (in force as of October 10,
            1998);
       •    The European Convention on Transfrontier Television (in force as of May 29,
            1998);
       •    The Trademark Law Treaty (signed on October 27, 1994);
       •    The Agreement for the Protection of Intellectual Property between the
            Republic of Latvia and the United States of America (effective from January
            29, 1995).

188. Latvia also became a member of the 1993 Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS) upon joining the WTO (as of December 29, 1998).

189. The registration of a trademark is done by filing a trademark application with the
Latvian patent office. After preliminary and substantive examination, the mark is published,
and third parties are invited to submit oppositions against the registration of the mark within 3
months of the date of publication.

190. Certain signs may not be registered as marks, namely those which reproduce or are
similar to the names of firms and products which are well-known in Latvia, as well as marks
which reproduce trademarks belonging to any other entity.


       E.      Specialized Licenses


191. The number of business requiring licenses has been reduced from 118 (1997) to 66 (as
of January 1, 1998). The full list of businesses requiring licenses is given in regulations of the
Cabinet of Ministers No. 348 on Licensing of Certain Kinds of Entrepreneurial Activities (see
Annex 3.4). A license is necessary if a person or a company is involved in the following
sectors:

       •    The operation of higher and secondary educational institutions;
       •    The production, import, or export of weapons and explosives;
       •    Manufacturing and sales of medicines and pharmaceuticals;
       •    Foreign currency transactions;
       •    Banking and credit activities;
       •    Insurance services;


                                                42
       •   Radio and television broadcasts;
       •   Production of tobacco and spirits for sale;
       •   The inspection of weights and measures;
       •   The manufacturing of dangerous equipment; and
       •   Trade in precious metals.

192. This law is very useful both for identifying all the business activities that require
licensing (and providing related information about the licensing bodies and procedures), and
for proscribing any potential proliferation of licensing requirements.

193. Some of the more frequently encountered licenses are listed below. Samples of the
licensing forms are presented in Annex 3.5.

               1.     Transportation Licenses

194. The current regulations are defined by licensing laws from dated from 1994. However,
new regulations came into effect on 1 January, 1999 to conform with European Union
regulations. In order to ease the transition to EU requirements, they will not be in full
compliance until the year 2000.

195. Companies engaged in the commercial transport of goods can apply for any of four
different licenses:

       -   Local Cargo Transportation
       -   International Cargo Transportation
       -   Local Passenger Transportation
       -   International Passenger Transportation


196. A holder of an international license for either passengers or cargo is also allowed to
carry out domestic activities.

197. In order to obtain a license a company must apply to the nearest regional office. The
office conducts an inspection of the vehicles and dispatches the paperwork to the central office
in Riga. The central office issues the permit, which the investor can collect in the regional
office. The process is required by law to take less than 30 days, although Ministry of
Transportation officials state that the process often takes less than 15 days.

198. While it is not required that a firm transporting goods for its own use acquire a license
is highly recommended for any large company that frequently crosses the borders with its own
goods for several reasons. In order to cross a border now without a license, a company must
apply for a one-time license. While this is inexpensive, the process is time consuming.
Additionally, acquiring an annual license allows transporters to carry other loads when the
main company goods do not fill the truck.




                                                43
               2.      Excise Goods

199. Excise Tax is placed on a number of goods in Latvia, the most notable being liquor,
tobacco, oil and oil products, and cars. Tax rates vary, for example on alcohol and strong
alcoholic beverages (spirits, brandies, liquors etc.) – 460 Ls per 100 liters of absolute alcohol;
wine 25 Ls per 100 liters; filter cigarettes 4.5 Ls per 1000 cigarettes; cigarettes without filter
5.5 Ls per 1000 cigarettes; lead free petrol 160 Ls per 1000 liters; lead-containing petrol 190 Ls
per 1000 litres; diesel fuel – 130 Ls per 1000 litres.

                       a.      Excise Tax Registration

200. Enterprises that wish to import or manufacture goods subject to excise tax or to trade in
them must register with the Board of Excise Goods. Companies wishing to import oil must
have a minimum equity of 20,000 Ls (about $35,000). In order to register for a license, the
importer must submit the following:

       •   Registration form (Oil products and retail alcohol trade have separate
           documentation forms).
       •   Fee (different per product, ranges from 20 Ls – 200 Ls).
       •   Company Statutes.
       •   Registration Certificate from Enterprise Registry.
       •   Verification of Bank Accounts.
       •   Title or lease of premises.
       •   Copy of certificate of cash register (for retail operations).
       •   Permission of municipality to do business.

201. Officials at the Board of Excise Goods state that the license must be issued in 10 days,
and is usually issued in 5 to 6 days. Any changes to the address, statutes, or bank account
require submission to excise. Registration must be done physically in the Riga office, although
renewals may be done by mail.

202. A licensed company must submit monthly excise tax declarations to the State Revenue
Service. Excise tax on alcoholic drinks and cigarettes is calculated and paid by means of excise
tax stamps. On cigars and other articles of tobacco, the tax is paid upon the importation or
exportation from the warehouse of excise goods. Excise stamps are available through the
Excise Goods Marking Division of the State Revenue Service.

203. According to officials at the Board of Excise Goods, recent improvements in the
systems have reduced documentation, matched rules to WTO standards, and reduced licensing
times from 30 days to 10 days. The Board intends to computerize its operations further
speeding processes and improving accuracy. Excise has also begun using electronic payment
systems, although conflicts have arisen. Excise states that it is working with the banks to rectify
the problems.




                                                44
               b.      Analysis

204. While a number of efforts have been made by the Board of Excise Goods to improve
their processes, investors have complained about uncertainty of dealing with several different
organizations (State Revenue, Customs, Excise, and the Bandroll Department). Investors
suggest that the number of departments reduces the control over the excise stamps and illegal
imports.

205. Investors complain about inconsistent application of customs officials at the border
posts. Different interpretations of laws have led to very different rates levied against investors.
However, investors said that the Department of Excise has been willing to work with investors
on issues and has improved.

206. The Ministry of Finance notes that during recent years, essential changes have taken
place in the circulation and taxation of excise goods in Latvia. New laws have been adopted,
for example On Excise Tax on Alcoholic Beverages, On Excise Tax on Tobacco Products and
Regulations of the Cabinet of Ministers, the application of which should improve the
circulation of excise goods in the country and make the procedure of paying excise tax easier
for entrepreneurs. Currently several excise goods warehouses are in operation for oil products,
which enables companies to make use of deferred tax payments. In the near future, after the
adoption of the Regulations of the Cabinet of Ministers, such warehouses will be allowed for
alcoholic drinks and tobacco products too.

207. The Ministry of Finance also notes that enterprises that deal with excise goods must
interact with institutions such as the territorial institutions of the State Revenue Service, the
Excise Goods Marking Division of the State Revenue Service, Customs, the Board of Excise
Goods, and observes that perhaps the number of institutions hampers the settlement of various
formalities.

               3.      Pharmaceuticals

208. As described above, there are a number of different licenses that specific industries may
need to acquire. Among the licensing departments investors described as quite effective is the
Department of Pharmaceuticals. Their licensing procedures are described below.

209. Gaining a license to manufacture and market drugs is a multiple stage process.
Pharmacies, manufacturers, and distributors are required to have licenses to operate (different
licenses for each of these functions). After obtaining a license, a distributor (or a manufacturer
that distributes locally) must obtain a “Market Authorization”.

                       a.      Licenses

210. After registering the company with the Enterprise Registry and registering with the
State Revenue Service, a company intending to dispense, distribute, or manufacture drugs must
apply for a license with the Department of Pharmaceuticals. An international manufacturer
wishing to import drugs for sale to distributors is not required to obtain a license. The investor
submits to the State Pharmaceutical Institute the following:



                                                45
       •   Notarized copy of certificate from Enterprise Registry.
       •   Notarized copy of taxpayer registration certificate.
       •   A plan which reflects Good Manufacturing Practice (which includes plans for
           language requirements and company plans).
       •   Notarized copy of Articles of Association.
       •   Lease Agreement or Land Book registration for premises.
       •   Equipment List.
       •   Emergency recall plan.

211.   Replies are typically given within 30 days.

212. License fees are 500 Ls (about $875) for producers, 800 Ls ($1400) for wholesalers and
70-150 Ls ($120 - $250) for pharmacies. Licenses can be renewed annually for 10% of the
license fee.

                      b.      Market Authorization

213. Once a company is licensed, it is free to obtain a market authorization. This is required
for each product. In the case of a producer, however, market authorizations can only be issued
upon completion and inspection of premises. In order to acquire market authorizations for
imported products, Latvia can usually work with foreign countries’ authorizations.

                      c.      Analysis

214. Investors cited the Department of Pharmaceuticals as an example of a well-functioning
licensing and regulatory body. In particular, investors noted:

       •   They are completely computerized, and have upgraded their operations
           significantly since inception.
       •   They understand the distinctions between sales and manufacturing and they
           are able to classify appropriately.
       •   They are effective at controlling illegal sales.
       •   They are working on reciprocity agreements with Estonia and Lithuania.
       •   Drug registration is relatively transparent and consistent.

215.   However, some problems still exist.

       •   There is some confusion (at least among investors) over possibly over-lapping
           responsibilities between the various agencies that participate in this process
           including the Department of Pharmaceuticals and the State Pharmaceutical
           Institute.

       •   The market authorization process is fairly long (it can exceed one year), but it
           cannot be started until the factory is completed. This ensures that a
           pharmaceutical investor in Riga may have to wait several years before the
           products can reach market.



                                               46
                                            CHAPTER IV

                                             LOCATING



216. Finding and developing a site for a new business is by far the most time-consuming
aspect of starting a business in Latvia. A specific parcel of real estate must be identified, and
either purchased or leased. Since Latvia is not yet finished with the restitution process, these
procedures are generally lengthy, cumbersome, and highly bureaucratic. However, it appears
that the process is improving with time, and Latvia is receiving assistance in this area from the
EU Phare program.

217. Once the land has been secured, the process of obtaining a construction permit is also
lengthy and time consuming. This process too, is improving with time, and has received the
support of the Canadian Urban Institute for the development of the Riga Master Plan.


        A.      Identifying Real Estate


218. Latvia decided very quickly to restitute land confiscated during the Soviet occupation to
the original owners or their heirs (including non-citizens). However, the Government is
restituting land only to individuals ("physical persons"), to religious institutions, and to the
State and municipalities, on the basis of claims dating from before World War II. Land is not
being restituted to companies, since companies registered prior to 1940 no longer exist, but
according to the Riga City Land Commission, very little land was owned by companies prior to
1940.

219. A new business wanting to acquire land must find a suitable parcel (usually working
with a private real estate firm), and then identify the owners. Unfortunately, the restitution
process is not yet complete in Latvia, and ownership might not be firmly established. The land
must be entered in the Cadastral registry, surveyed, and evaluated, and entered in the Land
Book. These procedures are the responsibility of the land holder. Only land registered in the
land book may be sold. The municipality must be offered the right of first refusal, based on the
agreed selling price. Investors from some countries also need permission from the Head of the
Municipal council. The sections below described the process of getting land registered in the
Land Book.

                1.      Restitution of Land

220. The restitution process is governed by three laws dating from 1990 to 1992. 15 In Riga,
as of October 1998, 99% of the claims of physical persons had been restituted (other
municipalities have not necessarily made this much progress). However, only about half the

15
  Law on Land Reform in Rural Regions (21 Nov., 1990), the Law on Land Reform in Towns and Cities (20 Nov.
1991), and Law on Land Privatization in Rural Regions (9 July, 1992).


                                                   47
parcels that existed in 1945 (about 60,000 parcels) had valid claims on them. Riga's land area
was also expanded by about one third in the 1960s, but the records of pre-Soviet land
ownership in the annexed areas are not very good. There are complications with claimants
whose land can not be restituted (e.g., because it is under public facilities, such as roads or
bridges). They are entitled to compensatory land from the stock of unclaimed land, or vouchers
which can be used to purchase unclaimed land. Ownerless land is in the competence of the
State. 16 In practice, most such land is being assigned 50% to the State and 50% to
municipalities. Individuals could also obtain unclaimed land through the voucher privatization
program up to December 31, 1999. Thereafter, all land purchases will have to be paid for in
Lats. The entire land reform program is expected to be completed in 2002/3.

221. A significant problem stems from the fact that during the Soviet era, there was a great
deal of new construction. In 1991, therefore, there were many large Soviet era buildings (e.g.,
apartment buildings, warehouses, etc.) that were situated on land owned by many different
individuals in the pre-Soviet era. The buildings then belong to the State or municipality, but
the land underneath may have been restituted to the original owners or their heirs. The State or
municipality may decide to sell the building, but the new owner of the building must negotiate
with each of the land-owners either to purchase the property or to pay rent. If the buildings
have been privatized during the Land reform, the owner of the land on which the buildings are
located is limited to charging rent of no more than 5% of the assessed property value per year.
This limitation is effective only for the owners of the privatized buildings. In any other case
(e.g., land that has been sold since privatization), the rental fee is not limited and is based on
mutual agreement between the parties. If the parties cannot agree upon the rental fee they can
submit the case to court.

222. Conversely, there are cases where buildings were restituted, but the land under the
building was never the property of the owner of the buildings. If the land is owned by the State
or municipality, then the owner of the building has the first right to buy the land. Government
policy aims to ensure that title to land and buildings is consolidated. In cases where the land
and the buildings have been registered as joint real estate, they can not subsequently be
separated. The owner is entitled to subdivide the land into smaller parcels but once registering
buildings and the associated land as joint property s/he is not entitled to sell the building
separately from the land underneath.

                   2.       Cadastre Registry

223. As property is restituted, it enters the Cadastre Registry17 , and the claimant then has full
use-rights over the property. Almost all land that has been claimed by anyone can be found in
the Cadastre registry, but in Riga, for instance, this is only about half of the total land area.

224. In Riga, of a total land area of 30,700 hectares, about 14,000 have been entered in the
Cadastre Registry. Of an estimated 520,000 potential property owners, about 210,000 (96% of
those who have claimed land) have their property registered in the Cadastre Registry, and


16
     Law on state and Municipal Ownership of Land and its Regulation in Landbooks, Article 7.
17
     Law On State Land Service15.12.1992.and Cabinet of Ministers Regulations on Real Estate Cadastre.


                                                       48
166,500 are registered in the Land Book (see below). The Cadastre Registry is thus the most
comprehensive source of information about property ownership in Latvia.

225. Real estate tax is paid on all real estate located on the territory of the Republic of
Latvia, except for parcels that, in accordance with Part 2 of Article 1 of the Law On Real Estate
Tax, are exempted from taxation. The tax is calculated on the basis of the cadastral value of real
estate determined by the State Land Service.

226. The State Land Service (SLS) is setting up a valuation commission to hear disputes
about land values. The commission will include representatives of local municipalities, the
Ministries of Economy, Finance, and Agriculture, among others. Disputes can also be taken to
court, even if they have not been heard by the valuation commission.

