Accounting for Construction Companies — Industry-Specific Quirks in Latvia 2026
Construction is one of the most regulated and complex industries in Latvia from an accounting perspective. Reverse-charge VAT, subcontractor chains, project cost allocation, work acceptance certificates, and the specific requirements of the Construction Law create an environment where mistakes cost considerably more than in other industries. In 2026 these requirements have gotten even stricter: the construction-sector minimum wage is €1,050, oversight of subcontractor tax payments has intensified, and since August 1 amendments to the Construction Law have been in force that abolish contractor classification and introduce phased construction.
Key takeaways
Reverse-charge VAT (VAT Law, Article 142) for construction services applies to both buildings and engineering structures, but only between two VAT payers — never between a contractor and a private individual
The business risk state fee is a fixed amount — €0.36 per month per employee, not a percentage rate
The overtime supplement (Labor Law, Article 68) is at least 100% of the hourly rate (double pay in total) — the construction sector's current general agreement (2026–2031) confirms this general rate, not a reduced 50%
The minimum civil liability insurance limit depends on the building group: Group 2 buildings — at least €15,000; Group 3 buildings — at least €150,000 (or 10% of the contract sum, if that's higher)
As of August 1, 2026, mandatory contractor classification has been abolished, including for publicly funded projects
Why construction accounting differs from the ordinary kind
Ordinary SIA accounting is linear: an invoice to the client, an invoice from a supplier, a journal entry. In construction, that linearity disappears. Every site is its own financial center with its own budget, cost structure, and revenue schedule. Subcontractors can be three or four levels deep. VAT isn't simply charged and deducted — in most transactions between VAT payers, none is actually paid at all, but it still has to be shown on both sides of the return.
On top of that, every construction site has its own life cycle: procurement, contract signing, design, construction work, handover into use, the warranty period. Accounting needs to be able to track costs and revenue at each of these stages, since payments are often tied to specific completion percentages or work acceptance certificates.
Reverse-charge VAT in construction — how it works
This is the single most important element of construction accounting, and no construction company can operate without understanding it. Reverse-charge VAT means that VAT on construction services is paid not by the service provider, but by the recipient of the service. This mechanism was introduced to stop VAT fraud schemes in which a subcontractor charged VAT to the client but never paid it to the state.
Under Article 142 of the Value Added Tax Law, reverse-charge VAT applies to construction services — including the performance of any construction work, as well as design services when they're included in a comprehensive construction service contract. The rule covers the construction, reconstruction, renovation, repair, restoration, and demolition of both buildings and engineering structures.
Source: Value Added Tax Law
Reverse charge applies when:
Both parties — the service provider and the recipient — are registered VAT payers in Latvia.
The service falls within the construction service list described above. This includes the assembly of building structures, but doesn't include design, architectural services, or construction supervision provided on a standalone basis — unless they're part of a comprehensive construction contract.
In practice, reverse charge looks like this: the contractor issues an invoice for €50,000 without VAT (marked "VAT reverse charge"). The client (also a VAT payer) shows this amount on their own VAT return both as output VAT (calculated) and as input VAT. Nothing gets paid into the budget, but the transaction is declared.
The most common mistake: applying reverse charge to a transaction with a non-VAT-payer (for example, a private individual building a house). In that case, reverse charge must not be applied — standard 21% VAT applies instead. A second common mistake is trying to apply reverse charge to the purchase of materials themselves: materials (concrete, rebar, finishing materials) are bought with standard 21% VAT, since reverse charge applies only to the service itself (performing the work), not to the supply of goods.
Work acceptance certificates — the basis for revenue recognition
In construction, revenue isn't recognized when an invoice is issued — it's recognized based on the degree of work completed. This is usually done based on monthly work acceptance certificates, signed by both parties — the contractor and the client (or the construction supervisor).
The certificate needs to include:
The site's name and address
The reporting period (usually a month)
The volume of completed work, in physical units and monetary terms
A breakdown by type of work or cost estimate
Signatures from both parties
Certificates are legally binding documents confirming that the client has accepted a specific volume of work. Invoices are issued based on these certificates, and they're also the basis for applying VAT and making accounting entries.
