USE OF LATVIAN COMPANIES

LATVIA  -  favorable tax regime and membership in the EU.  The cost of company registration from € 400. Read more…

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Sample structure of Latvian company and English partnership

Below we consider the case where a foreign partnership with a separate legal personality receives income form a Latvian company.

For example, a Latvian company may act as a commercial agent, which sells goods or provides services under instruction of the principal company and pays the major part of sales revenue to the principal excluding the agency fee. 

It is important to note that all payments from Latvian companies to the countries included into the Latvian offshore list are subject to the withholding tax in Latvia at a rate of 15%. Therefore, a principal should not be resident in an offshore jurisdiction from the "blacklist”.

The solution is to use an English limited liability partnership (LLP) or a Scottish limited partnership (LP) as a principal. In this case, no tax in Latvia is to be withheld, as the United Kingdom is not included into the Latvian offshore list (except for payments for the "management and consulting" services – the withholding tax in this case is 10%).

The partnership distributes its income between its members (partners). It is not subject to taxation in the UK as a separate entity: each partner is accountable for their income from participation in the partnership and pays taxes at the place of their incorporation (or place of residence in case of individuals). Therefore, if the members of the partnership are the companies registered in tax-free jurisdictions, the income paid to the partnership is not actually taxed.

A similar situation occurs when a British partnership is a founder of a company in Latvia and receives income from it. Upon payment of the dividends from a Latvian company to a legal entity, which is not listed as an offshore jurisdiction, the withholding tax is not levied. 

Holding companies in Latvia

Since 1 January 2013, Latvia has actually introduced a tax-exempt regime for international holdings in order to attract foreign capital.

The holding regime existing in Latvia can be characterized by the fact that the incentives granted to holding companies do not demand the companies to comply with a list of certain conditions as it is usually practiced in the most of EU countries (such as, percentage of participation in capital, duration of ownership of subsidiary companies’ shares, type of activity of subsidiary companies).

The holding company can have any legal form: in most cases it is a limited liability company (SIA) or joint-stock company (AS).

Shareholders and directors can be of any nationality (citizenship) and residency.

Besides the holding activity as such – ownership (holding) of the subsidiary companies’ shares, their management and deriving income – Latvian companies may conduct other businesses, enter into transactions with Latvian citizens and companies, use (purchase, rent, lease) immovable property, intellectual property rights, either in Latvia or outside it.

Example of holding structure (investing to Russia)

Explanatory notes:

* The received dividends are subject to a 13% personal income tax in Russia. However, the credit for tax withheld in Latvia at source of payment is available.

** The withholding tax rates in Russia are given in accordance with the Agreement on avoidance of double taxation between Russia and Latvia (section 10). If the provisions of the Agreement are not applied, the 15% tax should be withheld at source.

*** The withholding tax in Latvia is not levied in case if the country of the recipient company is not included into the Latvian blacklist.

**** The taxation of the received dividends depends on a specific jurisdiction and legal form of the recipient. It is possible to achieve a zero taxation under certain conditions.

Example of holding structure (investing to the EU)

Explanatory notes:

* Withholding tax is not levied in accordance with the EU Parent-Subsidiary Directive (under certain conditions).

** Taxation according to rules of the individual’s country of residence. The credit for tax withheld in Latvia at source of payment may be available.

*** Withholding tax is not levied in case if the country of the recipient company is not included into the Latvian blacklist.

**** The taxation of the received dividends depends on a specific jurisdiction and legal form of the recipient. It is possible to achieve a zero taxation under certain conditions.

Taxation of Latvian company paying interest

Explanatory note:

* The withholding tax rate in Russia is given in accordance with the Agreement on avoidance of double taxation between Russia and Latvia (section 11). If the provisions of the Agreement are not applied, the 20% tax should be withheld at source.

** The 15% tax rate applies to net income, i.e. the difference between the received and paid interest. The credit for tax withheld in Russia is also possible.

*** Withholding tax is not levied in case if the country of the recipient company is not included into the Latvian blacklist. In allocating interest payable to the costs the Latvian thin capitalization rules (1:4) should be considered.

**** Taxation of the received interest income depends on specific jurisdiction or legal form of the recipient. It is possible to achieve a zero taxation under certain conditions.

Taxation of Latvian company paying royalties

Explanatory notes:

* The withholding tax rate in Russia is given in accordance with the Agreement on avoidance of double taxation between Russia and Latvia (section 12). If the provisions of the Agreement are not applied, the 20% tax should be withheld at source.

** The 15% tax rate applies to net income, i.e. the difference between the received and paid interest. The credit for tax withheld in Russia is also possible.

*** Withholding tax is not levied in case if the country of the recipient company is not included into the Latvian blacklist.

**** Taxation of the received royalty income depends on specific jurisdiction or legal form of the recipient. It is possible to achieve a zero taxation under certain conditions.

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