227. Buildings can be registered by an owner even if the land is owned by someone else. If
the building and land is owned by the same person, then the titles have to be registered
together. Property that is registered in the Cadastre Registry can be leased (and the lease is
supposed to be recorded in the registry), but can not be sold unless it has been registered in the
Land Book. In practice, mortgages are also only available for property that has been registered
in the Land Book, since creditors need the ability to recover their assets.

228. The Cadastre Registry is kept by town or city and district divisions of the State Land
Service, which is a supervised institution under the Ministry of Justice. They are in the process
of computerizing their files, and they share information with the Enterprise Registry and the
Population Registry. Annex 4.1 presents the detailed procedures for property to be listed in the
Cadastre Registry.

               3.      Survey

229. The next step is usually for a parcel to be surveyed. Surveys can be undertaken by
licensed, private surveyors, but most Latvian citizens find this too expensive. Private surveyors
are licensed by the SLS. Those who have had land restituted to them directly, and their first-
generation heirs, are entitled to have their land surveyed, free of charge, by the SLS; however,
there is a back-log of about three years for this work.

230. A company wishing to buy land that has not yet been surveyed can agree with the
owner to pay for a private survey, and sign a contract to cover this work.

231.   Survey results are recorded in the Cadastre Registry.

               4.      State Valuation

232. If a property is going to be registered in the Land Book, and for all subsequent
transactions, it must be valued by the State Land Service (SLS). All property is supposed be re-
valued at least every five years, for tax purposes.

233. Land is valued primarily by area, by zoning category, location, and market data, under
regulations issued by the Cabinet of Ministers. The SLS has a data base of the market value of
real estate transactions (as recorded in the Land Book), including buildings and even individual


                                                49
flats. Rural land values, where there have been few market transactions, are based on estimates
of the agricultural output of the land.

234. For buildings from the Soviet and pre-Soviet era, the SLS makes use of Soviet
"inventorization" records, which details building usage, volume of all rooms, etc. For newer
buildings, they rely primarily on construction costs and data in the approved occupancy permit.
There are new draft Cabinet Ministers' regulations which should be issued in the near future.

235. According to the State Land Service, after an application for a valuation is received, the
valuation can usually take place within 1 - 5 weeks. The wait is supposed to be no longer than
a month. Expedited service can be negotiated, but is "discouraged." According to private real
estate firms, it is possible to pay double the usual fee for expedited service, and ensure that it is
complete within two weeks.

236. The fee for a first individual valuation of a property ranges from a low of 5 - 8 L for
undeveloped land, to 30-40 L for a small flat, to about 300-400 L for an apartment building, or
higher for more complicated properties. Subsequent valuations of property that has not
changed physically is 5 L.

237. SLS evaluations can be appealed to the Director of the SLS, and/or in court. In near
future SLS is planning to create an appellate institution – specifically, an evaluation
commission comprised of officials from a number of different institutions, including, but not
limited to, the SLS.

                 5.       Registration in Land Book

238. Once the land has been restituted, surveyed and evaluated, it can be entered in the Land
Book 18 . In Latvia, the Land Book registry is attached to (but independent of) the Regional
courts. Special Land Judges are responsible for the registration of the title to real estate. The
Land Book issues official title to property, and also records subdivisions, mortgages, leases,
and other encumbrances ("servitudes") on the land. Ownership rights, lease rights, mortgages
and servitudes must be registered in the Land Book in order to enjoy the full protection of the
law, or to legally transfer such rights to another person.

239. An owner must first request a primary registration19 in the land book, based on a
notarized cover letter 20 , plus documentation as described in public regulations, including the
following (see Annex 4.2 for more detail):

        •    The decision of the land committee (for restituted land);
        •    Document confirming ownership rights (from the municipal Land
             Commission);
        •    The layout of the land's boundaries (from the SLS, including cadastral
             number);

18
   Law On Land Books, 22.12.1937; Law On the order of taking effect of the restituted law on land books,
30.03.1993.
19
   Law On Initial Registration Of Real Estate Into The Landbooks, 30 January, 1997
20
   An application form will be available within about 2 - 3 months, once they are fully computerized.


                                                      50
       •    The stock-taking file (from the Cadastral Registry); and
       •    Receipts for payment of relevant fees.

240. Notaries in Latvia are public officials. They can be seen by appointment, and are not
particularly expensive by Western standards, but the notary may refuse to sign unless he or she
is satisfied with the legality of all the documentation.

241. Files that come in each day are dated and numbered and assigned to a Land Judge.
Files must, by law, be handled on a first-come, first-serve basis (although each day's files are
considered as a batch). Files should be completed within one month; expedited service is
available for ten times the normal fee, in which case the file should be completed within five
working days. Within the time frame allotted, the Land Judge must either issue the title or a
"motivated refusal" (i.e., a written statement as to why he or she legally can not issue title).
Such a refusal can be appealed to the courts.

242. There is no State Fee (transfer tax) for a primary registration, although there are
processing fees ("judges fees") (see Annex 4.3).

243. Amendments to the Law on Land Books issued in October 1998 allows for legal
recognition of computerized records of title to real estate, and related information. In Riga, all
their data is already computerized, although it must be double-checked before the process is
complete. There are 28 Land Book divisions in Latvia. Other divisions outside Riga have
computers, but not all of them have yet computerized all their records. They will soon be able
to provide computerized print-outs for all parcels on record, for a fee of 1.4 L per parcel; banks
and real-estate agencies can pay a monthly fee for regular on-line service.

244. The Land Book also issues official copies of one's title, which is needed to obtain a
mortgage, a building permit, and for other real-estate transactions. This document also records
mortgages, leases and other encumbrances.


       B.      Purchasing or Leasing Real Estate


245. Land can be legally transferred only after it has been entered in the Land Book. In
particular, any company that wants to obtain land can only buy land that has been registered in
the Land Book. If a company wants to buy a particular parcel that is not in the Land Book,
they will have to identify the owner through the Cadastre Registry, and arrange with the owner
to have the land surveyed, evaluated, and entered in the Land Book (as described above in
Section A), before they can legally enter into a contract. The documents required are listed in
Annex 4.2.

246. Once a contract between buyer and seller has been signed, it must be taken to a public
notary. The land may have to be evaluated by the SLS again (if the previous evaluation is more
than six months old). A re-valuation of property that has not been physically changed since the
previous evaluation usually costs 5 L and can take one to three months. Expedited service is
double the normal fee but ensures that the evaluation will take place within two weeks.


                                                51
                 1.       Municipal Right of First Refusal

247. Once the evaluation has been completed, the seller must bring the notarized sales
contract and the SLS evaluation report to the Municipal Land Council, which issues a dated
receipt. The Council must decide whether or not to exercise their right of first refusal21 on all
land transfers. Normally, every town and district must have a regional plan that indicates areas
where the local government may have an interest in exercising its option and where it does not.
For any particular transfer, it has 20 days to make its decision, after which it loses its right to
exercise its option. If it does exercise its option, it must pay the contract price in full within 10
days. 22 Further, according to a recent regulation, it is not allowed to sell the land again within
five years, except by public auction.

248. The State and Municipalities also have the right of eminent domain. During the Land
reform, land is being alienated and compensated for as of the value prior to 1940. The
application of the valuations made prior to 1940 is detailed in the decision of the Higher
Council of 15th September, 1992 "On the order of entering into force of the law 'On
Compulsory Alienation of Immovable Property for State or Social Needs' ”. The law stipulates
that during the land reform the compensation for the private real estate which is being alienated
for state and social needs (including alienation for the purpose of maintenance of engineering,
energy and transport infrastructure) is to be paid out promptly in Lats, however the amount
cannot exceed the value of the real estate entered into the Land Books or the Cadastral registry
as it was of 22nd July, 1940. The coefficients for recalculating the prices of 1938-1940 (prewar
lats) into the current prices in lats are determined by the SLS.

                 2.       Permission from Head of Municipal Council
                          (for some Foreign Investors)

249. Most foreign investors do not have to go through the extra step of seeking permission
for a land purchase. However, for the duration of the land reform program, land may be
purchased freely only by citizens of Latvia, governmental bodies, public joint-stock companies
listed on the Riga stock exchange, and statutory companies listed in the Enterprise Registry,
provided that more than half of the fixed capital is owned by23 :

        •    Latvian citizens and/or Latvian governmental bodies; and/or

        •    Natural or legal persons from countries with which Latvia has signed and
             ratified an international agreement on the promotion and protection of
             investments by 31 December, 1996 or (for agreements concluded after that
             date) if the agreement provides for reciprocal rights to land acquisition. (Refer
             to Annex 3.1 for the list of such countries.)


21
   Law On Municipalities
22
    See Cabinet Ministers' Regulation No. 110 (17 June, 1994) Of the order in which the municipalities and district
governments enjoy the pre-emption right for purchase of real estate.
23
   Law on Land Privatisation in Rural Regions (21 Nov., 1990) and the Law on Land Reform in Towns and Cities
of the Republic of Latvia (20 Nov. 1991)



                                                        52
250. When purchasing land, a corporate buyer must bring a reference issued by the
Enterprise Registry, which lists the nationality of the shareholders. In addition, the corporate
buyer has to submit a notarized copy of the registration certificate and charter of the company.
If necessary, the Land Book officials will direct the buyer to the relevant municipal council for
approval. If so, then the investor must submit an application to buy land, including a
description of the intended use of the land.

251. The Head of the Municipal Council has 20 days to review the request and offer either
approval, or a "motivated refusal" (i.e., a written statement with evidence that the land purchase
or the land use is not legal). If the intended land use is in contradiction to the Municipal Master
Plan (zoning), the purchase can be refused. If a municipality does not have a Master Plan yet, it
must be referred to the Ministry of Environmental Protection and Regional Development.

252. In addition, the Head of the Municipal Council is responsible for enforcing provisions
of the land laws that bar investors from non-eligible countries from owning land in the
following areas:

           •   Agricultural and forest land selected by town or city master planners;
           •   Publicly reserved nature areas;
           •   Protection ("shelter") belts of seashore and other public bodies of water; and
           •   State borderland areas (including ports).

253. However, any foreign investor can own buildings in most of these areas and lease the
land for up to 99 years. 24 If the lease is registered in the Land Book, then the lease rights
prevail even if the property is sold to another owner. 25 In the case of the border area, the State
owns almost all this land and does not intend to sell to private investors, even domestic
investors. Private investors wanting to lease land from the State (mostly controlled either by
the Ministry of Transportation or Ministry of Finance) in the border and port areas must explain
the purpose of their investment.

254. If a company that was eligible to own such land were to sell a majority of its shares to
investors that were not eligible, then the company would have two years to divest itself of its
land-holdings. It could, however, sell the land to eligible owners and lease back the land for up
to 99 years.

255. According to the State Land Service, these restrictions might be dropped after the land
reform program is complete (expected in 2002 or 2003). At that point, the current restrictions
will become void. However, by that time, the Council of Ministers' Land Policy Council will
have developed a new land policy, which could retain some or all of the current restrictions.

                   3.       Valuation

256. The SLS valuation of the land (as described above in section A.4) is valid for six
months. If there have been no changes to the property, it can be extended for a further three

24
     Law On Foreign Investment into the Republic of Latvia
25
     Civil Law 1937


                                                        53
months, twice (i.e., for a total of not more than one year). Thereafter it will have to be revalued
by the SLS. SLS evaluations can be appealed to the Director of the SLS and/or in the courts.

                  4.       Transfer Taxes and Real Estate Taxes

257. The "State Fee" or transfer tax is 2% of the higher of the contract value or the SLS
valuation of the land, plus 2 L. The payment is technically the responsibility of the buyer, but it
is a common practice to split the fee between buyer and seller. Before title can be transferred,
the seller must also show a certificate from the State Revenue Service that all real estate taxes
are up to date.

258.     In accordance with the Law On Real Estate Tax, real estate tax until December 31,
2000 is 1.5% of the cadastral value of land determined by the State Land Service. In
accordance with the Law On Property Tax, property tax is 0.5 - 4% of the book value of
buildings and constructions. From 1 January 2001 onward, the Law On Property Tax will be
obsolete, and real estate tax will be applied to land as well as buildings and constructions at a
rate of 1% of the cadastral value of real estate determined by the State Land Service.

                  5.       Analysis

259. Assuming a parcel of real estate is already registered in the Land Book, then the time
required from the point that a contract between buyer and seller is signed until title is
transferred can be as little as one to one and a half months, if the buyer is willing to pay the
higher "expedite fees" for all Government services: about two weeks for the SLS evaluation,
no more than 20 days for the right of first refusal from the municipality, and one week at the
Land Book. 26 Normal service may take twice as long or more. In particular, SLS evaluation
alone is said by many interviewees in the private sector to take 1 - 3 months. Figure 4.1,
comparing Latvia to other investment sites, is presented below.

260. The SLS evaluation function exists, in one form or another, in most countries.
However, in most OECD nations, on-site land valuation is carried out periodically only for tax
purposes, and is rarely required, on site, before a transaction can take place. In many countries,
the valuation process is contracted out to multiple private firms, which helps guard against
collusion or systematic error. As transaction data and evaluation data accumulate, firms can be
judged against the number of "outlying" evaluations it produces. Having multiple valuation
agencies also speeds up the valuation process when timeliness is important. Another way to
improve speed is to avoid on-site valuations where feasible by relying on building-plans plus
neighborhood or zone market data.

261. Aside from the SLS evaluation, the two biggest concerns about the purchase of land are
the municipalities' right of first refusal and the need for some foreign investors to secure
approval from the Head of the Municipal Council.




26
   This also assumes the investor is eligible to buy real estate without need for municipal approval, and excludes
time required to secure a mortgage.


                                                        54
Figure 4.1 Site and Investment Development/Country Comparisons




                                                        55
262. Since the SLS evaluations are often higher than contract prices, buyers are often
concerned that a municipality might exercise its right of first refusal on a transaction, at the
contract price. In fact, this does not happen very often, but the threat of intervention causes
considerable consternation.

263. One example offered by the Riga City Land Commission was an area adjacent to a park.
The contract selling price was listed as 10 L /sq. meter; whereas the SLS evaluated it at 30-40
L/sq. meter. Interviewees in both the public and private sector noted that sales contracts (which
are concluded before the SLS evaluation) often try to understate the actual selling price, since
transfer and real estate taxes depend on the higher of the contract price and the SLS evaluation.

264. To the extent that the Government is concerned about collecting its taxes and fees, the
SLS evaluation alone can suffice. Further, since the State and the municipalities will gain title
to all unclaimed land by the end of the land-reform period, it seems that municipalities will not
suffer from a shortage of real estate. Finally, the State and municipalities have the right to
purchase land from private owners, at market prices (effectively SLS evaluation prices) at any
time this is deemed necessary for public purposes, with the approval of Parliament (e.g., for a
new highway). 27

265. In addition, during the mission, several interviewees in both the public and private
sector referred to mechanisms to circumvent the Municipal Right of First Refusal, which many
private transactions are now employing. In cases where buildings and the associated land have
different owners, the owner of either the building or the land has the right of first refusal in case
either is being sold. In this case the municipality is entitled to exercise its right of first refusal
only if the former have refused to buy the real estate. Also, in accordance with the Civil Law,
the rights of first refusal cannot be exercised when part of the joint property (i.e., a share of a
co-operatively owned property) is sold to the co-owner. Therefore, many real estate
transactions are being sold by first bringing in a "co-owner," and then selling the remaining
interest in the real estate to that co-owner.

