Company formation and accounting in Latvia
Last updated: 2018-03-03
Latvia is not the best place to register holding company, but Latvian company can be included in a group of companies as a subsidiary, and Latvian company may own shares (stocks) of other companies.

Latvian company has quite a lot advantages (not so advantageous starting from 1st, January, 2018).

This article contains some of the characteristics of Latvian company. And knowing the characteristics, you can decide - is it possible to use Latvian company for your purposes.

What is Latvian holding company?

Latvian legislation does not contain definition of the word "holding". Latvian holding company, - it is usual limited liability company or joint stock company. The registration process and the requirements relating to the registration of the holding company in general are the same as for a "normal" company.
Holding of shares in other companies, or buying and selling companies, - it is one of business activities, that Latvian company may engage in. And Latvian company may engage in an unlimited number of activities not prohibited by law.

In holding regime you can use Latvian company because of legislation, "passive income" (dividends, sale of shares, income from intellectual property) of Latvian company in general is not taxable with corporate income tax.

Changes in legislation, because of which the Latvian company can be used in holding regime.

As Latvia is a member of the European Union, Latvian legislation must comply with European Union directives. Including so-called Parent and subsidiary enterprises directive and interest and royalties directive.

Therefore, on December 15, 2011, the Latvian Parliament (Saeima), adopted amendments to the law "On corporate income tax" (further, - The Law) (for example, changed part 4 of the article 3 and point 9 of part 4 of the article 6; since Year 2018 corresponding articles are: article 5 and article 13).
According to the amendments, starting from 01 January 2013, if Latvian company pays dividends to legal entities non-residents, then a payment of dividends is not subject to corporate income tax.
Also, since 01 January 2013 a sale of shares (stock) is not subject to corporate income tax.
Starting from 01 January 2013, interest payments and payments for intellectual property (if paid to legal entities) also are not subject to corporate income tax.

From 1st January, 2018 comes into force new Corporate income tax law. According to the law Latvian holding company in general continues to have some advantages. However, less advantages in case of expenditures on research and development and in case of sale of shares and if a company receives dividends. In general, starting from 1st January, 2018, to use certain exemptions, a company must do also another business activities (not only holding shares of another company).
Main difference between "old" and "new" law is that according to the "new" law, a company must pay corporate income tax at the moment of use (distribution) of profit, not at the moment when a company receives profit.

There is an exception when must apply corporate income tax. Payments related with the states and territories of low taxes and no taxes are taxable with corporate income tax.

Income from the sale of shares (stocks).

Latvian company can own shares of any other company and Latvian company can buy and sell shares of other companies. If as a result of such activity Latvian company get profit, then such profit such not subject to corporate income tax (with one exception). Profit is taxable with corporate income tax if Latvian company gets profit from sale of shares of "offshore" company.

What are the basis not to tax profit from the sale of shares?
  • According to the part 21 of article 1 of The Law (part 2 of article 1 of the "new" law), "shares" ("stocks") are shares and any other document that gives the right to receive dividends.
  • According to The Law, "dividends" are income (in form of money or other things) from shares (stocks) of a capital company (a limited liability company of a joint stock company), or shares of a cooperative society, or from other rights (not deriving from debt obligations) to distribute profit.
    But dividends are not income, received in case of liquidation.
  • According to article 13 of the "new" law and the rules of the Cabinet of ministers a company has rights to decrease taxable basis for amount of income of sold shares, if all below mentioned conditions are true:
    • The company holded the shares directly.
    • The company holded shares for at least 36 months.
    • The sold shares were not shares of a company, registered in low or no tax zone / territory.
    • The main aim of the company or sale of shares is not to use the exemption of taxation of a sale of shares. It means that company has income also from another activity, not only sale of shares. The question may be regarding amount of income from sale of shares amount of income from other activities.
    • The sold shares gives rights to receive dividends.
    For period, that ends on 31st December, 2017.

Paid and received dividends.

Has rights not to pay tax for dividends, if all following conditions are true:
  • The dividends received from company that is payer of corporate income tax or if a payer of the dividends withheld a tax from the payment.
  • A payer of dividends is not registered in low or no tax zone / territory.
  • A payer of dividends does not decreases taxable income for the paid dividends.
  • A payer of dividends has not status of the micro - enterprise tax payer.
  • The main aim of payer and receiver of dividends is not to use the exemption of taxation for the dividends.
For example, Latvian company received dividends from Estonian company (payer of corporate income tax in Estonia), Latvian company has profit and owners of Latvian company decided to distribute the profit and pay dividends to the owners of Latvian company. In such case Latvian company has rights not to pay CIT for amount of dividends, received from Estonian company.

For period, that ends on 31st December, 2017.

Payment for intellectual property.

