Tax benefits in Latvia:
In 2018 a new law was introduced, with some similarities to the successful model in Estonia .
There is no corporate income tax (CIT) on undistributed profits; Latvia applies a cash flow based principle: a Latvian company pays CIT only when it distributes profits. In this case, 20% based on the total profit before tax has to be declared and to be paid within one month (which is 25% of the distributed amount)
Distributed profits include dividends, deemed dividends or deemed profit distributions:
- expenses not related to economic activity;
- doubtful debts;
- disproportionate interest payments;
- transfer pricing adjustments
- benefits granted to the employees of the permanent establishments or board members;
- liquidation quota
Consequently, while non- taxable income can be redistributed easily, a structure for profit sharing agreements, for hybrid loans, for outgoing royalties or for outgoing payments via subsidiaries has to be planned carefully to avoid unexpected taxation.
Based on the Participation Exemption Regime, redistribution of dividend is not taxed, if the payer of the dividend is not in a blacklisted country, pays corporate income tax in his country or if there is a withholding tax. This is also a consequence of the Parent-Subsidiary Directive of the EU, according to which dividends from a subsidiary company can be received tax-free in the parent company, even across borders, if some conditions are met.
Under the Holding Company Regime, capital gains from selling of shares remain tax free, if the holding period is 36 months and if there is no real estate in Latvia involved.
For branch offices, there are some restrictions for the payments to the main seat, but no branch remittance tax
Withholding tax: there is no withholding tax on outgoing dividends, interest or royalties, if the recipient is not located in a blacklisted country. Also there is no withholding tax on technical service fees, but fees for consulting and management are subject to a 20% withholding tax, if there is no double tax treaty where art. 7 is applicable. Eventually, a triangle structure for services can be used.
Tax residency: there is a formal criteria that a company is considered to be tax resident when it is registered in Latvia. Non- resident companies are taxed only on their Latvian sourced income. Consequently a foreign company with effective management and control in Latvia should be taxed only on Latvian sourced income.
For individual shareholders outside Latvia, a Latvian holding company is attractive if they reside in a country where they are not taxed on dividends from Latvia (e.g. if they have a resident/ non-domicile status) and if the profit that is distributed from Latvia to the shareholder is not taxable in Latvia. For example, the company in Latvia can receive tax free dividends from third EU countries based on the Parent Subsidiary Directive and pass them through.
Tax residents of Latvia are not taxed on dividends they receive from companies in foreign countries provided that the dividend payer has paid the corporate income tax out of this profit generated. Therefore it is an option to take residence in Latvia if someone desires to repatriate funds accumulated before.