266. It is likely that these mechanism will be employed with growing frequency, even though
it adds somewhat to the costs and risks born by investors.

267. The requirement for some foreign investors to obtain the approval of the Head of the
Municipal Council to purchase real estate affects relatively few investors, but represents a
significant hurdle for those who must. The delay adds to their costs and risks, and is distinctly
unwelcoming.

268. It is noteworthy that the Head of the Municipal Council has little significant discretion.
A refusal can be justified on the basis that the intended land use is contrary to the Municipal
Master Plan (i.e., it violates zoning requirements). A domestic investor or eligible foreign
investor could seek to have the Master Plan amended, but this is very difficult (a minimum of
six months to a year). For foreign investors from non-eligible countries, the Head of the
Municipal Council could completely block such a request.


27
     Law of Complusory Alienation of Immovable Property for State or Social Needs, 1992.


                                                       56
269. The enforcement of the other restrictions (against ineligible foreign investors owning
land in designated areas) does not necessarily have to be delegated to the Municipal Council.
For border and port areas controlled by the State, it is entirely redundant. For agricultural and
forest land and protected areas controlled by the municipality, the Master Plan already governs
development. The requirement for a handful of investors to receive permission from the
Municipal Council does not add any significant degree of protection. Any non-eligible investor
who wanted to own such land could easily find an eligible investor as a front, or simply lease
the land, and circumvent the requirement for the permission.

270. Finally, several interviewees noted that there was significant redundancy between the
Cadastre Registry and the Land Book, and suggested consolidation.

               6.     Recommendations

271. For the SLS land survey function, at least in Riga and other large cities, a growing
proportion of valuation work should be contracted out to several competing private firms. In
addition, as market data accumulates, routine valuations can take place on the basis of building
plans and neighborhood or zone market data. These valuations should also be used for
compensation purposes in cases of compulsory alienation.

272. Since there does not seem to be a compelling reason to maintain the municipalities' right
of first refusal on real estate transactions, and it is anyway being circumvented with increasing
frequency, FIAS recommends that it be eliminated, at least for parcels not already designated
by the Master Plan as being of interest to the municipality. The Master Plans should not have
an excessive amount of land designated as "of interest" to the municipalities.

273. Similarly, the requirement for certain foreign investors to obtain the permission of the
Head of the Municipal Council in order to buy land is largely unnecessary and ineffective in
protecting the concerns of the Latvian Government and citizens. FIAS recommends that it also
be eliminated.

274. Given the considerable overlap between the Cadastre Registry and the Land Book, after
the land reform is completed, the Government of Latvia should consider consolidating the two
registries, so that there is one source of information on all real estate.


       C.      Construction Permits


275. The various steps that must be taken before obtaining a construction permit are
relatively time-consuming and cumbersome, but have been improving. The description
contained in this section is based primarily on procedures in Riga, and may not always be
applicable in other municipalities. On the one hand, Riga has a very high level of human
resource capacity in the municipal administration. On the other hand, the demands placed on
the municipal administration are severe, as construction activity continues to accelerate.




                                               57
276. In Riga, the following stages are normally required in order to obtain a construction
permit: application for construction, terms of reference for architecture and planning, the
coordination of the draft project, and the coordination and final acceptance of the construction
project. These are described in turn below, and summarized in the flow-chart in Figure 4.2. 28

                 1.       Preliminary Approval: Application for Construction,
                          Terms of Reference of Architecture and Planning

277. Construction may be initiated by the owner of the property, the lessee, user of the real
estate, or by any other person authorized by the owner of the property (the developer). The
developer presents a simple sketch or written description of the project and the location to the
District Architect (there are six districts in Riga). The District Architect responds in writing,
stating whether development is possible or not, and outlines what approvals will be needed,
under the regulations of the Architecture Department. (Annex 4.4).

278.    There are five categories of projects in Riga:

        •    Category I includes capital construction of new buildings, or renovation of
             existing buildings, (changing their volume, restoration, facilities of short-term
             use with or without details of external engineering networks, and other
             projects with connections to the urban engineering network). These projects
             are coordinated by the Engineering Committee, the Chief Architect of the
             district, the Inspectorate of Cultural Monuments (if the building is an
             architectural or cultural monument or is located in the monument zone), the
             Chief Artist (if advertising elements are involved), the Architect or Head of
             the Engineering Division of the Architecture Department and accepted by the
             Chief Architect of Riga.

        •    Category II includes renovation of existing facilities and individual family
             dwellings, outbuildings and auxiliary buildings without providing for the
             construction or renovation of new engineering networks. These projects are
             coordinated by the Inspectorate of Cultural Monuments (in the case of
             relevant buildings), the Chief Artist of the city and accepted by the Chief
             Architect of the district.

        •    Category III includes all kinds of engineering facilities, streets, access roads,
             engineering networks and their renovation. These projects are coordinated by
             the Engineering Committee, the Chief Architect of the respective district, the
             Inspectorate of Cultural Monuments (in the case of relevant buildings) and
             accepted by the Architect or Head of the Engineering Division of the
             Architecture Department.


28
  This section benefits from a document prepared by the Riga Municipality in cooperation with the Canadian
Urban Institute, "Streamlining of the Development Approval Process in Riga City and Evaluation of the Riga
Development Approval Process", presented to the Workshop on Private Sector Involvement in Municipal
Development, April 28-29, 1998 in Tallinn, Estonia.


                                                      58
                                       Figure 4.2

                      THE DEVELOPMENT APPROVAL PROCESS


                                    1. PRELIMINARY PROPOSALS
                                 SUBMITTED TO DISTRICT ARCHITECT
                                      (usually as a letter and sketch)
Pre-planning stage

                                        2. WRITTEN RESPONSE
                      (development possible or not; outlines what must be done and what
                                            approvals necessary)


                                 3. DRAFT (SKETCH) PROJECT DESIGN
                                (in the case of technically complicated project)

Project design, co-    4. PERMIT FOR PREPARATION OT TECHNICAL PROJECT
ordination and        (applicant pays fee for planning development before receiving TOR)
acceptance

                         5. FINAL PROJECT SUBMITTED TO ARCHITECTURE
                        DEPARTMENT FOR CO-ORDINATION OF ACCEPTANCE


                                   6. ENGINEERING CO-ORDINATION
                        considers and co-ordinates or refuses pending the elimination of
                                       weakness and making corrections

Construction Permit
                                  7. CONSTRUCTION INSPECTORATE
                            considers documents and issues the construction permit,
                                    sets the fee for the construction permit


                         8. ACCEPTANCE OF THE FACILITY FOR OPERATION




                                            59
       •   Category IV includes small forms of architecture, kiosks etc. These projects
           are coordinated by the Engineering Committee (if necessary), the Chief Artist,
           the Chief Architect of the respective district, with the Inspectorate of Cultural
           Monuments, the Architect or the Head of the Engineering Division of the
           Architecture Department and accepted by the Chief Artist of Riga.

       •    Category V: includes socially important and technically complicated
           facilities, which must be worked out in the draft (sketch) stage (before the
           technical project stage). These projects are coordinated with the Chief
           Architect of the respective district, the Inspectorate of Cultural Monuments,
           the Chief Artist of Riga, the Head of the Architecture Division and the Head
           of the Engineering Division of the Architecture Department.


               2.      Coordination of the Draft (Sketch) Project

279.      If the envisaged construction project is socially important or technically complicated,
construction design must be carried out in two stages, the first of which is the draft (sketch)
project stage. The sketch project must include the following components: the location of the
facility, the development of the improvement of the site, the plans of the floors of the facility;
characteristic sections of the facility, facades, and an explanatory letter (see Annex 4.5). It
must be submitted to the Construction Board (in Riga - to the Chief Architect of the district) for
approval. The approved sketch project is the basis for the development of a technical project.

               3.      The Approval and Acceptance of Construction Projects

280. The draft version of the technical project must be approved by all municipal institutions,
on the basis of their technical regulations. The construction project must be submitted for
coordination and acceptance to the Architecture Department.

281. Major projects (including most commercial projects) must submit the following
information:

       •   Proof of ownership or lease agreement from the owner, topography plan,
           situation plan;

       •   Recommendations from environmental protection agencies (see section 6,
           below), sanitary inspection, fire marshal, transportation safety inspectorate,
           city economic development branch, and the historical protection board (if the
           project is located within a "heritage district";

       •   Results of public evaluation of the project (developer must arrange a public
           meeting, advertized in the Government gazette and regional newspapers, and
           record the responses of the public);

       •   Site Plan of the project;



                                               60
       •   Decision of the City Development Committee (for projects that are deemed
           important to the community).

282. Within two days, the materials submitted and their compliance with the data submitted
for completion and project design are checked. Within another two days, preliminary
coordination with the Chief Architect of the district is carried out and a respective entry made
on the registration card of the construction project.
283. Within five days, the construction project is prepared for consideration by the
Engineering Coordination Committee of Riga (during this time, representatives of the
coordinating organizations may acquaint themselves with it) in the order of their submission.

284. The construction project is accepted if it has been coordinated with all the institutions
concerned, the structural units of the Architecture Department and the authorized official.
Projects related to the center of Riga or historical buildings must, during the stage of project
design and coordination, also be considered by the Inspectorate of Cultural Monuments.

285. The District Architect then prepares a written response to the developer (a "Planning
Assignment") within 10 - 30 days, outlining in detail the requirements that must be fulfilled and
approvals that need to be obtained, depending on the complexity of the project. A number of
fees are required, including those for the Architectural Terms of Reference (TOR), the
Engineering TOR, and the Artists TOR. These range from 10-50 Lats. Each of the agencies
who sign off on the plan also set fees, which range from 0.5-20 Lats.

286. The developer then prepares more detailed plans, taking into account the requirements
stipulated by the District Architect's office.

287. The applicant can show his detailed plans to all the members of the review committee
during weekly public meetings in Riga. All plans must be presented in Latvian. At this
meeting, the developer can go around the room with a special form (see Annex 4.6), show his
plans to representatives of each of the offices from which he needs approval (e.g., fire,
sanitation, water, sewerage, electricity, telephone, etc., see Section 4, below), and collect
signatures or receive instructions for further changes. If there are no problems, this can take
place within two - three weeks.

288. After these preliminary approvals, all projects are submitted to the city's Architecture
Department for the settlement of payments and to the specialist of the co-ordinating committee
of the Architecture Department, who checks the application for completeness (including all
necessary approvals and payments) and either approves or disapproves the project. The
infrastructure charges are based on a formula based factors including the use of services (water,
sewerage, etc.), area of site occupied, and number of employees. A small shop might have a
fee of about 100 Lats; a heavy user of services may have to pay 10,000 Lats or more. This
stage takes at least 4 days.




                                                61
289.   Approved projects receive a seal, and are then ready for the building permit application.

               4.      Utilities

290. Utility hook-ups and construction approvals are also required during the construction
permit process. The major utilities of concern to most commercial projects include
water/sewerage, electricity, gas, telecommunications, and (often) heat.

291. In all cases, construction projects need to apply to each of the utilities for technical
specifications at the planning stage, incorporate the specifications into the detailed plan, and get
the detailed plan approved by the utilities during the approval process for the construction
permit. Procedures for each of the utilities are described below.

                       a.      Water/Sewerage

292. For water and sewerage connections in Riga, the relevant authority is "Riga Water." In
applying to receive the technical specifications for a construction project, an investor must
provide information on the location of the building site, estimates of the volume of water use
and effluent, and the content of the effluent. The fee to receive the technical specifications is
13 L for incoming water and 13 L for outgoing effluent.

293. Riga Water must supply the appropriate technical specifications within 15 days of
receipt of the application (see Annex 4.7). The specifications will indicate whether mains
access is already available at the proposed site, whether it is adequate to handle the proposed
volume of water use, and if so, where the hook up should be located. The specifications will
also include a list of permitted effluents and concentrations. Effluents outside the permitted
content and concentrations must be pre-treated. Failure to do so results in a fine.

294. The minimum hook up cost for a commercial enterprise that is not a large volume user
is about 30 L. Water users requiring larger diameter pipes are charged proportionally higher
hook-up fees. Riga Water does not have a price list, and states that the relevant price will be
designated in a letter to the applicant. In the future, the current hook up fee will be replaced by
a subscription fee including an installation charge plus a monthly maintenance fee in addition
to the metered water usage fees.

295. If the mains must be extended to the building site, that work is usually the responsibility
of the client, which must follow the specifications of Riga Water. Upgrades (e.g., to increase
the capacity of the mains serving the site in question) also incur special charges, based on the
diameter of the pipe. If the site is outside the jurisdiction of any of the municipal water
utilities, then the investor must turn to the Groundwater Institute for permission to drill a well.

                       b.      Electricity

296. Electrical connections in Riga are the responsibility of Latvenergo. When applying for
technical specifications, the applicant must provide the location of the site, the purpose of the
electrical connection (residential, commercial or industrial), and provide either proof of
ownership of the building or the permission of the owner (who in turn must provide proof of
ownership). There is no fee for the technical specifications for electricity, and the


                                                62
specifications are supposed to be provided by Latvenergo within one month of receipt of the
application (see Annex 4.8).

297. Once the specifications are received, the builder may either use his own contractor to
prepare the design for the infrastructure connections (at an average cost of 10% of the
estimated construction cost) or contract with Latvenergo to undertake the design work (for 8%
of the estimated construction cost). However, officials at Latvenergo note that a private
contractor can usually prepare the designs more quickly than Latvenergo.

298. Once the design has been prepared, it must be approved by two different offices within
Latvenergo: one responsible for the electrical scheme inside the building (looking in particular
at capacity requirements) and one for the cables outside the building (focusing on the physical
layout and possible disruption of existing cables). Latvenergo management has established a
goal of reviewing designs and issuing an approval within one month of submission, but
officials in the company note that it often takes longer. In particular, there may be delays if the
grid capacity is too low, relative to the requirements of a new building. In this case,
Latvenergo must prepare to increase capacity and to cost the work involved. This in turn
requires that Latvenergo send for three bids for the required work.

299. The cost of a simple new connection that does not require any increase in capacity or
extension of the electrical grid is as follows:

               Short connection (up to 30 m)          4.2 L per ampere
               Long connection (over 30 m)            16.16 L per ampere

300. If an extension or upgrading of the electrical grid is required, then the connection price
will be set to cover the cost of the construction work and materials, based on actual cost.
Latvenergo supplies all the lines and meters. For a greenfield project, the average cost for
digging cables is as follows:

               Old Riga                               up to 100 L per meter
               Outside old Riga                       30 - 40 L per meter


301. If network capacity must be increased by over 100 Kw, Latvenergo will have to install a
new transformer. Their standard transformer size is 650 Kw, which costs L 25,000. Many
businesses that require capacity in the range of 200 - 400 Kw are not willing or able to pay the
cost of a 650 Kw transformer by themselves, in which case co-financing (either with
Latvenergo or other users in the same area) must be negotiated.

                       c.      Natural Gas

302. Riga has a network of natural gas distribution pipes, which is the responsibility of Rigas
Gaze. Even if a construction project will not require a new gas connection, approval will still
be required to ensure that construction activity does not disrupt the existing network.



