Latvian companies in international tax planning
Shifting of emphasis to non-offshore jurisdictions when using non-resident structures is one of the trends in the international tax planning of recent time. Companies registered in the European countries can use not only advantageous tax regime provided by local legislation or the EU rules, but also the rules of international double taxation treaties.
Latvia is not an exception. Its tax legislation makes Latvian companies to be rather convenient instrument for international business. This article considers the advantages of Latvia as a new and promising jurisdiction for tax planning.
Taxation in Latvia: general information
The main sources of tax law in Latvia are the following: Taxes and Duties Act, Corporate Income Tax Act, Value Added Tax Act, Microenterprises Taxation Act and others.
Tax legislation of Latvia includes thin capitalization rules, transfer pricing and affiliated persons’ rules, as well as offshore zones blacklist.
A company is considered resident if it is registered in Latvia. Residents are taxed on their worldwide income. Permanent establishments of foreign companies are taxed the same way as Latvian resident companies. Non-residents are taxed only on income received from Latvian sources.
Corporate income tax and withholding tax
The corporate income tax rate is 15%.
Microenterprises are subject to a reduced tax on their annual turnover. The tax is to be paid quarterly (the tax base is defined as annual proceeds of the company without deduction of expenses). The first EUR 7000 are taxed at a rate 12%, and income from EUR 7000,01 and more is taxed at a rate 15% (from 1 January 2018 the tax rate will be 15% of the whole income). The reform of microenterprises regime up to its full discontinuation is currently under discussion.
Dividends received by Latvian company are exempt from tax (regardless of whether the country, which paid the dividends, is a EU member state or a third country). However, there is an exception for dividends received from countries included in Latvia’s list of low-tax and tax-free territories, approved by the cabinet of Ministers of Latvia on 26 June 2001 No. 276 (further – the “blacklist”).
Latvia considers more than 60 states and territories to be offshore, including the Bahamas, Belize, British Virgin Islands, Jersey, Gibraltar, Hong Kong, Cayman Islands, Liechtenstein, Marshall Islands, Panama, Venezuela, Uruguay and others.
Dividends payable by a Latvian company to a non-resident legal entity are exempt from withholding tax, with exception for dividends paid to persons resident in the blacklisted countries (such dividends are subject to a 15% withholding tax).
Dividends payable to individuals are subject to a 10% withholding tax in Latvia.
Capital gains received from sale of property are subject to tax at a standard rate of 15%. Capital gains received from alienation of shares are exempt from tax (with exception for shares of offshore companies).
Interest and royalties payable by a Latvian company are exempt from withholding tax (since 1 January 2014) with exception for interest and royalties paid to persons resident in the blacklisted countries (such payments are subject to a 15% withholding tax).
Interest received by a Latvian company is taxed at a standard rate of 15%.
Other cases of withholding taxation
All payments (including payments for supplied goods or services) made by a Latvian company to a non-resident company or individual of a blacklisted state are subject to a 15% withholding tax in Latvia (with exception for supply of goods acquired in the European Union or countries of European Economic Area and publicly traded securities, if such goods and securities are acquired at market prices).
In case if a Latvian company pays for goods or services (except for management and consulting services), supplied by non-resident company not included into the blacklist (i.e. non-offshore) the withholding tax is not levied.
The law also prescribes special withholding tax rates for certain types of income:
Payments for consulting and management services supplied by a Latvian company to a non-resident company are subject to a 10% withholding tax (unless the rate is reduced by a double taxation treaty).
Rental payments for use of property made to a non-resident company are subject to a 5% withholding tax.
Remunerations received from participation in Latvian partnerships are subject to a 15% withholding tax.
Income received by a non-resident from the sale of real property in Latvia or sale of company’s shares where more than 50% of its assets consist of real estate in Latvia is subject to a 2% withholding tax.
Regardless of the above-mentioned provisions, if the payments are made to companies or individuals from the blacklisted states, a 15% withholding tax is to be paid.
|Type of payment||Withholding tax|
Payment to offshore company for supplied goods
Payment to offshore company for supplied services (any kinds of)
Payment to non-offshore company for supplied goods
no tax to be withheld
Payment to non-offshore company for supplied services (except for management and consulting services)
no tax to be withheld
Payment to non-offshore company for management and consulting services
The rules of the EU Parent-Subsidiary and Interest-Royalty Directives set forth that dividend, interest and royalty payments between the affiliated companies within the EU (as well as in Switzerland) may, subject to certain conditions, be exempt from withholding tax.