Delayed or unsigned certificates are one of the biggest financial risks in construction. If a certificate isn't signed, the contractor can't issue an invoice, and so can't get paid. But costs (materials, wages, subcontractors) have already been incurred — creating a cash flow gap.
Project cost tracking — why standard accounting isn't enough
A construction company with several parallel sites needs project (job) cost accounting. For each site, you need to be able to determine:
Direct material costs: concrete, rebar, finishing materials bought for a specific site.
Direct labor costs: wages for workers who worked on a specific site (must be tracked in timesheets by site).
Subcontractor costs: tracked separately for each subcontractor and each site.
Indirect costs: the construction supervisor's salary, equipment rental, electricity on site — allocated proportionally across sites.
Without this kind of tracking, it's impossible to determine each site's profitability. And conversely — with precise tracking, you can identify which site is losing money, which is profitable, and why.
Wages in construction — the minimum rate, overtime, and payroll taxes
In 2026, the construction sector has its own minimum wage: €1,050/month (€270 more than the general minimum wage of €780). This is set by the sector's general agreement, in effect from January 1, 2026 through December 31, 2031. For construction companies, this means considerably higher labor costs than in other industries.
Total employer cost for one worker at the minimum wage:
Amount | |
|---|---|
Gross salary | €1,050.00 |
Employer VSAOI (23.59%) | €247.70 |
Business risk state fee (fixed amount) | €0.36 |
Total per month for the employer | €1,298.06 |
Employee net salary (simplified example, with the €550/month non-taxable minimum):
Amount | |
|---|---|
Gross salary | €1,050.00 |
Employee VSAOI (10.50%) | €110.25 |
Personal income tax base (gross − VSAOI − non-taxable minimum) | €389.75 |
Personal income tax (25.5%) | €99.39 |
Net salary | €840.36 |
For a precise calculation, including any declared tax-book allowances, see our salary calculator.
Overtime pay. Under Article 68 of the Labor Law, an employee performing overtime work is entitled to a supplement of at least 100% of their set hourly wage rate — in total, double pay (base wage + 100% supplement). The law allows a reduced supplement, of no less than 50%, only when the sector's general agreement has raised the sector minimum wage by at least 50% above the national minimum wage. The construction sector's current (2026–2031) general agreement doesn't meet this condition — €1,050 is only about 35% (not 50%) higher than the general €780 minimum wage — so the condition for the 50% supplement in Labor Law, Article 68(3), is not met and the standard 100% supplement applies.
Source: Labor Law, Article 68
On top of that, construction often uses aggregated working time accounting, which requires additional recordkeeping in timesheets.
Subcontractors and their tax risks
In construction, subcontractor chains can be long: general contractor → subcontractor → sub-subcontractor. VID pays especially close attention to these chains. If a subcontractor fails to pay taxes, liability can also be directed at the general contractor.
Joint and several liability for tax payment is one of the most significant risk areas. If the general contractor knew, or should have known, that a subcontractor wouldn't pay its taxes (for example, if the subcontractor is a "shell" company with no employees or assets), the general contractor can be held jointly liable for the unpaid taxes.
Recommendations for protecting yourself:
Check the subcontractor's VID tax debt (publicly available information).
Confirm the subcontractor is registered in the Construction Contractor Register, if it performs work requiring registration.
Keep documentation of all subcontractors and checks performed.
Include a clause in contracts where the subcontractor confirms it has met its tax obligations.
The construction contractor register, civil liability insurance, and other mandatory requirements
Every company performing construction work that requires a building permit must register in the Construction Contractor Register. Registration is handled by the Construction State Control Bureau (BVKB).
Requirements for registration:
An appointed responsible construction works manager with appropriate education and experience (registered in the Construction Specialist Register).
Mandatory civil liability insurance.
The company must meet certain qualification criteria (experience, technical resources).
The civil liability insurance limit isn't a single fixed amount — it depends on the building group (complexity) and the contract sum:
Group 2 buildings — at least €15,000, or 10% of the construction contract sum, whichever is higher.
Group 3 buildings — at least €150,000, or 10% of the construction contract sum, whichever is higher.
After the building is handed over into use, the minimum liability limit may be reduced by 50%.