                                                63
303. At the planning stage of a construction project, an investor will need to ask for technical
regulations from the technical department. If there is a nearby, existing pipeline, the
procedures are very simple. The cost of a connection is 100 - 300 L. However, if the gas
pipeline must be extended, then the necessary design and construction work must be
negotiated.

304. If a gas pipeline must be extended more than about 100 meters, either the client can pay
for the design and construction work or, if it will be a major consumer or in an area likely to be
developed in the near future, then Rigas Gaze might assume the costs. However, they can not
always work as quickly as some customers want. Construction costs average about 40 L per
meter of pipe, up to a maximum of about 100 L per meter. Pipelines that run along city street
are owned by Rigas Gaze, although the connection itself may be owned by the client.

305. For the design phase, it is possible to contract with Latvia Gaze to prepare the designs,
but that usually takes two months. The design work can also be carried out by a private
contractor, but Rigas Gaze must be a party to the contract.

306. Construction work on gas pipelines for industrial projects average about six months,
and most work is only undertaken in the warmer months (April - November). Customers that
are willing to pay double may have work undertaken during the winter.

                       d.     Heating

307. Riga Heat is responsible for a network of pipes delivering steam heat to buildings
throughout Riga. Although there is no obligation for a building to use the system, all
construction projects must ensure against disruption of the existing network.

308. Technical specifications are available from the Technical Department of Riga Heat. To
apply for the technical specifications, an investor merely writes a free-form letter stating the
address of the construction site, the total space, and the consumption requirements (if any).
The fee for the technical specifications is currently L 5.90. The technical specifications will
indicate where a hook-up can be located and the construction steps required. It takes
approximately 1 - 2 weeks to receive the technical specifications (see Annex 4.9).

309. Riga Heat will only contract with the actual owners of a building, not with tenants.
They therefore require documents from the Land Book and/or Enterprise Registry to determine
signature authority.

310. Riga Heat's charges for connections are only to cover the materials and labor costs
involved in the actual work. Large industrial or commercial projects may require upgrading of
the distribution network. Riga Heat is in competition with other sources of heating, so prices
its services competitively. Officials at Riga Heat stated that they can invest up to 30 - 40% of a
client's yearly consumption and sign a long-term agreement on the infrastructure costs.




                                               64
                      e.      Telecommunications

311. The fixed-wire telecommunications network is the responsibility of Lattelekom.
Technical regulations for construction that may disturb the existing network are handled
through the office of the Riga Architect.

312. An application for a new connection must receive a response from Lattelekom within
15 days (see Annex 4.10). If the network is readily accessible and a line is available,
Lattelekom will send an invoice for installation, and will establish the connection within 10
days of receiving payment. Customers with a pre-existing credit history can be billed for the
connection. Connection fees are set to cover costs. The standard connection fee is currently
about 60 L. Business connections receive priority over household connections. In the past,
there was a waiting list of about 140,000 for a line. The waiting list is (as of January 1999)
down to about 40,000, of which about 90 percent are for residential connections.

313. New connection requests that are some distance from the existing network or are
located in an area where there is a lack of capacity require more time and cost. The average
delay for a business connection in such circumstances is about 3 months. In that case, the
customer can use mobile telephones or digital wireless connections as a temporary solution.
The work can be expedited or contracted out, but Lattelekom must remain involved.

314. Satellite connections are also available, but require a license from the Ministry of
Transport.

               5.     Building Permit

315. In addition to the accepted construction project, as described above, the developer must
re-submit proof of land ownership or leasing agreement (in case there have been any changes),
plus the following documentation:

       •   approved and co-ordinated Site plan architectural package (as described above
           in Sections 1-3);
       •   receipt from Economic Development Branch for payment of applicable
           development/infrastructure charges (as described above in sections 3-4);
       •   contract for supervision by designing architects / engineers (including
           architects/engineers credentials);
       •   contract with a licensed building contractor (including builder's credentials)
       •   proof of agreement with certified site supervisor (including site supervisor's
           credentials);
       •   site journals;
       •   proof of insurance (not yet required, but will be eventually under new
           regulations);
       •   all required permits respecting cultural monuments (if applicable); and
       •   commitment that all work will be carried out in accordance with Latvian
           building standards in force.




                                               65
316. If everything is in order, the process can be completed in one week. The Chief Building
Inspector in Riga issues a building permit (see Annex 4.11), and the developer pays a fee of
0.2% of the ascribed value of construction.

317. The building permit includes an expiration date, and field work is expected to
commence within six months of the issuance of the building permit.

               6.     Inspections

318. During the construction process, the supervisor must maintain executive documentation
including protocols of works covered, a construction journal, completed construction records,
and must obtain approvals from on-site inspectors (fire, sanitation, etc.).

319. According to the building regulations, Building Inspectors must be notified for three
mandatory inspections during the construction phase:

       •   Foundation completion.
       •   Walls/roof (before proceeding with interior finishes and mechanical/ electrical
           works).
       •   Completion.

320. Building Inspectors must also be notified of any significant revisions to building project
plans or documentation, which must be submitted for review and approval.

321. All construction records must be submitted to the Project Completion Committee,
which issues a certificate of completion, and then the building is ready for occupancy. The
Chairperson of the Project Completion Committee is the construction inspector of the district.
The panel of the Committee includes the customer, the project designer, the construction
supervisor, the construction contractor, the public construction inspector (if the construction
has been fully or partly funded from municipal resources), and a representative of the credit
institution (if the facility has been credited upon state guarantees).

                      7.      Worker Safety Approval

322. Upon completion of the construction of the premises, the investor must receive approval
from the State Labor Inspectorate for worker safety. Upon a successful inspection, the Labor
Inspectorate issues a statement approving operations to commence in the building. Typically,
the investor contacts the Labor Inspectorate before plans are developed in order to ensure no
major changes will be required after completion.

323. According to the Labor Inspectorate, they generally give 60 days to an investor to fix a
minor problem. They will not allow a factory to operate with a significant safety problem. The
Labor Inspectorate has the capability to shut down a plant in the event of a major and
immediate risk to safety

324. The Labor Inspectorate has been working with the European Union to upgrade its
standards to that of the EU. The largest concern of the Labor Inspectorate is the ability of many


                                               66
existing businesses to comply with the new regulations. They are particularly concerned with
small and medium size enterprises that do not have the resources for significant upgrades.

325. The Labor Inspectorate also conducts random inspections of factories, particularly those
with complaints in the past. The choice of inspection targets is made by a committee of
inspectors. The inspectors can issue fines for infractions. The Director must also approve
factory closures. Appeals are made to the Director.

                           8.       Environmental Approval

326. Separate environmental approvals are necessary for projects that may have a significant
impact on the environment. Latvia is issuing a new law on environmental impact assessments
(EIAs) that govern this process. 29 Annex 1 to the new law describe which types of projects
require an EIA. These include, for example, electrical power projects, metal production and
fabrication, asbestos production, pharmaceuticals, fertilizer, pulp/paper, dams, pipelines, and
waste disposal facilities (see Annex 4.12).

327. The approval process includes an initial appraisal, public hearings, determination of the
need to develop an EIA, preparation of a "working statement" (draft EIA), a conclusion by the
Regional Environmental Board, and a decision by the responsible state or municipal institution.

328. The first step is for the developer to submit a written application to the municipality and
to the Regional Environmental Board (there are eight such Boards in Latvia, each responsible
for 3 - 4 districts). The application should include a description of the type of environmental
impacts expected, and at least two alternative approaches to mitigate the environmental impact.

329. The Regional Environmental Board makes an initial appraisal of the project, to
determine whether a full EIA will be necessary (according to the criteria listed in Annexes 1
and 2 of the Law). If not, the Environmental Board may merely issue technical requirements
for the project. If the EIA is deemed necessary, the Board sends its initial appraisal to the
competent institution (usually the municipality environmental commission) for approval.

330. Assuming the municipality confirms the need for an EIA, it must notify the developer
as well as interested state and municipal institutions, in writing. This decision may be
appealed. 30

331. The next step for the developer is to publish a notice about the proposed project in the
Government gazette and regional newspapers. At the request of the municipality, the Regional
Environmental Board, or any ten residents of the area, the developer must hold public meetings
about the project. The meeting must be advertized in advance in the Government gazette and
regional newspapers, and sometimes on radio or television. Officials from the municipality are
expected to be in attendance.


29
   Currently in force as Cabinet of Ministers Rules on evaluation of the influence on environment (No. 278, in
force as of 8 Aug., 1998).
30
   If it decides not to require an EIA, it must notify the Regional Environmental Board as well as the developer.



                                                        67
332. The developer can then request (and it is advised to do so) the municipality and the
Board to develop a "program" describing the outstanding issues that must be covered by the
EIA, including the concerns expressed at the public meeting. The Board then usually organizes
an "expert commission". The Board is made up of technical experts from the Government
ministries, universities, municipalities, and if necessary, outside experts. If such outside
experts are deemed necessary by the Board, the investor must pay for the extra costs (according
to the State Expertise on Environment, this has happened only once so far in five years). The
Board presents the program to the developer.

333. The developer is then responsible for preparing a "working statement" (draft EIA). The
working statement provides information on the project itself, expected environmental impacts,
and alternative technologies for limiting the environmental impact. The developer must then
publish a notice about the EIA and offer to make it available to interested parties, and to hold
another set of public meetings. If there are still any outstanding objections by the public, the
Environmental Board must make its recommendations on the basis of the requirements of the
law.

334. The working statement is then submitted to the Regional Environmental Board, which
checks to see if it conforms with the agreed program. The Board sends its recommendation to
the Municipality, which is responsible for the final decision. It must respond with a written
opinion to the developer, including any additions or changes required in the working statement.

335. The developer must then prepare a "conclusion statement" (final EIA) and submit it to
the environmental board. If the board believes the conclusion statement is still not in
conformance with the agreed program, it can request further revisions in writing. If it approves
the conclusion statement, it must publish notification of its approval, and make the conclusion
statement and the final opinion available to the public. The opinion on the conclusion statement
is valid for three years.

336. The opinion, however, is not binding on the municipality. It is the responsibility of the
developer to submit the conclusion statement and the opinion of the environmental board. The
municipality appraises the conclusion statement and the environmental boards opinion, as well
as input from other interested institutions and the public, and adopts a decision to accept or not
accept the developer's proposal.

337. The approved EIA of the developer then forms part of the building plan, and is subject
to inspection during construction (see sections 3 and 4, above). The EIA also includes a
monitoring plan for on-going industrial emissions and other expected environmental impacts.
If inspectors find that emissions are higher than agreed, they can levy fines. Appeals are
possible first through the Ministry of Environmental Protection and Regional Development and
then through the courts.

               9.      Analysis

338. According to the Riga Municipal Building Inspectorate, it takes an average of one to
one and a half years for a commercial project to get a building permit, which is significantly
longer than many other transition and developing economies that are at a similar level of


                                                68
development. The FIAS mission heard of examples that took up to two and a half years, as
well as small and simple projects that were finalized in three to four months. Most of the delay
appears to be attributable to the need to upgrade or extend infrastructure. Chart 4.3, comparing
Latvia to other countries in this regard, is presented below.

339. Latvia can probably improve the efficiency of its procedures considerably. This will
require attention urgently, as the Riga municipality is now experiencing a tremendous increase
in the number of construction applications it must consider. The length of time required for
approvals is a source of complaint from investors in Latvia. Even at the preliminary planning
stages, interviewees stated that it could take up to two months after submitting an application
for technical regulations from, e.g., Latvenergo, before the technical regulations are received.
Since, in the case of Latvenergo, there is more than one department involved in preparing the
technical regulations (internal wiring/capacity plans and external grid plans), it is possible that
time is wasted passing the application from one department to another.

340. It is clear that all the utilities face problems with the age and capacity of the existing
distribution networks. In the case of electricity, a large industrial project may affect the grid
over an area 3 km wide, and may require extensive reconstruction. In the case of the gas lines,
the existing "medium pressure" (about 15 millibars) network is less dense than the "low
pressure" (10-12 millibars) network, but most new equipment requires "medium pressure,"
such that the relevant network needs substantial expansion, which is expected to take
approximately three years.

341. In the case of district heat, the old system operated by city blocks, and the mains are
often located directly under buildings rather than along the streets, as is normal in EU
countries. Therefore, when the system needs up-grading, the project requires the approval of
all the affected real estate owners. Interviewees noted that backlogs for new telephone lines
were a problem in the past, but the situation is improving. In the case of water and sewerage,
interviewees stated that the network plans contained errors, and some wells were no longer
functional. These problems have contributed to the delays.

342. The most frequent complaints from investors interviewed during the FIAS mission
about the construction approval process were leveled at the various inspectors involved in both
the planning approval and during the construction process. For example, one investor who
intended to build a small canteen for his workers, and whose plans for the canteen kitchen
included both a sink and a dishwasher, was told he must include a second sink.

343. Another complaint was that many municipalities demand that developers make
"infrastructure donations" to the city before they can receive a construction permit. In some
cases, this is clearly needed because the infrastructure grid does not extend to the area where
the developer wants to build. In other cases, however, investors claimed that municipalities
demanded "infrastructure donations" entirely unrelated to the development itself (e.g., to
renovate a local school). These are not required by any law or regulation in Latvia.

344. Foreign investors, in particular, perceived that they were more likely to be "milked"
than domestic investors. Domestic investors, on the other hand, felt that foreign investors
(particularly those with active Chambers of Commerce or Ambassadors) received better


                                                69
Figure 4.3: Site and Investment Development/Country Comparisons




                                                         70
treatment. Investors in general all agreed that inspectors were very inconsistent in their
treatment of similar projects. Many asserted that some inspectors are "looking for trouble" and
often demand bribes to leave an investor alone. The appeals process is perceived to be very
weak. Although most agencies have an appeals process within them, investors find the process
less than fully impartial. In most cases, it would be possible to bring a case to court, but this is
a very slow, cumbersome, risky, and expensive undertaking. Most investors will only take a
major case to court.

345. It is worth noting that the most frequent complaints were leveled against the agencies
that had the least modern and transparent regulations - the various inspectorates. Where
legislation and regulations are up to date and well publicized (e.g., the new environmental
regulations), investors may complain about delays and inefficiencies, but significantly less
about inconsistency or corruption. Although there are State Building Inspection Regulations
(No. 339, effective from January 1, 1998), they are quite general.

346. The "pre-approval stage" is considered necessary until the private construction industry
in Latvia matures, the regulations and procedures have been codified and published, and
licensed architects and developers are more thoroughly familiar with the regulations and
procedures. It is envisioned that many routine projects can then dispense with the pre-approval
clearances.

347. A particular problem area cited by the Canadian Urban Institute (CUI) and confirmed
by the Riga Architects Office and Construction Inspectorate is the requirement for the City
Architects Office and Construction Inspectorate to verify the validity of land ownership on
construction sites. Although this can be relatively straightforward for property that is registered
in the Land Book, it can be much more difficult and problematic for property that is not yet
registered in the Land Book. It has been pointed out that these offices lack the legal expertise to
verify the documentation that is submitted to them.