VAT (Value Added Tax)
Latvian VAT legislation is based on the relevant EU rules (EU Directive 2006/112/ЕС).
The standard VAT rate (pievienotas vertibas nodoklis, PVN) is 21%.
The reduced VAT rates are applied to certain kind of goods and services – 12% (e.g., pharmaceuticals) or 0% (e.g., export operations), as well as exemption from VAT (e.g. financial, insurance services, education, healthcare and others).
A case: Latvian agent company deals with a British partnership in the course of trading
Consider the example where the British partnership consisting of two offshore companies and having a separate legal personality receives income from a Latvian company.
A Latvian company acts as a commercial agent, which sells goods or provides services under instructions of the principal company and pays the major part of sales revenue to the principal excluding the agency fee. An English limited liability partnership (LLP) or Scottish limited partnership (LP) acts as a principal.
In view of the fact that the United Kingdom is not a blacklisted jurisdiction, generally no tax is withheld in Latvia. The partnership distributes the received income between the partners.
LLP or LP here is not subject to taxation in the UK as a separate taxpayer: each of its partners accounts for its income from the partnership and pays taxes in the place of their residency.
Therefore, in cases where both partners are incorporated in tax-free jurisdictions (Seychelles, BVI etc.), the income received by the partnership is virtually not subject to taxation.
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 Latvian holding company can be of any legal form: in most cases it is a limited liability company (SIA) or a 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, deal with Latvian citizens and companies, use (purchase, rent, lease) immovable property, intellectual property rights, either in Latvia or outside it.
Example of a holding structure (investing to the EU)
* Withholding tax is not levied in accordance with the EU Parent-Subsidiary Directive (under certain conditions) or is withheld at a lower rate provided in a double tax treaty (if available).
** 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 blacklisted.
**** Taxation of the received dividends depends on a specific jurisdiction and legal form of the recipient. A zero taxation may be available under certain conditions.
Taxation of a Latvian company paying interest
* Withholding tax is not levied in case if the country of the recipient company is not blacklisted. In allocating interest payable to the costs the Latvian thin capitalization rules should be considered.
** Taxation of the received interest depends on specific jurisdiction or legal form of the recipient. A zero taxation may be available under certain conditions.
Taxation of Latvian company paying royalties
* Withholding tax is not levied in case if the country of the recipient company is not blacklisted.
** Taxation of the received royalties depends on specific jurisdiction or legal form of the recipient. A zero taxation may be available under certain conditions.
Latvia’s double taxation treaties
Latvia has double taxation treaties with the following countries: Albania, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Guernsey, Georgia, Germany, Greece, Hungary, Iceland, India, Ireland, Israel, Italy, Jersey, Kazakhstan, Kuwait, Kyrgyzstan, Lithuania, Luxembourg, Macedonia, Malta, Mexico, Moldova, Morocco, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Russia, Spain, Serbia, Singapore, Slovakia, Slovenia, Sweden, Switzerland, South Korea, Tajikistan, Turkey, Turkmenistan, Ukraine, United Kingdom, Uzbekistan, United Arab Emirates, USA.
The double taxation treaties provide mechanisms for tax credit (tax deduction) in respect of taxes paid in other country, as well as lower rates and tax exemptions in respect of some types of income (e.g. dividends, interest, royalties etc.)
To summarize all of the aforesaid we shall specify the advantages of Latvia for corporate and tax planning.
- Membership in the European Union, Euro zone, participation in the Schengen Agreement.
- Geographical position: Latvia is closer both to the EU and to CIS and EAEU countries.
- Unexpansive business registration and maintenance.
- High level of international banking services, loyalty to non-residents.
- Wide use of Russian language, including in business and in banking practice.
- Apostille on public documents from Belarus, Kyrgyzstan, Moldova, Russia, Uzbekistan, Ukraine is not required for application in Latvia.
- 15% corporate income tax rate (one of the lowest in Europe).
- Tax exemption for dividends both payable and receivable by a Latvian company (with exception for dividends received from or paid to the offshore jurisdictions).
- Tax exemption for interest and royalty income payable to non-residents (with exception for interest and royalties paid to the offshore jurisdictions).
- The EU Parent-Subsidiary Directive (PSD) and Interest-Royalty Directive (IRD) are applicable; cross-border transactions between the affiliated companies may be tax exempt.
- A wide network of double taxation agreements.
- Simplicity of a tax residency certificate obtainment.
- VAT registration to deal with the EU companies is available.