For example, for a Group 3 building with a contract sum of €2,000,000, 10% comes to €200,000 — so in this case the required minimum is €200,000, not the fixed €150,000 floor, since the percentage calculation exceeds it.
2026 changes to the Construction Law. Since August 1, 2026, amendments have been in force that abolish mandatory contractor classification, including for publicly funded projects, EU-fund-financed projects, or projects financed by foreign assistance — classification hasn't been mandatory in public procurement itself since 2020, but the Construction Law still required it in certain cases until now. The amendments also introduce the option to begin construction work in phases, before the full technical project is finished (with municipal approval for each phase within 10 business days), to speed up construction processes and reduce red tape.
Your accounting needs to be able to show that all required certificates, licenses, and insurance policies are valid, since their absence can lead to a suspension of activity.
Common VID audit triggers in construction
VID monitors the construction industry especially closely, since it has historically had a high share of shadow economy activity. The most common things that draw VID's attention:
Mismatches between work certificates and VAT returns. If reverse charge is applied to transactions where it doesn't belong, or if certificates show a larger volume than what's declared.
Subcontractors with no employees. If a subcontractor reports large turnover but has no employees and doesn't buy materials — a sign of a "shell" company.
Paying wages in cash. Still a common practice in construction — wages paid in cash without proper recordkeeping. This is a direct path to a fine.
No time tracking. If workers are on site but there are no timesheets, VID can challenge the wage payments and assess additional taxes.
Incorrect VAT application to materials. Reverse charge doesn't apply to material purchases — they're bought with 21% VAT. A common mistake is trying to apply reverse charge to materials too.
Construction accounting requires precision, a systematic approach, and a deep understanding of industry specifics. Reverse-charge VAT, project-based cost tracking, work acceptance certificates, and subcontractor management are areas where support from a professional accountant isn't just advisable — it's essential. Our team helps construction companies get their accounting in order and avoid the most costly mistakes. Get in touch with us to learn more about our accounting services.
Frequently Asked Questions
Does reverse-charge VAT apply to transactions with a private individual?
No. Reverse charge applies only to transactions between two VAT payers. If the client is a private individual (for example, building their own house), standard 21% VAT applies.
Does reverse charge apply to buying materials?
No. Reverse charge applies only to the construction service itself (performing the work), not to the supply of goods (materials) — materials are bought with standard 21% VAT.
How much is the overtime supplement in construction in 2026?
At least 100% of the hourly rate (double pay in total), the same as in other industries. The construction sector's current general agreement (in effect 2026–2031) confirms this general rate — a reduced 50% supplement would only be possible if the sector's minimum wage were at least 50% higher than the national minimum wage, which currently isn't the case.
What civil liability insurance limit does my construction company need?
It depends on the building group: Group 2 buildings — at least €15,000 (or 10% of the contract sum), Group 3 buildings — at least €150,000 (or 10% of the contract sum). After the building is handed over into use, the limit may be reduced by 50%.
Do I still need to register in the Construction Contractor Register if I'm bidding on a public procurement?
As of August 1, 2026, mandatory contractor classification has been abolished, including for publicly funded projects, but the Construction Contractor Register itself (maintained by BVKB) is still mandatory for anyone performing construction work that requires a building permit — these are two separate requirements, and abolishing classification doesn't remove the registration obligation.
How do I protect my company from joint liability for a subcontractor's unpaid taxes?
Check the subcontractor's VID tax debt before signing a contract, confirm its registration in the Construction Contractor Register (if required), keep documentation of the checks performed, and include a clause in the contract where the subcontractor confirms it has met its tax obligations.
Related reading: VAT registration and managing cash flow.
Sources
Value Added Tax Law — Article 142 (reverse charge for construction services)
Labor Law — Article 68 (overtime supplement)
VID methodical material: VAT application to construction services
Last updated: September 2026. Information is based on the Value Added Tax Law, the Labor Law, the Construction Law with its 2026 amendments, official materials from VID, and the construction sector's general agreement. Before making decisions, it's advisable to consult an accountant or lawyer, since your specific project's situation (contract sum, building group, number of subcontractors) can change the exact calculations.
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