348. Another problem identified by the CUI is the difficulty of obtaining site-specific
changes to the City Master plan. As mentioned above in Section B, the "amendment" process
for the City Master plan is extremely time-consuming and difficult. It is essentially the same
process that was needed to approve the entire Master Plan in the first place. In many other
countries, a "zoning variance" for a specific plot of land has a simpler and faster approval
procedure.

349. Finally, the CUI noted that the fee structure is not yet well developed, nor does it bring
in enough revenue to cover the necessary expenses of the municipal agencies responsible for
regulating construction.

350. Utility pricing in general could benefit from a thorough review. At the moment, for
instance, it appears that electricity prices are set too low to cover relevant costs while
telecommunications prices (especially for long-distance services) are high relative to providers
based in OECD countries.

351. With regard to environmental regulations, Latvia is bringing its laws and policies into
conformity with the EU. The most important areas in this regard are water, air and waste.



                                                 71
Hazardous waste management is one of the areas where further progress is needed, in the view
of the EU. But there is a significant cost barrier for Latvia. As is the case for all the transition
economies, funding the necessary investments for achieving environmental compliance will
require not only significant allocations from domestic resources (both public and private
investment), but significant external resources as well. This is viewed as a major hurdle for
harmonization. The EU is currently dealing with this problem by proceeding along two tracks
simultaneously, i.e. progressive alignment of regulations and new finance for necessary
physical investments.

352. Latvia’s target is to adopt all the environmental Acquis in full by the end of 2002. This
seems feasible but, in the view of the EU Commission, Latvia should concentrate its efforts on
reinforcing the monitoring infrastructure in the air and water sectors and on strengthening
capacity at the local level. The proper transposition of some 500 items which currently
constitute the environmental Acquis is thus only the first problem. The Commission insists that
it is equally important that the new standards be enforced on a consistent basis.

353. From an investor point of view one can conclude that - in principle, and over time - the
same environmental standards must be complied with as in the EU. As there in principle is
nothing that prevents an EU country to apply higher standards, it may be that the requirements
applicable in Latvia will be even higher than in other countries. However, there is no point in
setting standards that can not be consistently enforced.

               9.      Recommendations

354. The Canadian Urban Institute has already provided several recommendations to
improve efficiency of the building permit process, including the following:

       •   Publish a chart of the approval process, as well as all relevant regulations;
       •   Improve signage in the buildings housing the relevant offices;
       •   Increase staff resources;
       •   Improve computer resources (including approval tracking software);
       •   Create a consolidated fee structure to help finance the need for increased
           resources;
       •   Establish a process for site-specific changes to the Municipal Master Plan
           (zoning variance); and
       •   Create a commission to resolve land ownership issues, and eliminate the
           requirement for multiple checks of land ownership.


355.   Other recommendations that might be worth considering include the following:

       •   Prepare and publish regulations with guidelines for municipal officials on the
           maximum approval times associated with each stage of the construction
           approval process;
       •   Create an Ombudsman to hear complaints against inspectors and other
           officials and to ensure against unreasonable demands on developers at the



                                                 72
    municipal level for infrastructure “donations” unrelated to the project being
    considered (for more details, see Executive Summary);
•   Undertake Process Re-engineering techniques to find ways to speed up the
    approval process, including elimination of unnecessary or duplicative
    procedures and to ensure that applications are not "gathering dust" in any
    particular location;
•   Undertake a review of utility pricing, to ensure that prices cover long run costs
    (including infrastructure) and are competitive with providers in the EU.
•   Monitor the environmental approvals process closely, in order to ensure
    consistency of implementation and to identify and eliminate unnecessary
    delays.




                                        73
                                          CHAPTER V

                                          OPERATING



356. Once a firm begins operating, a number of additional steps must be undertaken. The
most important of these steps relate to import/export clearance procedures and foreign
exchange. A firm will also interact with the State Employment Service, the State Language
Service and other inspectors.


          A.      Import/Export Procedures


357. By law, only a Latvian resident (physical or legal) can make a customs entry31 (a non-
Latvian may declare transit goods or temporary importation by way of exception, or "goods
that are regularly transported" at the discretion of the SRS). Therefore, if a foreign country is
planning to sell its goods in Latvia, either a Latvian attorney must be appointed or a customs
broker must be hired.

358. According to the Law on Customs Duties (adopted October 29, 1994 but amended
several times since then), tax applies to both import and export of goods. The tariff
nomenclature is based upon the Harmonized Commodity Description and Coding System and
the Combined Nomenclature System. There are altogether 98 classes. Customs duties are
levied depending on the class of goods Applicable rates depend on the origin of the goods
imported. The basic import rate varies from 0 to 55%, while export rates vary from 0 to 100%.

359. Rates are coming down as Latvia continues to liberalize its trade regime. In particular,
tariff rates have been reduced on food products and for various industrial goods. Some fresh
fruits and vegetables are subject to seasonal tariffs in the summer. A special rate exists for
goods originating in countries with which Latvia has concluded free trade agreements, and
another rate is applicable to goods originating in countries with most-favored nation status.
Goods that transit through Latvia are not subject to export and import duties. Duty is assessed
on the CIF (cost, insurance and freight) price. Recent amendments to legislation converted the
majority of the remaining specific rates (Ls per unit) to ad valorum tariffs, except for alcoholic
beverages and tobacco (which will be converted in 1999) and sugar.

360. The Value Added Tax is applied at all stages of production of a good. The VAT rate in
Latvia is 18%. Fixed asset investment goods imported into Latvia are not subject to VAT,
provided the importer is a registered VAT-payer and the imported asset does not threaten
Latvian competitiveness. Zero percent tax is levied on export services, international
transportation, and services related to export of goods. The VAT is assessed on the CIF price
plus the amount paid in duties.


31
     Customs Law, 11.06.1997.


                                                74
361. With a permit from the SRS, customs warehouses may be used to temporarily store
goods that have been imported with tax and duty deferred. The permits are issued only to
Latvian residents. Certain processing operations may also be performed in the warehouse.
Particular conditions are applied to excise goods warehouses for oil products. In the
warehouses, transactions with oil products provided for in regulatory enactments are allowed.
So are the production and marking of oil products, applying deferred tax payment. The
introduction of such excise warehouses are also envisaged for alcoholic drinks and tobacco
products.

362.   The holder of a customs warehouse is responsible for:

       •   ensuring the customs control of all goods in the customs warehouse;
       •   fulfilling the responsibilities that arise from the storage of goods as provided
           for according to the official customs procedures for warehousing.
363. With the approval of the customs authorities, permission may be granted to use customs
warehouses for the following particular purposes:

   •   the storage of Latvian goods on the premises of the customs warehouse;

   •   the processing of foreign goods on the premises of the customs warehouse in
       compliance with the official customs procedures for importation for processing,
       observing the conditions of the mentioned procedure;

   •   the processing of foreign goods on the premises of the customs warehouse in
       accordance with the official customs procedures for importation for processing under
       customs control.

364. Upon the application of the official customs procedures for warehousing, the terms of
the storage of goods are not limited. However, in specific cases provided for in official
regulations, the customs institution may set a term by which the possessor of the goods must
apply the goods for a new customs procedure.

365. Customs tax on exports is applied only to goods that have a strategic value, including
ferrous scrap and waste, round logs, and antiques.

              1.      Exemptions from Taxes and Duties

366.   Customs duties are not applied to:

   •   Latvian and foreign currencies and securities;
   •   Property imported into the Republic of Latvia as a foreign investment not designated for
       sale;
   •   transport vehicles, which carry out regular international transportation;
   •   transit cargo carriage;
   •   goods brought to Latvian customs warehouses and inland customs zones;
   •   humanitarian aid consignments and gifts;


                                                75
     •   inherited property and articles of the private use of natural persons and the household
         articles of natural persons who arrive to reside in Latvia or depart from Latvia to
         permanently reside abroad;
     •   goods envisaged for exhibitions and trade fairs;
     •   books for educational and scientific institutions and libraries;
     •   goods for the disabled;
     •   mass media; and
     •   goods for sporting events and exercise.

                2.      Security for Pre-clearance and Performance of Customs Procedures 32

367. Customs authorities may require a guarantee for the performance of pre-clearance
treatment and/or of customs procedures. The two types of guarantees are:

         •   Single-time guarantee: for the execution of one pre-clearance procedure, one
             customs procedure, or a pre-clearance and customs procedure.
         •   A comprehensive guarantee: envisaged for a limited period of time to cover
             any customs debt which may be incurred.

368.     The security may be provided:

         •   By the payment of security;
         •   By submitting a bank guarantee;
         •   By submitting a liability insurance policy;
         •   By submitting documents, certifying the guarantees provided by international
             agreements subscribed to by the Republic of Latvia;
         •   By carrying goods escorted under the guidance of a customs convoy (although the
             Customs will not assume responsibility for the cargo).

369. The security must not be less than the amount of the customs debt that may be incurred,
unless stated otherwise by law. However, according to the State Revenue Service, persons who
regularly perform the customs procedure without violation shall receive a pledge discount.

                3.      Free Zones

370. Presently, four free zones are mandated by law in Latvia: Ventspils Freeport, Riga
Freeport, Liepaja Special Economic Zone (including Liepaja port), and Rezekne Special
Economic Zone 33 . The Special Economic Zones not only enjoy free zone status, but
considerable tax incentives. Currently, free zones may be established only in free ports and
special economic zones. While the Riga commercial port is concurrently a free zone, only a
part of the Ventspils Freeport and Liepaja port operates under the mandate of the free zone
regime.


32
  Customs Law, 11.06.1997
33
  Law On Ports, Law On Riga Commercial Free Port, Law On Ventspils Freeport, Law On Liepaja Special
Economic Zone, Law On Rezekne Special Economic Zone


                                                   76
371. In State Revenue’s parlance, the goods in free zones are in “Customs territories”. Goods
in free circulation are said to be in “Latvian territory”.

372. The time for storing goods in the free zone is not limited. Latvian, as well as foreign
goods may be stored in the free zone. The goods must be registered when brought into a free
zone. The recording must reflect the movement of goods and the secure identification of goods
at the customs institution.

373.   Non-Latvian goods placed in a free zone may:

       •   Be released for free circulation in accordance with the appropriate customs
           procedure;
       •   Be subject to the inward processing procedure under the conditions laid down
           by this procedure;
       •   Be subject to the temporary importation procedure;
       •   Be abandoned to the state;
       •   Be destroyed, provided that the person concerned provides the customs
           authorities with all necessary information.

374. Special economic zones (such as that established in Liepaja) are designed to develop
and promote trade, industry, shipping and air transport, as well as the transit of goods via
Latvia. When the company starts operating under the status of the Special economic zone, the
following tax allowances are received:

       •   80-100% rebate on the application of property and real estate tax;
       •   up to 100% depreciation rates, applying the double-declining method for all
           types of fixed assets in certain instances;
       •   10 year carry forward of losses;
       •   80% rebate on corporate income tax applicable to income derived within the
           zone;
       •   80% rebate on the applicable withholding tax on dividends; management fee
           and payments for usage of intellectual property;
       •   0% VAT for most services and goods supplied in the free zones, including
           construction services;
       •   VAT, excise, and customs duty exemption on import to free zones from
           foreign countries or export processing zones abroad;
       •   No VAT or customs duty on all investment property within the zone
           (according to the order of authorities in infrastructure and real estate);
       •   Expatriates who pay social tax in their home countries may pay social tax an a
           minimum amount, that is, 15 minimum salaries as determined by law.

375. These incentives are available for 20 years to companies in Liepaja Special Economic
Zone selling no more than 20% of their industrial output within Latvia. The Liepaja special
economic zone has been established for 20 years, from March 1, 1997 to March 1, 2017
(subject to extension).



                                              77
                 4.        Import Licensing

376. Latvia currently licenses imports of alcohol, fuel, sugar and arms. In 1997, Latvia lifted
the licensing requirement for grains, however, a formal procedure for registering imports
remains for statistical purposes.

377. For food imports, a producer's declaration or a food conformity certificate has been
required for food products under HS code groups 1-31, 33-35, 38, 41, 43-46, 48, 50-53, 90, 95,
96 since July 1997 34 . The conformity certificate should be issued by an accredited laboratory.
Imported products have to be approved for sale in Latvia. Prior to issuing a retail sale permit,
the National Food Center (NFC) tests and certifies all commodities. The procedure may include
sampling and testing of product for conformity to Latvian regulations.

                 5.       Export Licensing

378. Goods that need an export license are defïned in the Regulations No.348 “On the
licensing of separate kinds of entrepreneurial activities”. Generally, defense products and
equipment such as optical equipment and software that may have a dual usage still require an
export license.

                 6.       Customs Procedures at Border Crossings

379.    Conveyance of goods across the customs border includes:

        •    the actual crossing of the border, bringing the goods into the customs territory
             and moving the goods from the free zone into the customs territory;
        •    submitting the customs declaration indicating that the goods are taken out of
             the customs territory, also when bringing them into free zone territory.

380. Conveyance of goods across the customs border is accomplished in accordance with the
customs procedures applied, which are described as follows (for more detail, refer to Appendix
5.1):

        •    Release for free circulation: This is a customs procedure which allows goods
             that have been imported in either the free zones, special economic zones, or
             customs warehouses to be moved into Latvian territory permanently, without
             being required to re-export. Goods that are held in “Customs Territory" must
             be cleared in order to be available for “free circulation”. Release for free
             circulation confers on non-Latvian goods the same customs status as Latvian
             goods.

             The procedure entails the payment of customs duties and the application of
             other commercial policy measures. The procedure is completed upon release
             of the goods.

34
  Regulations No.236, 02.07.1997, "On the order of veterinary, fitosanitary and sanitary hygienic control of
vehicles and cargoes at the customs checkpoints”


                                                       78
•   Temporary importation/exportation: The temporary importation or temporary
    exportation procedure allows the use of goods in the customs territory or
    outside its borders without their being subject to customs duties. The term is
    set by customs authorities and cannot be more than three years. After the
    expiration of the term the goods have to be returned in an unaltered state, save
    their natural depreciation or losses due to transportation or storage.

•   Re-importation: Re-importation allows Latvian goods, after they have been
    exported from the customs territory of the Republic of Latvia in accordance
    with the customs procedure - export - to be returned without paying customs
    duties.

    The goods must be re-imported into the customs territory within the period of
    three years, starting from the date of the exportation of the said goods. Upon
    re-importation of goods the customs authority repays the customs duties
    levied on the exportation of goods from the state budget.

•   Warehousing: This customs procedure can be applied to any non-Latvian
    goods. There are four types of customs warehouses, which can be operated
    only after the authorization from SRS is received. The customs duties are
    levied upon the release of goods from customs warehouse. Depending on the
    type of the warehouse, the customs duties are levied on the day of release or
    after 15 days of completing the chosen customs procedure.

•   Importation to a duty-free shop/inward processing: The inward processing
    procedure allows non-Latvian goods intended for re-export to be used in the
    customs territory of the Republic of Latvia in one or more processing
    operations. Under this procedure the customs duties are either suspended or
    the drawback system is applied if following processing operations are
    conducted:

       a) the assembling of goods,
       b) the processing of goods,
       c) the repair of goods.

