Since external security risks have significantly increased in our region, military personnel from the armed forces of the allied countries of the North Atlantic Treaty Organization (NATO) and NATO structural units are being stationed more and more often on the territory of Latvia, and military exercises also take place. These types of military operations require supplies, so it is important to understand the specifics of the taxes applicable to goods, services and possibly construction works.

Value Added Tax (VAT) is a general consumption tax borne by the final consumer, but collected by businesses that supply goods or provide services. Basically, VAT applies to any supply of goods and services for consideration by a taxable person within the territory of an EU country, as well as to any import of goods into the EU.

The general procedure is that goods or services supplied to or imported by the armed forces are subject to VAT. The National Armed Forces cannot recover the VAT paid as input tax, thus they become end consumers. VAT paid on goods and services supplied to the armed forces generates revenue for the national budget, which in turn finances activities such as national defence. Therefore, the EU VAT framework provides for a derogation from the general principle of VAT application, and certain transactions, including supplies to the armed forces, may be exempted from VAT.

Since 1977, the VAT Directive 2006/112/EC (previously the Sixth Directive) has stipulated that VAT exemption can be applied to the supply of goods and services to the armed forces of a NATO member participating in common defence measures outside their country. Moreover, when Latvia became a member state of NATO, such a VAT exemption for supplies to NATO armed forces was introduced into Latvian national legislation.

To reduce the administrative burden and costs of military mobility between EU member states in the field of military mobility provided within the EU framework, in 2019 the regulations of VAT Directive 2006/112/EC were supplemented to provide for the application of a 0% VAT rate also in relation to the common defence measures between EU member states. In compliance with the provisions of the VAT Directive 2006/112/EC, on 1 July 2022, the Latvian Value Added Tax Law (VAT Law) introduced a 0% VAT  for supplies of goods and services provided domestically to the armed forces of other EU member states, including for the needs of accompanying civilian personnel and for the supply of the kitchens or canteens of these armed force units, if such forces are participating in defence measures in the European common security and defence policy framework of the given member state.

VAT is also not applied to the import of goods carried out by the armed forces of NATO member countries and the armed forces of other EU member states for their own needs, including the needs of accompanying civilian personnel or for supplying the kitchens or canteens of these armed forces.

Similarly, the EU Excise Directive 2008/11/EC provides for a similar exemption from excise duty on the movement of excise goods for the armed forces of any NATO member country and, from 2019, for supplies to the armed forces of EU member states (including their accompanying civilian personnel or the supply of their kitchens or canteens). The relevant norms have been introduced into the national legal acts of Latvia which regulate the circulation of excise goods.

Procedure for applying the tax exemption

The VAT and excise duty exemption for supplies of goods and services provided domestically to the armed forces units of NATO or other EU member states (or for the needs of civilian personnel accompanying them or for the supply of the kitchens or canteens of these armed force units) shall apply:

  • indirectly, by refunding the tax paid – by submitting an application to the relevant competent authority (the Ministry of Defence or Ministry of Foreign Affairs), once a quarter, for the goods purchased and services received during the quarter
  • directly, on the basis of an approved certificate approved by the competent authorities of the relevant EU member state (in Latvia, these are the Ministry of Foreign Affairs of the Republic of Latvia and the Ministry of Defence of the Republic of Latvia)

Thus, the direct application of the 0% VAT rate is made on the basis of a VAT and/or excise duty exemption certificate. That is, the organisation – a unit of the armed forces or a private individual receiving the exemption must coordinate with the Ministry of Foreign Affairs or the Ministry of Defence a VAT and/or excise tax exemption certificate, which must contain the details of the relevant goods supplier and service provider and other information about the goods or services for which exemption from VAT and/or excise tax is requested. After that, the user of the certificate (NATO or EU armed forces) submits the original exemption certificate approved in accordance with Annex II of Regulation No. 282/2011 to the goods supplier or service provider.

In certain cases, the competent state authorities may grant the right to use the certificate without approval for a period not exceeding 36 months or during the execution of the real estate construction project.

Allied Forces Headquarters shops (duty-free shops)

Latvian VAT Law provides that the 0% VAT rate can be applied directly to goods sold in stores of the Allied Forces (NATO) Headquarters in Latvia to members of the Allied Forces Headquarters and their dependants.

However, this VAT exemption is not applicable to citizens and permanent residents of Latvia. According to the basic principles of VAT application, the armed forces of the member state where the supply of goods or services takes place cannot benefit from the VAT exemption. Thus, if the National Armed Forces of the Republic of Latvia participate in a defence event in Latvia within the framework of a common defence event held by NATO member countries, supplies of goods made to a unit of the Latvian Armed Forces or a member thereof who is a Latvian citizen cannot be subject to 0% VAT but must be subject to VAT as a general rule.


Our team is ready to help and advise

As our office considers it necessary to contribute to the security and defence sector, we continue to strengthen and build our expertise in this area. Experts from the Sorainen Defence sector group, together with experts from other fields, will definitely be able to offer you precise solutions.