Latvia – Holding company regime introduced

Recent changes to Latvia’s income tax rules include the introduction of a new holding company regime. As from 1 January 2013, dividends and capital gains received by Latvian resident entities are exempt from tax and the withholding tax on dividends paid to foreign parent companies is abolished. The regime is beneficial for Latvian holding companies with subsidiaries within or outside the EU/EEA.

Dividends.
Under the holding company regime, dividends received by a Latvian parent company from its foreign subsidiaries are exempt from Latvian corporate income tax. In turn, dividends paid by a Latvian subsidiary to its foreign parent company are exempt from withholding tax in Latvia (previously 10%). There is no minimum holding period or minimum participation requirement to benefit from either exemption; the exemption applies for all dividends received or distributed, regardless of the country of residence of the company paying or receiving the dividends.

Capital gains.
Gains derived by a Latvian company from the sale of shares of other companies are exempt from corporate and withholding tax, regardless of where the company whose shares are sold is resident. As in the case of the exemption for dividends, there is no minimum holding period or minimum participation requirement to benefit from the exemption.

Withholding tax on interest and royalty payments.
Under existing rules, interest paid by a Latvian company to a nonresident company is subject to withholding tax in Latvia at the following rates (if no lower rate is provided under a tax treaty):

  • 5% for payments made to affiliated EU companies that qualify for application of the EU interest and royalties directive; no tax will be withheld after 1 July 2013 when the transition rules in the directive expire and
  • 10% for payments to companies in all other jurisdictions.

Royalty payments made to a nonresident company are subject to a 5% withholding tax. As from 1 January 2014, the withholding tax on both interest and royalty payments will be abolished, regardless of whether the recipient is resident within or outside the EU/EEA.

Anti-avoidance rule.
It should be noted, however, that none of the exemptions will apply where dividend, interest or royalty payments are made by a Latvian company to a company resident in a low-tax or zero tax jurisdiction (according to a list issued by the Cabinet of Ministers) or to capital gains derived from the sale of shares of such companies, such payments will be subject to a 15% withholding tax.

Igor Rodin
irodin@deloittece.com

 

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