•   Importation for processing under customs control: The procedure for
    processing under customs control allows non-Latvian goods to be used in the
    customs territory in operations which alter their nature and state of being non-
    Latvian goods. The products from such operations can be released for free
    circulation. The applicable customs duties are levied when the goods are
    released.

•   Export/outward processing: The outward processing procedure allows
    Latvian goods to be exported temporarily from the customs territory in order
    to undergo processing operations and the products resulting from those


                                        79
           operations to be released for free circulation with total or partial relief from
           import duties. This procedure can be used for assembling, processing and
           repair of the goods.

       •   Re-exportation/transit : The transit procedure allows the movement of Latvian
           goods which are subject to the completion of the export procedure and the
           movement of non-Latvian goods from one customs office to another within
           the customs territory of the Republic of Latvia:

              Movement takes place:
                a) under the transit procedure;
                b) under cover of a TIR carnet (TIR Convention).

       •   Destruction.

       •   Abandonment to the Exchequer.

       •   Stores for commercial means of transport.

381. The Cabinet of Ministers is establishing the procedures in more detail. For the moment,
8 out of 15 customs procedures have been detailed in accordance with the new Customs Law.
The procedures that have not been detailed under the new Customs Law are being effected
under the old regulations (amended) and during 1999 all the procedures will be covered.

382. Procedures at the different border crossing officially may vary slightly depending upon
the infrastructure put in place. The process begins by submitting the transport license or one-
time permission and transport permit (unless the goods come from Great Britain, Lithuania,
Estonia, or Ireland). Regular transporters will annually renew international cargo transit
licenses. For a company importing goods for their own purposes, it is necessary to acquire one-
time permissions from the Ministry of Transportation. Transport permits are limited in supply.

383. Entrepreneurs and companies registered in the Republic of Latvia have the right to
declare goods (this does not refer to transit cargo transporters). Goods are declared by
submission of a filled-in standard declaration form (the Single Administrative Document or
SAD) and other documents to a customs institution. At the border, an importer or his agent
must complete a customs declaration and a customs freight delivery note. The following
documents are required:

       •   The contract of the deal or its copy, invoice, consignment note.
       •   Bill of lading indicating the amount, weight, and value of goods.
       •   Original copy of a certificate of origin (form EUR.1 or form A).
       •   A notarized registration certificate of the entrepreneur or company.
       •   A license if transportation of the particular goods across the border of the
           Republic of Latvia is restricted.
       •   A warranty entitling the holder to act on behalf of the entrepreneur or business
           company.


                                                80
       •   In specific cases, certificates verifying that the goods in transit are not
           hazardous to health or environment.

384. A Latvian language label with information on ingredients, producer, country, importer
name, and consumption end-date is mandatory for food products. Such a label should be
attached to each retail package, unless the original product package contains the required
information.

385. Customs collects duties, excise charges when applicable, and VAT where applicable.
Once an importer has received customs clearance, the importer must often interact with a
Border Guard. The Border Guard represents the Ministry of Interior, and is empowered to
search all vehicles. Importers assert that Border Guards search a significant percentage of all
incoming vehicles.

386. The entire process of crossing a border can vary in time from less than one hour to more
than five hours. Typically, the Latvian Government has ascribed the longer delays to
infrastructure problems. In the case of Russian border posts, it is estimated that the delay is
typically 2 hours. This is frequently mentioned as being a result of difficult clearance
procedures on the Russian side of the border post.

               7.      Procedures at the Free Port of Riga

387. A total of 38.8 million tons of goods came in through Latvia in the first nine months of
1998, of which 26.5 million tons are handled by the primarily bulk-handling equipment at
Ventspils Free Port. The Free Port of Riga is the largest container port in Eastern Baltic
littoral. It processed approximately 10.4 million tons in the first nine months of the 1998. The
procedures for the Free Port of Riga follow:

       •   The port must receive the manifest (usually transmitted electronically via the
           receiving agent).
       •   The importer purchase a Delivery Order document (which are serial
           numbered).
       •   The importer brings the bill of lading to the port gate. At the port gate there
           are offices for Customs, a bank, and clearing agents.
       •   Once the bill of lading has been submitted, customs duties are paid, and any
           applicable port fees have been paid, the importer enters the port gate with the
           stamped Delivery Order.
       •   The guard issues the trucker a gate pass. The port is upgrading to electronic
           card swipes.
       •   The goods are loaded onto the truck and the truck is dispatched.

This process can be completed in less than one hour.




                                                 81
The Chart below presents the procedures for clearance in Riga port:


                                       Delivery              Bill of
                 Port
                                        order               Lading
               receives
                                      document            presented
                manifest
                                      purchased           to port gate




                                                           Importer
                                       Customs
                                                         enteres the
                Customs               duties and
                                                        port gate with
               processing              port fees
                                                         a stamped
                                          paid
                                                        Delivery Order




                                                             Truck
                                        Goods
               Gate pass                                  dispatched
                                      loaded to
                issued                                    and goods
                                         truck
                                                           released



388. Latvian customs is, in reality, less than 10 years old. Investors report that significant
progress has been made since the SRS started collecting customs revenue. Crown Agents, a
British consulting firm, is currently working with the State Revenue Service to institute several
new tools into the process of clearing goods in Latvia.

       •   In cooperation with Crown Agents a TIMS (Trade Information Management
           System) is being developed for the determination of cargo risk. It is intended
           to make officials responsible for the inspection of cargos, reduce corruption,
           increase revenue and facilitate the entrance of lawful importers. The TIMS has
           already been introduced at 8 customs points and work is being carried out on
           the introduction of the TIMS at other customs points.

       •   The State Revenue Service is also implementing ASYCUDA, the United
           Nations computerized clearing system. It is envisaged that the new system
           will support the risk-based physical inspections, improve data collection, and
           reduce processing time for clearing goods. The pilot is expected to roll out in
           1999.

       •   Latvia, Lithuania, and Estonia are currently establishing joint border posts.
           This is intended to reduce the backlogs at the border posts.

               8.          Analysis

389. The Customs Law entered in to force directly on July 1, 1997. Most of the "secondary"
legislation is however not yet drafted, leaving a wide room for individual interpretation of the
law and questions concerning to what extent the EC based Customs Law can be supplemented
with additional internal legal regulations.



                                                   82
390. Major improvements have been reported. As FIAS was conducting its study, significant
changes were proposed in respect of intra-ministerial communication between the Customs
Legislation Department, the Customs Modernization Management Division under the Customs
Board and the European Integration Bureau. There are currently some 14 projects running in
the customs field, (e.g. regarding customs procedures, management program, ASYCUDA--a
critical path for the computerization program--the interim system, mobile units, border posts,
and customs free zones).

391. There are few major complaints with the various bodies involved in clearing goods into
Latvia. The most significant complaints came from companies involved in the transit of goods
through Latvia.

       •   Companies stated that the one-hour clearance time stated by the State
           Revenue Service is, in most cases, accurate. The SRS is involved in a
           significant upgrade program including the movement to ASYCUDA (a
           computerised customs system), risk-based container inspection (rather than a
           random inspection system), and the upgrading of border posts including joint
           clearing posts with Lithuania.
       •   The only major complaints in transporting goods into Latvia concerned the
           border post between Lithuania and Latvia, which serves as a major route. It is
           unclear which aspects of processing goods are to blame for delays stretching
           up to five hours, but many investors are blaming the lack of physical
           infrastructure.
       •   Investors mentioned the use of Border Guards at the crossings as delays to
           clearance. According to investors, many of these guards conduct redundant
           inspections of vehicles, further slowing the process.
       •   Transit companies transporting goods through Latvia complain of inconsistent
           procedures at various border posts and even within various shifts within the
           same border posts. Investors added that the problems came up when the
           transporters did not use the TIR forms. (Non-TIR transit shipments represent
           approximately 10% of all transit shipments).
       •   A lack of knowledge of the modern customs rules and techniques is a major
           problem for the customs authorities. There is a perception among transporters
           that there is no central administration of the local customs that assures that all
           local customs offices receive the same information about the existence of a
           regulation and its interpretation. Other perceptions among traders are that
           there is a general lack of co-ordination. Another problem mentioned is that the
           Customs Board/State Revenue Service issues instructions without legal
           foundation. (E.g. the frequently reported problem that the customs require a
           SRS clearance certificate evidencing that all taxes have been paid by the
           company that wishes to import or transit goods.)
       •   There is no system in place that makes it possible to monitor goods in transit.
           A project regarding licensed customs brokers is being discussed.



                                                83
       •   Other problems included the shortage of transportation permits, particularly
           into Russia. Transportation permits are negotiated at the beginning of each
           year between countries by the Ministry of Economy. The shortage of Russian
           transport permits became so acute (Latvia ran out halfway through the year)
           that Russian authorities began charging US$250 per permit to transport goods
           into Russia.

392. It should be noted that, in a case at the European Court of Justice (52/77), the court held
that any administrative or penal measure which goes beyond what is strictly necessary for the
purpose of the importing Member State to obtain reasonably complete and accurate information
on the movement of goods falling within specific measures of the commercial policy must be
regarded as a measure having equivalent effect to a quantitative restriction, forbidden by
Articles 30 to 35 of the EC Treaty.

393. With regard to EU accession, it has been noted that the EU Customs and
Implementation Codex and the secondary legislation is considered to be overly complex. The
EU Transit system has been severely criticized within the EU itself, and the EU has not decided
yet on the future guarantee system.

394. The EU Commission has initiated a program ("SLIM" - Simpler Legislation for the
Internal Market) aiming at further simplifying the system. Applicant countries, such as Latvia,
will hopefully benefit from the general overhaul in the customs field that is currently under
consideration. Upon becoming a member of the EU, Latvia will be a party to the EC customs
legislation which will largely nullify national customs legislation. The process of entering into
the EU will, however, be greatly facilitated if the national legislation is already similar to that
employed in the EU.

395.    A specific issue for the EU is the status of the special economic free zones (such as that
established in Liepaja) designed to develop and promote trade, industry, shipping and air
transport, as well as the transit of goods via Latvia. According to Latvian legislation, the
Liepaja special economic zone is supposed to maintain its status for 20 years. This may cause
some significant problems:

       •   According to a knowledgeable EU-Phare representative, there is considerable
           confusion in this respect; the applicable regulations are definitely not in line
           with EU standards, nor do they correspond to what an economic zone
           normally should be since the concept of a customs zone and an economic zone
           have been mixed. Some aspects are highly irregular, e.g. rules allowing the
           management of the economic zone to declare it a customs zone.

       •   Since the direct taxes have not yet been harmonized within EU, there is
           nothing that prevents a country from establishing an "economic zone" where
           corporate tax, income tax, real property tax etc. are very low, (although the
           World Bank and IMF heavily discourage it for the economic distortions it
           tends to introduce). However, this is an area of law that the EU is expected to
           harmonize in the near future.



                                                84
       •   It is difficult to see how the EU will be able to accept exemption from
           customs and value-added taxes within such zones. The VAT-system has been
           harmonized within the EU and shall - as a principle - be applied throughout
           the territory of a country. Pursuant to Article 3 of the 6th EC Directive on
           VAT, certain geographical areas are not covered by the harmonization (e.g.
           Helgoland, Büsingen in Germany, the Canary Islands and the Athos-mountain
           in Greece). But there must be very strong arguments supporting such a
           specific treatment and this is typically only granted to distant, isolated islands.

       •   The EU customs territory with exceptions is defined in Article 3 in the EC
           Customs Codex. If a country wishes to establish other customs free zones than
           those provided for in the EC Customs Code, this geographical area must be
           granted a preferential status. This can only be achieved through negotiations
           in connection with a potential membership in the EU (e.g., as Poland is
           doing).

       •   By way of conclusion, the current regulations regarding "economic zones"
           and "customs zones" need to be significantly revised, at least as regards
           indirect taxation and customs, if they are to comply with EU requirements.
           The chances for Latvia to successfully negotiate for a preferential exempt
           status in this respect in connection with membership negotiations can be
           considered small.

               9.      Recommendations

396. Because Latvia is in the midst of a massive upgrade program, few recommendations are
applicable at this time. Crown Agents, a British Consulting firm, is assisting SRS with the
training of officers in the new EU laws and regulations.

397. However, the inconsistency of border post procedures must be addressed immediately.
This inconsistency can lead to delays in shipping and creates opportunities for corruption. It is
recommended that Customs develop and publish clear guidelines, and create a fast-track system
for receiving and acting upon complaints and appeals.

398. It is also recommended that the role of the Border Guards be either better defined or
eliminated altogether. This function appears to be a vestige of the former regime. It is clear that
it creates an additional delay for importers.

399. Latvia will also need to address the EU's concerns about the economic zones and
customs zones.

400. Finally, although the requirement for Latvian labeling for all goods is perfectly
reasonable, it would be more efficient for most businesses to handle re-labeling at their own
warehouses, instead of at the port.




                                                85
        B.        Foreign Exchange Control


401. Latvia has no controls on import, export, nor use and conversion of foreign currencies,
making investment and repatriation of profits exceptionally easy.

                  1.      Issues

402. Many investors have stated that they had experienced no obstacles in the transfer of
capital abroad. However, it was noted that officials sometimes fail to observe and apply
Latvia’s double taxation treaties on the transfer of profits abroad (in particular with the
European Union).

                  2.      Recommendations

403. The government of Latvia should create a regular mechanism of training which aims to
familiarizing all relevant officials with the full implications of profit transfer clauses in double
taxation treaties.


          C.      State Language

                  1.      Language Laws

404.    According to the Language Law of Latvia, of May 1989:

        “All institutions, enterprises, and organizations, in the Republic of Latvia must use the
        official State Language [i.e. Latvian] in conducting their affairs, and in all documents
        relating to the conduct of their affairs, as well as their correspondence within Latvia.”

405.    The State Language Service applies this practically to three areas:

        •      Interaction with employees within an organization.
        •      Documentation, both internal and external including minutes of Board
               Meetings, signs within the facility, and communications with government and
               other organizations.
        •      Product literature, advertising, and labeling.

406. According to the Language Inspection, there are some exceptions to the regulations. 35
According to the law, “In correspondence with countries abroad…. Organizations shall apply
this provision in their activity so far as it does not interfere with their normal functioning….”
According to the regulations regarding internal office signs, other public information and
advertisements, the following provisions apply:


35
   The exceptions are defined in the regulations of the Council of Ministers No. 462, 04.11.92. "Statute on the Use
of State Language in titles and Information."


                                                       86
       1.   Public notices, signboards, posters and advertisements have to be in Latvian;
       2.   Any other language, besides Latvian (the text of which has to be dominant) is
            allowed for public information if this information is:

            2.1.     necessary for safety reasons (warnings and prohibitions);
            2.2.     includes references on the procedure of tax and fee payments;
            2.3.     in connection with the events of the national cultural organizations and
                     religious denominations;
            2.4.     given by organizations which are connected with international travel, and
                     the necessity of use of the information is approved by the State Language
                     Center;
            2.5.     are in connection with international events (conferences, exhibitions,
                     competitions, symposiums, etc.).

