Key tax factors for efficient cross-border business and investment involving Latvia.
With the following countries, territories and jurisdictions:
|Azerbaijan||Hong Kong SR||Montenegro||Switzerland|
|Estonia||Rep. of Korea||Russia||Vietnam|
Limited Liability company, Joint-stock company.
Limited Liability company - EUR 2,800, joint-stock company – EUR 35,000.
A company is deemed to be a resident if it is incorporated in Latvia. Latvian tax law treats branches as tax payer (permanent establishments) whether they are formally registered or should have been registered.
Resident companies are taxed on their worldwide income. Non-resident companies are taxed only on their Latvian source income. Both resident and non-resident companies are taxed when a taxable event occurs (see Compliance requirements for CIT purposes).
As of 2018, the Latvian Corporate Income Tax Law has changed significantly. The new Tax Act provides for a tax on distributions and deemed distributions rather than on income. Undistributed corporate profits are exempt. The taxation of profits is deferred until those profits are distributed as dividends or are deemed to be distributed.
Examples of deemed distributions are non-business expenses, bad debts or excess interest payments.
The taxation period is a calendar month. CIT is payable by the 20th of the following month if a taxable event occurs. If no taxable events occur in a particular month, no return needs to be filed, with the exception of the last month of the year. A taxable event is when a liability is created, e.g. a non-business expense is booked or a shareholder resolution on a dividend distribution is adopted. Non-business expenses and dividends have to be declared on a monthly basis, while all other taxable items have to be reported in the CIT return for the last month of the financial year.
Tax rate is 20 percent, but it is calculated at 0.2/0.8 of the net dividend or distribution.
No withholding tax. Dividends are subject to CIT (see Corporate income tax rate) once payment has been made.
No WHT, except if interest paid to entities registered in listed low tax territories.
No WHT, except if royalties are paid to entities registered in listed low tax territories.
Dividends ‘passing through’ companies are not subject to CIT, if received from taxed profits (CIT or WHT), or if the distributing company is subject to CIT in the country of residence. This exemption does not apply to:
All gains are taxable as ordinary income and therefore are taxed upon profit distribution. However, gains on the disposal of shares are tax-exempt if these were held for at least 36 months, with the exception of the disposal of shares in a company established in a low or no tax jurisdiction and the shares of investment funds and alternative investment funds.
Tax losses as at December 31, 2017 can be used to cover up to 50 percent of the tax calculated on taxable dividend distributions through to 2022.
Proceeds from the sale of real estate company shares in Latvia if owned by a non-resident: 3 percent. Also applies if the transaction is between two non-residents.
Stamp duties apply on the transfer of immovable property: The rate is 2 percent (6 percent if a flat is purchased by a legal person that performs commercial activities) of the higher of the purchase price or cadastral value of the property or valuation for mortgage purposes. No other stamp duties apply.
Please see above.
Yes, locally determined.
As of January 1, 2019, Latvia adopted the minimum requirement of the EU Anti-Tax Avoidance Directive 2016/1164 regarding the Controlled Foreign Company (CFC) rules. An entity is treated as a CFC if the Latvian entity holds, alone or together with a related party, more than 50 percent of the shares or voting rights in a foreign entity or if the Latvian entity alone or together with a related party has the right to receive more than 50 percent of the profit of that foreign entity, or if it is a permanent establishment. The profit of the CFC should be taxed at the level of the Latvian entity if this profit was derived from an artificial arrangement designed for the purposes of a tax advantage. An exemption from the CFC rules applies if the profit of the CFC does not exceed EUR 750,000and income derived from sources other than the sale of goods or the provision of services does not exceed EUR 75,000.
Master file: Mandatory preparation and submission of a Master file is required within 12 months of the end of the financial year, if the total volume of related party transactions exceeds EUR 5 million and company turnover exceeds EUR 50 million, or if the volume of related party transactions exceeds EUR 15 million. If the volume of related party transactions exceeds EUR 5 million, but company turnover does not exceed EUR 50 million the Master file must be prepared within 12 months of the end of the financial year and upon request be submitted within one year.
Local file: Mandatory preparation and submission of the Local file within 12 months of the end of the financial year is required if the total volume of related party transactions exceeds EUR 5 million. If the total annual value of related party transactions exceeds EUR 250,000 the Local file must be prepared within 12 months of the end of the financial year and upon request be submitted within one year. Transactions between two residents of the Republic of Latvia where the volume of related party transactions exceeds EUR 250.000 must be supported by a Local file if requested by the tax authorities. The Local file must then be prepared within 90 days.
If the volume of related party transactions does not exceed EUR 250,000, documentation of a limited scope (functional and economic analysis) must be prepared in free form on request and submitted to the tax authorities within 30 days.
Debt-equity ratio of 4:1 with equity at the beginning of the financial year. As of 2018, the excess amount of interest is deemed a distribution and included in the taxable base. If the interest expense is above EUR 3 million, then the additional deductible interest cap of 30 percent of EBITDA applies. If both ratios are exceeded, then the higher amount is non-deductible.
The thin cap rules do not apply to loans from Latvian credit institutions and credit institutions registered in the EU, EEA, and DTT countries.
There are no specific GAAR rules. However, there is a general provision on substance over form in the Latvian Law on Taxes and Duties.
Tax allowance for enterprises engaged in agricultural activity. CIT relief is available for companies registered in a Special Economic Zone or Free Port.
The standard rate is 21 percent.
KPMG in Latvia
T: +371 67 038 057