Latvia: Corporate income tax and value added tax amendments

In July 2017, the Latvian parliament adopted a new CIT Law and amendments to the VAT Law. The new rules will enter into force on 1 January 2018, whereby various transition rules will apply.

Corporate income tax.

The major changes to the current CIT regime concern, among others, the following:

  • Any company operating in Latvia will be paying CIT only at the moment of profit distribution (i.e. the new CIT regime is based on a cash-flow taxation model).
  • In case of reinvestment of profit, CIT shall not be applied.
  • The applicable CIT rate upon profit distribution is increased to 20% (currently 15%) tax on profit distributions and deemed profit distributions (e.g. excess interest payments and donations).
  • Companies will be entitled to distribute profits accumulated until the year 2018 without application of the increased tax rate for an unlimited period of time.
  • Capital gains from the sale of shares are exempt from CIT only if the holding period is at least three years.
  • Participation exemption for dividends, when the payer of the dividend is a CIT payer in the country of residence and is not registered in a black listed jurisdiction.
  • A transitional rule will allow tax losses incurred through 2017 to be carried forward to reduce up to 50% of taxable distributed profits in the following five years, i.e. through 31 December 2022.
  • Introduction of anti-avoidance rules, which stipulate that loans issued to related parties are considered as deemed profit distribution.
  • Exemptions apply for loans
    • provided to directly owned subsidiaries
    • provided to a foreign PE
    • provided by eligible cooperatives (agriculture, forestry) to their members for business purposes
    • where back-to-back financing is provided by third parties
    • where the loan amount does not exceed the amount of equity minus total amount of outstanding debt
    • when there are no retained earnings from previous years on the balance sheet of the company at the beginning of the year
    • where the maturity does not exceed 12 months
    • issued by Social Enterprises for specific target groups

Along with the tax reform, compliance with transfer pricing rules becomes of utmost importance and will be the main focus area for tax authorities in the area of direct taxes. Transfer pricing adjustments will trigger immediate taxation at an effective rate of 25% plus penalties (i.e. interest at a rate of 0.05% per day for late payment of tax and fines amounting to 20-30% of the tax liability).

Value added tax.

The major VAT amendments concern, among others, the following:

  • Reduction of the VAT registration threshold to EUR 40,000 (currently EUR 50,000)
  • Broadening of the scope of construction services to which the reverse charge mechanism applies
  • Introduction of the reverse charge mechanism to supplies of
    • construction goods
    • gaming consoles
    • metal goods and related services
    • consumer electronics and household electrical equipment
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Barbara Behrendt-Krüglstein

Barbara Behrendt-Krüglstein

Manager | Deloitte Tax
Telefon: +43 1 537 00 7112
Mail: bbehrendt-krueglstein@deloitte.at

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