407. Companies not in compliance with the Language Laws are subject to fines of up to 50L
by Municipal Inspectors and 250L by State Inspectors. Officials state that they do not penalize
foreign investors for internal correspondence between expatriates. They further state that they
do not fine foreign companies for corresponding in their native languages.

               2.      Inspections

408. Two separate bodies are engaged in the inspection of retail, commercial, and
manufacturing operations. The State Language Inspection maintains one inspector per district
in Riga (outside Riga, inspectors cover two to four districts). Similarly, some municipalities
also maintain language inspectors. Both levels of inspectors have the capability to carry out
inspections of any type of operation.

409. Both the State inspectors and Municipal inspectors of Riga state that they primarily
respond to complaints from either consumers or employees. The Riga Inspectorate states that
the majority of its inspectors’ time is spent on retail establishments and product labeling. The
State Inspectorate says that while it is involved in all areas, it has largely been working in
places of employment.

               3.      Analysis

410. Foreign investors complained quite a bit about the language inspection function. While
the fines are not particularly large, the nuisance factor of the inspections and the fines add cost
to doing business in Latvia. Latvia’s language requirements given its population size of 2.5
million considerably increases the relative cost of doing business. More notably, the inability
of companies to use slogans (other than those trademarked as names) in their language of
design requires additional costs and creates other problems.

411. The two levels of inspections, municipal and state, have no clear guidelines or
limitations and have been known to visit the same enterprise for the same cause. This overlap
of authority causes uncertainty to the investors.




                                                87
412. The Riga City Council Language Inspectorate states that it usually gives investors 30
days to fix an infraction. However, inspectors are not obliged to give a grace period and many
investors complain that penalties are frequently assessed on the spot. Because visit reports are
not required by the main offices except in the case of fines and the inspectors are largely
unsupervised, the language inspection is potentially an opportunity for bribery.

413. The Riga City Council Language Inspectorate also notes that Language Inspectors must
leave a copy of a report of any language violation with the inspectee. All such reports are
registered and entered into the data base of the State Language Inspectorate. However, in the
case where no violations are officially cited, there is no requirement for a report and it is
therefore the responsibility of the inspectee to keep a record of the visit. Some enterprises keep
"control journals" in which inspectors enter the findings of their visit.

414. Because appeals are directed to the supervisors of the inspectors, it is unlikely that an
investor would challenge a fine imposed by an inspector. The inspectors are responsible for
territories and would remain responsible for an enterprise after the event of an appeal. Because
the fines are so small, it is not usually worth the effort to appeal a fine.

415. One investor complained about the fact that they were required to translate an
internationally recognized slogan (an English phrase) into Latvian. Other investors have
complained that the Inspectorate has imposed itself where it felt the Latvian grammar was
incorrect. This imposition is troubling because the inspectors are not in the field of marketing,
where a degree of "poetic license" is normally tolerated, even in countries with language laws
(e.g., France).

416. The requirements of translating product labels into Latvian is understandable, however
continues to be extremely difficult for the Language Inspectorate to enforce. In the Riga
Metropolitan Area, it is estimated that there are approximately 1.8 million people with retailers
to serve. The area has a total of 12 inspectors – 6 municipal and 6 state. The lack of
enforcement capacity gives rise to inconsistent treatment, in that some businesses receive the
attention of language inspectors while others are never visited by inspectors. In the case of
such relatively unimportant regulations (e.g., regarding advertising slogans and internal
communications in a private company), it is usually preferable to scale back the scope of the
regulations to a level that can be enforced consistently and fairly, without requiring added
human resources.

417. The EU is very concerned about the language law, mostly from the point of view of the
human rights of minority groups, in this case the Russian-speaking community in Latvia. If the
language of an important minority in a country is suppressed, e.g., not allowed in official
correspondence, it could be an important bar to membership in the EU. The EC Commission
Report discusses the discriminatory provisions of the draft Language Law (such as the
imposition of the use of Latvian Language in the private sector) but makes no specific
statement or conclusion since it remains to be seen if the final law will be in compliance with
EU standards.




                                                88
               4.      Recommendations

418. The Riga Municipal Inspectorate (and any other municipal inspectorates) and the State
Language Inspectorate should either merge into a single unit or clearly define areas of
specialization. This would result in several benefits including the improved allocation of
resources, specialization and the benefits associated, and the avoidance of confusion on the part
of the investor.

419. In conjunction with other recommendations in this report, an office of an Ombudsman
would serve to improve the appeals process, especially in the case of conflicting actions
between municipal level and national level agencies.

420. Trip reports should be required of inspectors regardless of the outcome of the
inspection. These reports should be available to the investors as well as the Inspectorate. This
would reduce the opportunities for rent-seeking.

421. Most language inspectors lack training in areas of marketing and associated disciplines
that create slogans and marketing materials. It is recommended that inspectors receive basic
marketing training as well as customer service skills.


       D.      Other Inspections

               1.      Types of Inspection

422. Aside from the Language inspection, described above, an investor is likely to encounter
a number of other inspections on a regular basis. Included in these inspections are:

       •    The SRS tax Inspectorate (for any one of the different taxes)
       •    Sanitary Inspection
       •    Fire Inspection
       •    Department of Transportation (for those with vehicle fleets)
       •    Immigration Police
       •    Environmental Control
       •    Industry specific including excise, veterinary, or any one of the many
            licensing bodies.

               2.      Analysis

423. Inspections were one of the most often-mentioned complaints of Latvia when
describing the administrative environment for investment. Comments included:

       •    There is very little consistency from inspector to inspector – even inspections
            from the same inspector can be inconsistent.

       •    Few of the inspections require the inspector to complete reports that are
            available to the investor – particularly when the findings are positive.


                                                89
       •   Some of the inspections have various levels (municipal and state) that are not
           coordinated with one another.

       •   There are few mechanisms for recourse. The typical mechanism, appealing to
           the head of the inspectorate, is unappealing to investors because of potential
           problems in the future with the inspector in question. The alternative
           mechanism, the courts, is lengthy and expensive.

       •   The fines are small – in many cases under 100 Ls. It is the nuisance factor,
           and the opportunity cost of a company manager spending time with a
           Government inspector, not the fine itself, that causes problems for investors.
           One investor stated that they receive approximately one inspection per day

       •   Investors complain that fines can be given for unimportant reasons – copies
           made on wrong color paper, incorrect grammar, etc. Inspectors have a wide
           latitude of what can be assessed as an infraction and what the fines should be.

       •   Because the inspectors have wide latitude and low levels of accountability,
           investors say that inspections are often used to solicit bribes. Investors
           perceived that those companies with “deep pockets” were more likely to be
           inspected than smaller, locally-owned companies.

       •   Quite a number of investors (both transporters and other companies)
           complained to FIAS that police frequently stop commercial vehicles,
           seemingly at random, and check for infractions of any sort. Such infractions
           could include any kind of improper documentation, including, e.g., VAT or
           excise tax documentation, but the police often seemed unaware of what proper
           documentation should actually look like. Many investors stated that the police
           often demanded bribes during such encounters.

               3.     Recommendations

424. Government inspectors (including tax inspectors) should be required to write reports on
all site visits, describing what was inspected, what was the status of whatever was inspected,
whether or not there were violations (citing the relevant legal or regulatory criteria), and what
action was taken. These reports should be available to the business that was the subject of the
inspection. The right of the person being inspected to see the inspection report should be well
publicized.

425.   The site visit reports should be subject to regular review and evaluation to find evidence
of inconsistent treatment, unusual patterns, and unnecessary inspections.




                                               90
Work Group On Administrative Barriers to Foreign Investments in Latvia. Subcommittee On Issues of Entry, Residence and Employment of Foreigners.
                                                                               ACTION PLAN
Problem                                Objective                                                   Activities                                              Responsible Institution.
                                                                                                                                                           Term
1) Obtaining of residence and work     Simplification of work permit obtaining procedure:          1) Specify and submit to the Cabinet of Ministers       1) Ministry of Welfare –
permits is a complicated and time      1) provide for simplified work permit obtaining             the draft amendments to CM Regulations No. 54           prepare and submit to the
consuming process.                     procedures for directors, board members and responsible     On Employment of Foreigners and Stateless               State Chancellery by 1 June
2) Excessive documentation             representatives of enterprise executive structures;         persons;                                                1999
requirements                           2) reduce the number of visits to be made to the            2) Upon specification of amendments to CM
3)Inadequate cooperation between       Employment Service by establishing that:                    Regulations No. 54 On Employment of Foreigners          2) Ministry of the Interior
the Citizenship and Migration          - work permit shall be issued simultaneously with           and Stateless Persons the Ministry of the Interior
Board and the State Employment         residence permit                                            (MI) and the Ministry of Welfare (MW) shall
Service; inconsistent procedures.      - fixed payment for work permit issuance shall be made      consider and, if necessary, submit to the State
Investors complain about being sent                                                                Chancellery draft amendments to CM Regulations
from one department to another.                                                                    No. 417 On procedures for residence permit
4)Doubling CMB and SES                                                                             Issuance and Registration.
formalities
5) Entrepreneurs emphasize             Provide information to entrepreneurs on the procedure of    Prepare the following informative materials:            Ministry of Welfare (State
inadequacy of information available    obtaining work and residence permits, required              1)on obtaining work permits - Ministry of Welfare       Employment Service)
on the procedure for obtaining         documentation and related costs                             2) on obtaining residence permits – Citizenship and
residence and work permits.                                                                        Migration Board of the Ministry of the Interior         Ministry of the Interior
                                                                                                   3) dissemination of informative materials in English,   (Citizenship and Migration
                                                                                                   German and Russian among consular departments           Board)
                                                                                                   of the Republic of the Ministry of Foreign Affairs
                                                                                                   4) placing of information in Internet home page –       Consular Department of the
                                                                                                   the Latvian Development Agency                          Ministry of the Interior

                                                                                                                                                           Submission of the
                                                                                                                                                           informative materials by
                                                                                                                                                           SES and CMB by 1 July
                                                                                                                                                           1999
6) Authority of the Immigration        The Immigration Police should be authorized to inflict      Review legislation regulating activities of the         Ministry of the Interior
Police to detain investors and expel   penalty for technical breaches of immigration rules, but    Immigration Police and CMB and introduce
them from the country on the           should not have the authority to detain foreign investors   required amendments to ensure implementation of         By 15 June 1999
grounds of minor technical breaches    or representatives in the absence of an actual commitment   and abidance by the recommendation of the work




                                                                                                                                                                                   1
of immigration rules.               of criminally penal acts                                group



Work Group On Administrative Barriers to Foreign Investments in Latvia. Subcommittee On Enterprise Registration, Tax Administration, Customs
                                                                          ACTION PLAN

Problem                           Objective                         Activities                      Preconditions                    Responsible Institution. Term
Company Registration              Upon registration of an           At the end of April 1999 a      1) As information should be      Ministry of Finance
Process                           enterprise (company) with the     work group comprising           provided in electronic form,
Enterprise(company)               Enterprise Registry the           representatives from the        data transmission system         The section on enterprise
registration with the             enterprise obtains a              Ministry of Finance, the        connecting the Enterprise        registration of the Law On
Enterprise Registry and the       registration certificate which    Ministry of Justice, the        Registry and SRS shall be        Taxes and Duties will be
Tax Payers Register of SRS        shall simultaneously be           Enterprise Registry and the     installed.                       developed by 30 June 1999;
actually is a duplicative         deemed as taxpayer’s              State Revenue Service will      2) Legislation shall stipulate   the Law shall be submitted to
procedure resulting in double     registration certificate.         commence activities; it will    that information exchange        the State Chancellery by 1
registration.                     Information to SRS on the         work out the Chapter of the     between the ER and SRS is by     October 1999.
                                  enterprise (company) shall be     Law On Taxes and Duties         way of electronic documents
                                  provided by the Enterprise        related to enterprise           having legal validity.
                                  Registry instead of the           registration ( MF Order No.     3) The issue of information
                                  entrepreneur. An enterprise       255 as of 19 April 1999)        provision on accounts shall
                                  (company) shall register with                                     be solved.
                                  SRS only as VAT payer and                                         4) Transfer of registration of
                                  shall register also its                                           other legal entities to the ER
                                  structures.                                                       is desirable.
                                                                                                    5) The issue of identification
                                                                                                    numbers shall be solved.

Tax administration and
solution of disputes              Establish an independent          Under Section 11 Tax            Selection of highly qualified    By 31 December 2001 (project
Resolution of SRS officials are   two-level appeals system for      Determination And Appeal of     staff for creation of the        implementation term) under
appealed to SRS Director          pre-court reviewing of tax        the SRS Modernization           information system               SRS Modernization Project
General and then to the court.    disputes aimed at:                Project 1998-2002 the Project                                    1998-2002.
The appeals process is            - achieving impartiality of tax   Management Unit has been
lengthy. The investors            dispute solution,                 formed ; it will draft the                                       Harmonization of legislation
question the impartiality and     - improving quality of the        appeals structures and                                           by Quarter I of 2000.