According to part 8 (part 22 of the "new" law) of article 1 of The Law, payment for intellectual property is any payment:
  • for any copyright, or
  • for the use of copyright of literary, artistic or scientific work, including computer programs, films, sound recording, patent, trade mark, design or model design, plan, secret formula or process, or
  • for the right to use industrial, commercial or scientific equipment
  • for the use industrial, commercial or scientific equipment, or
  • for information in relation to industrial, commercial or scientific activity or experience.
If Latvian company pays to non-residents (legal entities) for intellectual property, then there is no obligation for Latvian company to withhold the corporate income tax. Such payments are not subject to the tax, with exclusion if a receiver of the payment is registered in low-tax or no tax country or territory.

If Latvian company receives payment for intellectual property, then such payment increases the income of the Latvian company.
Starting from Year, 2018 until a company has no taxable basis, there is no obligation to pay the corporate income tax for received payment for intellectual property.

For period, that ends on 31st December, 2017.

Interest.

As well as paying for the intellectual property, if a Latvian company pays to legal entities interest on the loan, then in general there is no obligation to withhold the tax from the payment. That is, the interest paid to legal entities is not taxed, except if the recipient is registered in no-tax or low-tax territory.< br>
However, under certain circumstances, the Latvian company may have an obligation to pay the tax for the portion of the amount of interest paid (for example, if the interest rate or the total amount of the interest exceeds the limit).

Received interest increases profit of a company. If a company has taxable basis (for example, owners decided to pay dividends), then obligation to pay the corporate income tax. If no taxable basis, no obligation to pay the tax.

For period, that ends on 31st December, 2017.

Tax conventions.

Latvia has concluded tax conventions with about 60 countries. In particular, with almost all countries of the European Union and many countries of the former Soviet Union.

Tax conventions prevent double taxation and define the country in which the income or other object will be taxed.

Types of business activities. How certain expenses impact taxable amount?

Latvian holding company has the right to engage in an unlimited number of activities not prohibited by the legislation (for some of the activities it is necessary to obtain a license).

Unfortunately, conclusion is that the "new" law is a less advantageous in comparison with the "old" law.

According to the "old" law, for example, if a company has profit 100 euro and the company has spent 50 euro for research and development then amount of corporate income tax is zero. And if owners decided to receive dividends, then for dividends must pay 10 euro personal income tax. As a result if profit is 100 euro, then amount of total taxes is 10 euro and owners receives 90 euro.

According to the "new" law if a company has profit 100 euro and owners decided to distribute profit to dividends, then total amount of taxes (must pay only corporate income tax) is 25 euro and owners receives 100 euro.

For period, that ends on 31st December, 2017.

Payroll taxes.

Salaries are subject to mandatory state social insurance payments. Also a company must withhold the personal income tax from salaries.

Tax rates:
Social security general rate is 35.09% (11% must withhold from salary).
Various personal income tax rates (20%, 23% and 31,4%).

And a company must pay the business risk duty (0.36 euro per month for each employee).

For period, that ends on 31st December, 2017.

Taxes for payments for management and consultancy services.

If a Latvian company pays to a company (non-resident) for management and consultancy services, then Latvian company must withhold the corporate income tax from such payments. But if Latvia and corresponding country have concluded tax convention, then Latvian company has rights to get permission of the tax authority not to withhold the corporate income tax or to withhold the tax at lower rate.

Publicly available information.

Any person has the right to get information about the members of the board of directors of a limited liability and a joint-stock company.
Also, any person has the right to get information about shareholders of a limited liability company.
You can get information by referring to the Register of enterprises, as well as online, in electronic form from lursoft.lv, and firmas.lv.

But there is no obligation to submit information about stockholders of a joint stock company to the Register of enterprises (governmental register).
Special company "Latvijas Centrālais depozitārijs" (LCD) maintains a register of stockholders of joint stock companies which stock are quoted on the stock exchange, and LCD also registers bearer shares.
At the request of the JSC, LCD can also maintain a register of stockholders of JSC, which stock are not quoted in the stock exchange.
According to article 234 of the Commercial law a board of directors of JSC must maintain a registry of stockholders.

Taxation of income of controlled foreign corporation (CFC rules).

The Republic of Latvia has not adopted CFC rules. Latvian company has no obligation to pay tax in Latvia from profit of its subsidiaries.

Transfer prices. Controlled prices.

Latvian company has obligation to increase the amount taxable with corporate income tax if Latvian company:
  • Sells goods or provides services of associated companies at prices below market prices.
  • Buys goods or receives services from associated companies at prices above market prices.
  • Commits other type of transactions (for example, interest payment for loan) with association companies and price (value) of the transactions differs from market price.

To determine the market price, need to use the following methods:
  • Uncontrolled price method (“CUP”).
  • Resale price method (“RPM”).
  • Cost plus method.
  • Transactional net margin method (“TNMM”).
  • Profit split method.




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