Reverse Charge VAT in Latvia: When It Applies

Most people expect VAT to work in one direction: the seller charges it, the buyer pays it, the seller remits it to the tax authority. Reverse charge flips that logic entirely. Under this mechanism, the buyer — not the seller — becomes responsible for calculating and reporting the VAT. The seller issues an invoice at 0% with a reference to the reverse charge rule, and the buyer self-assesses the applicable VAT in their own PVN declaration.

It sounds counterintuitive until you understand the problem it solves. Without reverse charge, a German company selling EUR 100,000 in consulting services to a Latvian SIA would need to register for PVN in Latvia, charge 21%, collect the tax, and remit it to VID. Multiply that by 27 EU member states, and cross-border commerce becomes an administrative impossibility. Reverse charge eliminates the seller's VAT obligation in the buyer's country, keeping the tax mechanics where they belong — with the buyer's local tax authority.

When Reverse Charge Applies: The Three Main Scenarios

Scenario 1: Intra-Community B2B services. This is the most common trigger. When a VAT-registered business in one EU country provides services to a VAT-registered business in another, the general rule (Article 44 of the EU VAT Directive) places the supply at the buyer's location. The seller invoices without VAT; the buyer applies their domestic rate.

For Latvian businesses, this means: when you purchase consulting, IT development, marketing, legal, or most other professional services from an EU-based supplier, you receive an invoice without foreign VAT. You then self-assess 21% Latvian PVN on that amount in your declaration.

Scenario 2: Intra-Community goods acquisitions. When a PVN-registered Latvian company buys goods from a VAT-registered supplier in another EU country, the supplier zero-rates the sale. The Latvian buyer declares the acquisition as both output PVN (liability) and input PVN (deduction) in the same declaration. Net cash impact: zero, if the goods are used for taxable activities. But the reporting is mandatory.

Scenario 3: Domestic reverse charge (specific sectors). Latvia applies reverse charge to certain domestic transactions, notably construction services and supplies of metal waste and scrap. If you are a subcontractor providing construction work to a general contractor, and both parties are PVN-registered, the general contractor self-assesses the PVN rather than receiving a VAT-inclusive invoice. This domestic application was introduced to combat fraud in sectors where "missing trader" schemes were prevalent.

The Mechanics: How to Report Reverse Charge in Your PVN Declaration

Handling reverse charge correctly in your PVN declaration involves two simultaneous entries:

Line for output VAT (izejošais PVN): Report the taxable amount and the self-assessed PVN at 21% (or the applicable rate). This represents the VAT that would have been charged if the transaction were domestic.
Line for input VAT (priekšnodoklis): Report the same PVN amount as a deduction — provided the purchase is used for your taxable economic activities.

The result, for a fully deductible purchase, is symmetrical: output PVN and input PVN cancel out. Your cash position does not change. But VID sees the full picture — the transaction value, the applicable VAT, and the deduction — which is exactly the point.

Where businesses stumble is in the details:

Partial deductibility. If the purchase relates to both taxable and exempt activities (a mixed-use scenario), only the proportion attributable to taxable activities is deductible. The output PVN entry remains at the full amount; the input PVN entry is reduced. This creates a net tax cost.
Wrong rate. Not all goods and services are subject to 21%. If you acquire goods that qualify for 12% or 5% in Latvia, the self-assessment should use the applicable Latvian rate, not 21%. Applying the wrong rate is a common error we correct during client reviews.
Missing self-assessment entirely. Some businesses receive zero-rated invoices from EU suppliers and simply book them as expenses without any PVN entry. This is incorrect and creates an underdeclaration. VID cross-references your declarations against VIES data and can identify missing intra-Community acquisitions.

Invoicing Requirements Under Reverse Charge

When you are the seller in a reverse charge situation (selling B2B services to an EU client, for instance), your invoice must include:

Your PVN registration number
The buyer's VAT registration number
A clear notation indicating reverse charge applies — typically "Reverse charge" or "PVN apgrieztā maksāšana" or a reference to Article 196 of the EU VAT Directive
The taxable amount without VAT
No VAT amount line (since you are not charging VAT)

Omitting the reverse charge notation is a surprisingly frequent oversight. While it does not change the substantive tax treatment, it can create confusion for the buyer's bookkeeper and may trigger queries from tax authorities in the buyer's country. Professional invoicing software handles this automatically — if yours does not, it is worth updating the template.

When you are the buyer, you do not alter the invoice you received. Your obligation is in the declaration, not on the supplier's document.

Common Mistakes and Their Consequences

Double taxation through ignorance. A Latvian company receives an invoice from a Polish supplier with 23% Polish VAT charged on it. The Polish supplier should have zero-rated the transaction (assuming the Latvian buyer provided their PVN number). Instead of questioning the invoice, the Latvian company pays the full amount including Polish VAT and then also self-assesses 21% Latvian PVN. Result: the company effectively pays 44% tax on the transaction. Recovery of the incorrectly charged Polish VAT requires a cross-border refund application — a process that takes 4–8 months.

(In our experience, this happens at least twice a year among our client base. The fix is simple: always verify that EU B2B invoices arrive without the supplier's domestic VAT. If they do not, request a corrected invoice before payment.)

Forgetting the EC Sales List. When you are the seller providing reverse-charge services to EU businesses, you must report these transactions in the EC Sales List. This is a separate filing from the PVN declaration and is easy to overlook. Penalties are modest (EUR 50–150 per missing report) but signal poor compliance.

Applying reverse charge to B2C transactions. Reverse charge is a B2B mechanism. If your EU counterpart is a private individual, reverse charge does not apply — you charge Latvian PVN at the standard rate (or use OSS if distance selling thresholds are exceeded). Misapplying reverse charge to B2C creates a situation where no VAT is collected by anyone, which VID will correct.

The reverse charge mechanism is not complex once understood, but it demands consistent attention in bookkeeping and declaration preparation. Getting it right means clean declarations, no VID queries, and cross-border transactions that flow without friction.

Is Your Bookkeeping System Handling Reverse Charge Correctly?

Reverse charge applies to every EU cross-border B2B transaction and certain domestic construction services. If your accounting software is not configured to auto-assess and correctly report reverse charge in boxes 62 and 64 of the PVN declaration, errors accumulate silently until VID catches them.

Get a reverse charge compliance review →