                                                                                                                                                                    2
autonomy of SRS internal        decision making process,        amendments to the Law On
appeals system                  - achieving an agreement with   the State Revenue Service to                                     Elaboration of the section on
                                the taxpayer,                   improve the appeals                                              Appeal of Tax Dispute of the
                                - elimination of legislative    procedures of the officials’                                     Law On Taxes and Duties by
                                controversy.                    resolutions.                                                     30 June 1999
                                                                Proposals for amendments to
                                                                the Draft Law On the Latvian
                                                                Administrative Process and
                                                                CM Regulation on SRS
                                                                Appeals Structure will be
                                                                worked out.
Customs
The investors maintain that     Eliminate doubling of customs   The State Revenue Service        The Ministry of Finance shall   Ministry of Finance. Elaborate
the border guards create        and border guard functions      shall draft amendments to the    take into consideration the     and submit by 31 May 1999
obstacles for declaration of    related to controlling of       Law On the State Border of       recommendation of the EU
goods imported to Latvia.       goods and conventionally        the Republic of Latvia and the   experts on accurate
According to them the border    prohibited articles thus        Law On the Border Guard of       specification of the function
guards engage in                accelerating border crossing.   the Republic of Latvia for       of the customs and the border
unnecessary vehicle                                             submission to the Cabinet of     guards on the state border.
inspections thus slowing                                        Ministers.
down the border crossing.
Doubling of control functions
of the customs and border
guards is incidental
Inconsistency of the import     Improvement of import and       Elaboration and approval at                                      Ministry of Finance .
and export customs              export related legislation      the Cabinet of Ministers of                                      The draft was reviewed by the
procedures                                                      the CM Regulations on                                            Cabinet of Ministers on 22
                                                                Procedure for Declaration of                                     March 1999. Currently the text
                                                                Goods.                                                           of the draft is in the process
                                                                                                                                 of harmonization with the
                                                                                                                                 Ministry of Justice.
                                                                Elaboration and approval by      Related amendments to the       It has been developed and is
                                                                the Cabinet of Ministers of      Law On Customs shall be         ready for dispatch to the
                                                                the Draft on the Procedure of    enacted.                        ministries for harmonization. It
                                                                Pre-taxing Operations                                            is projected for submission to




                                                                                                                                                                 3
                                                                                 the State Chancellery by 1
                                                                                 July 1999 (under the condition
                                                                                 that the related amendments
                                                                                 to the Customs Law have
                                                                                 taken effect by this date).
                      A work group consisting of                                 Ministry of Finance
                      the representatives from the
                      Ministry of Finance, the State                             The amendments will be
                      Revenue Service, the Ministry                              developed and submitted to
                      of Transportation and the                                  the State Chancellery by 31
                      Latvian Transit Business                                   December 1999.
                      Association will be formed. It
                      will develop amendments to
                      the CM Regulations On
                      Submission and Acceptance
                      of Warranties at SRS Customs
                      Establishments, On Procedure
                      For Execution of Customs
                      Operation - Importing to the
                      Customs Warehouse, On
                      Procedure for Execution of
                      Customs Operation - Transit,
                      On Procedure for Execution
                      of Customs Operation -
                      Import for Processing
                      Development of CM                                          Ministry of Finance
                      regulations dealing with
                      customs procedures -                                       Draft regulations will be
                      temporary import, temporary                                developed and submitted to
                      export, clearance for free                                 the State Chancellery by 31
                      turnover, export and re-export                             December 1999.
                      - have been included in the
                      Action Plan of the Ministry of
                      Finance for 1999.
Improve the foreign   Supplement SRS Order No.         Proposal of the Latvian   SRS




                                                                                                               4
investment control              243 as of 23 July 1996          Development Agency shall be     By 1 June 1999
mechanism at the State                                          harmonized with the Legal
Revenue Service                                                 Department of the State
                                                                Revenue Service.
Accelerate introduction of      Introduce customs               Adoption of all secondary       Ministry of Finance
customs declaration             declaration processing          legislation for the Customs     By 31 December 2001
processing system               system ASYCUDA ++               and creation of an integrated
                                                                data transmission network
Improve consistent              An accurate distribution of                                     SRS
application of legislation at   duties and competence                                           By June 30, 1999
the border crossing points      regarding the decision making
                                powers of the customs
                                officials will be worked out
                                and presented to all
                                entrepreneurs.
                                1) In cooperation with the                                      SRS
                                Danish Tax and Customs                                          1) By 31 October 1999
                                Ministry a manual on
                                application of customs                                          2) By 31 July 1999
                                procedures will be prepared.
                                2) Prepare and publish
                                concise description of the
                                following customs
                                procedures:
                                - import,
                                - export,
                                - transit
Achieve that the customs        SRS Educational Department                                      Incorporated in the action
officers are trained in         and the Customs                                                 programs of the SRS
management, well-read in        Administration organize                                         Educational Department and
procedures and have             extensive training of their                                     Customs Administration for
computer proficiency.           staff to improve their                                          1999/2000
                                qualification.




                                                                                                                             5
Work Group On Administrative Barriers to Foreign Investments in Latvia. Subcommittee On Issues of Construction and Legal Land Registration

                                                                  ACTION PLAN

Problem                                     Objective                                 Activities                              Responsible institution. Term
Real Estate
1) The requirement to obtain                Eliminate the most essential              Give support to the draft legislation   Ministry of Economy.
permission of the municipality for land     procedural barriers for foreign           developed by the LDA On                 The drafts have been reviewed by the
purchase demanded from some                 investors wishing to obtain land          Amendments to the Law On Land           Cabinet of Ministers on 19 April 1999.
foreign investors is useless to a great     property rights in Latvia:                Reform in Cities and Towns of Latvia    Updated drafts are projected for
extent and does not efficiently protect     - reject the requirement to obtain the    and Amendments to the Law On            reviewing by CM in May.
the interests of the Government and         permission of the local government,       Privatization of Land in Rural Areas
citizens of Latvia                          - eliminate restriction with respect to   (Appendix 1, 2).
                                            free capital flows.
2) First refusal right of municipalities.   Cancel the first refusal right of         Prepare amendments to related           Ministry of Justice
This essentially prolongs the time          municipalities to real estate as          legislation and submit to the Cabinet   Prepare and submit by 1 September
required for formalization of real estate   practically ignored thing. By canceling   of Ministers                            1999
purchase. Preservation of such first        the obligation to obtain municipality’s
refusal rights is not sufficiently          refusal in case of real estate sale the
founded in relation to deals with real      procedure for deals with real estate
estate; moreover, it is disregarded in      and legal operation with it would
most cases.                                 become simpler. For the purpose of
                                            protecting municipal interests the
                                            provision stipulating the local
                                            government initiative of forceful
                                            alienation of real estate needed for
                                            public use should be preserved,
                                            provided such respective asset is
                                            required for implementation of the
                                            local government functions.




                                                                                                                                                                   6
3)The evaluation required for the          Extend the validity term of the             On the basis of proposals prepared by   Ministry of Justice
registration of ownership rights to real   documents certifying real estate            the work group develop and submit to    Prepare and submit to the State
estate is valid only for the period of 6   evaluation to 5 year period instead of      the Cabinet of Ministers draft          Chancellery by 1 July 1999
month. Issuance of a repeated              currently effective 6 months.               amendments to CM Regulation No.
evaluation takes from 1 to 3 months                                                    219 On State Duties for Execution of
even if the real estate has not                                                        Notaries Operations and Registration
physically changed.                                                                    of Ownership with the Land Registry
                                                                                       (Appendix 3)
4) Upon registration of the real estate    Cancel the requirement for the new          On the basis of amendments prepared     Ministry of Finance
ownership with the Land Registry the       owner to submit a certificate on real       by the work group prepare and submit    Incorporate the amendments
acquirer must confirm non-existence        estate tax payment upon registration        to the Cabinet of Ministers             proposed by the work group in the
of property tax by municipality-issued     of real estate with the Land Registry       amendments to the Law On Real           Draft Amendments to the Law On Real
certificate on tax payment which           which act would generally alleviate         Estate Tax (Appendix 4)                 Estate Tax developed by the Ministry
generally increases corroboration time     the real estate operations.                                                         of Finance.
of the deal and incurs extra indirect      Recently prepared draft amendments
charges.                                   provide that the tax arrears upon
                                           alienation of real estate transfer to the
                                           new owner.
5) Comparatively long registration         Provide for the opportunities of            On the basis of amendments prepared     Ministry of Justice
period (30 days) of real estate            accelerated real estate registration        by the work group prepare and submit    Prepare and submit to the State
operations with the Land Registry (30      period of 3 working days in case a ten-     to the Cabinet of Ministers             Chancellery by 1 July 1999
days). Legislation does not explicitly     fold chancellery duty is paid. The          amendments to the Law On
define if accelerated registration is      proposed amendment, though not              Registration of Real Estate With Land
permissible.                               accelerating corroboration of all           Registry (Appendix 5)
                                           operations, will nevertheless simplify
                                           legal operation related to real estate
                                           and enable the entrepreneur to
                                           execute accelerated registration of
                                           respective real estate.
Construction
1) Complexity and time consuming           Ensure consistent solution to               1) With due consideration of            Ministry of Environmental Protection
nature of construction problems            construction problems hereof.               complexity of the issue and the need    and Regional Development (MEPRD)
hereof                                                                                 to enter into an active dialogue with   Prepare and submit to the State
                                                                                       the local government representatives    Chancellery a draft order on the
                                                                                       we recommend to form a working          formation of the work group by 1 June




                                                                                                                                                                   7
                                                                                      group charged with the task to           1999.
                                                                                      develop proposals for streamlining the
                                                                                      construction process, such group
                                                                                      being represented by entrepreneurs,
                                                                                      MEPRD, Local Government Board and
                                                                                      municipalities.
2) Obtaining construction permit for a       Simplify the construction object         We recommend the following issues        Would-be work group handling
commercial project takes from 1 to 1.5       harmonization process in Riga by         to be reviewed and handled by the        construction issues.
years on the average.                        centralizing issuance of technical       would-be work group dealing with
3) The entrepreneurs have emphasized         documentation required for               construction issues:
the need to centralize and simplify the      commencement of designing.               2) The Riga City Council (Dome)
process of obtaining technical               Issuance of technical specification      should set up a construction board on
documentation necessary for                  should proceed on a centralized basis    the basis of the Riga City
commencement of construction                 by forming a special unit under the      Development Department by uniting
4) It is difficult to achieve modification   Riga Construction Board.                 all structures dealing with
of zone layout in the master plan of                                                  construction and territorial planning
the city. The master plan modification                                                as well as introduce centralized
process is particularly time consuming                                                procedure for issuance of technical
and complicated. It is actually equal to                                              specifications and harmonization of
the approval of the original master                                                   building designs.
plan. In many countries zone
variations for a particular parcel of
land are approved in a simpler manner
and quicker.
5) absence of a uniform system of fees       Provide the entrepreneurs with           4) Oblige all ministries with            The information shall be submitted by
- every service dealing with issuance        information regarding the fees payable   construction institutions and            all ministries to the Construction
of technical specifications charges a        at each stage of the construction        technical maintenance services under     Department of MEPRD by 1 July 1999.
fee the amount of which is regulated         process, assess the legal aspect of      them to submit to the Construction
by internal normative documents              such fees and their amount.              Department of MEPRD information on       Construction Department of MEPRD
                                                                                      technical regulations for                shall collect all information submitted
                                                                                      commencement of construction and         by the ministries and dispatch it to all
                                                                                      fees payable at different stages of      institutions involved in the
                                                                                      construction project for issuance of     construction process.
                                                                                      technical specifications and
                                                                                      agreement by identifying legislative




                                                                                                                                                                          8
                                                                            acts underlying and regulating such
                                                                            operations.
                                                                            5) Charge MEPRD with the task to          MEPRD
                                                                            revise and rationalize the procedure      By 1 August 1999
                                                                            for state expertise and prepare
                                                                            amendments to enacted legislation if
                                                                            necessary.
6) Lack of coordination among         Eliminate overlapping of functions    6) Reviewing of regulatory framework      MEPRD shall submit the prepared
technical departments - regulations   and competence of various technical   of those institutions that are involved   proposals to the State Chancellery by
issued by various services often      maintenance services                  in issuance of technical specifications   1 October 1999
contain similar requirements.                                               required for commencement of
                                                                            construction in Riga. Assess
                                                                            distribution of functions and
                                                                            competence among the said
                                                                            institutions with the aim to identify
                                                                            similar or doubling functions and
                                                                            develop proposals.




                                                                                                                                                          9
Work Group On Administrative Barriers to Foreign Investments in Latvia. Subcommittee On Inspections

                                                       ACTION PLAN


Problem                                   Objective                                  Activities                               Responsible Institution.
                                                                                                                              Implementation Term
1) Inconsistent attitude on behalf of     Ensure mandatory making of                 Develop and submit to the Cabinet of     Public Administration Reform Bureau
inspectors when inspecting                administrative statement and its           Ministers draft instruction obliging
enterprises. Administrative statement     issuance on the spot in writing.           the controlling institution to issue     Prepare and submit to the State
is not always issued on the spot in                                                  administrative statements in writing     Chancellery by 1 September 1999
writing. In cases when administrative     Even if administrative statement is not    on the spot or in case of absence of
statement is not made out (particularly   made out a written description of          an administrative statement to
in cases of a positive statement)         every inspection is necessary to           prepare, issue and place in the
inspectors in a series of institutions    ensure consistency of the decisions        archives description of each
are not obliged to prepare the            made by the respective institutions, to    inspection comprising:
description of inspection accessible      make the operation of inspections          • name, address of inspected entity
also to the investor. Such weaknesses     explicit and transparent for the public    • object of inspection
give rise to concerns of the              and to furnish inspection management       • results of inspection detected
businesses about transparency of the      with effective control instruments.             breaches (with reference to
inspectors’ operation and possibility     Apart from issuance such                        relative legislation, articles,
of reporting mechanism.                   administrative statement or                     criteria)
                                          description of inspection results          • steps taken by the inspector
                                          should be kept with the archive of the     If necessary, develop and submit draft
                                          inspection and made available to the       amendments to the Cabinet of
                                          inspected entity.                          Ministers Regulations No.154 On
                                                                                     Administrative Statement Process.
                                          The inspected entities shall be entitled
                                          to getting acquainted with the
                                          descriptions and the public shall be
                                          informed of such entitlement.
2) Work sub-groups disclosed that         Provide information to the public and      The following institutions shall         1) The enlisted institutions shall, by 1
entrepreneurs often lack information      businesses on inspections and their        develop their own internal regulations   July 1999, submit the regulations and
of inspections, their objectives, legal   functions thus reducing the alienation     for operation:                           informative materials to the Public
framework, rights and authority of the    from and misunderstanding related to       - The State Language Inspection (we      Administration Reform Bureau




                                                                                                                                                                    10
inspectors, rights of the inspected.         the inspected structures as well as     propose involvement of the Riga
                                             enhancing perception of inspectors      Dome Language Inspection as well)         2) The Public Administration Reform
                                             about their powers.                     - Sanitary Border Inspection              Bureau shall, by 1 August 1999,
                                                                                     - State Construction Board                collect the submitted informative
                                                                                     - State Employment Inspection             materials.
                                                                                     - State Inspection for Protection of
                                                                                     Cultural Monuments                        3) The Latvian Development Agency
                                                                                     - State Sanitary Inspection               shall place the prepared materials in its
                                                                                     - State Fire Safety Inspection            Internet home page.
                                                                                     - State Environmental Inspection, etc.

                                                                                     On the basis of such regulations the
                                                                                     institution enlisted above shall
                                                                                     prepare informative materials (in
                                                                                     accord with Appendix 6) to be
                                                                                     disseminated among the public and
                                                                                     businesses.
3) Appeals mechanism related to              Ensure a permanent appeals              1) Supplement the Draft Law On State      State Civil Service Administration
operation of public institutions is          mechanism and inform the public and     Civil Service by incorporating claim
inappropriate. The typical such              businesses on such opportunity          reviewing on neglect or inappropriate     Public Administration Reform Bureau
mechanism is appealing to the                regarding alleged incompetence,         compliance with duties on behalf of
management of the institution, which         discretion and wrongful activity of     civil servants in the powers of the       By 1 July 1999
is not at all attractive to the investors.   state officials and civil servants.     State Civil Service Administration
Appeals to court form an alternative                                                 (Appendix 7).
which is time consuming and                                                          2) Consider formation of ombudsman
expensive.                                                                           institution in Latvia as one of the
                                                                                     alternatives for effective reviewing of
                                                                                     claims against public officials.
4) Absence of cooperation and                Create an institutionalized mechanism   Work group proposes cooperation           Public Administration Reform Bureau
coordination mechanism among                 for involvement of public institution   between the following structures:         shall promote commencement of such
various public institutions dealing          into a mutual dialogue aimed at         - local governments and MEPRD on          cooperation.
with similar or overlapping                  solving competence distribution         construction issues
competence.                                  issues and elimination of function      - State Language Inspection and
                                             overlapping.                            regional institutions (including the
                                                                                     Riga Dome Language Inspection) on




                                                                                                                                                                     11
mutual coordination and
responsibility
- Citizenship and Migration Board and
State Employment Service on labor
and residence permits

and application of the mechanism to
cases of eventual disagreement
between public institutions.




                                        12

				
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