Depreciation and amortisation
Distributable profits are measured according to financial statements drawn up in accordance with Latvian GAAP or IAS/IFRS, and there are no adjustments to accounting profits for tax purposes (e.g. tax depreciation/capital allowances, tax loss carryforward/carryback).
There is no specific treatment for start-up expenses.
Input VAT on goods or services acquired before VAT registration is recoverable if those items are to be used for taxable suppliers.
Non-business expenses include costs that are not directly related to commercial activities; all expenses incurred for the leisure and recreation of owners and employees; entertainment trips taken by owners and employees in company vehicles; any benefits, gifts, credits, and loans turned into gifts to owners and employees; and any other disbursements in cash or in kind to owners or employees that are not part of remuneration or that are not related to the taxpayer’s commercial activities, etc.
Non-business expenses are considered a deemed profit distribution, and CIT is payable on these expenses monthly. Accountants often recognise expenses without supporting documents as non-business expenses (e.g. representation expenses or fuel costs not accompanied by appropriate documentation).
Representation expenses and staff sustainability expenses
Representation expenses, by definition, are expenses a taxpayer incurs to build one's prestige, entertain one's customers and suppliers, and provide meals, as well as amounts spent on low-value items intended to make the taxpayer popular.
A new concept of 'staff sustainability' events has been introduced from 2018. These are expenses a taxpayer incurs to motivate one's staff, build teams, or maintain social infrastructure.
Representation expenses and staff sustainability expenses are capped at 5% of gross wages for the past year. There is no taxable item until the cap is reached, but afterwards CIT is payable monthly.
To apply the exempt 5% limit, the company should keep a separate record and accurately describe representation expenses and staff sustainability expenses in its accounting policy, as well as provide supporting documents.
Fines and penalties
Any fines, contractual penalties, and statutory interest on arrears (including an increase in principal debt) that are disproportionate to the deal value or are made to a related party or one that is registered in a tax haven are considered non-business expenses and subject to CIT at the 20% rate.
Excess interest payments are considered a deemed profit distribution and subject to 20% CIT. For further details, see Thin capitalisation in the Group taxation section.
A bad debt that remains unrecovered within 36 months after a provision was made for it should be added to the tax base, unless the exemption criteria are met. An internal checklist can be drawn up for claiming an exemption. It is also important to ensure that accounting records are transparent, including a separate record of bad debts incurred before 2018 and an accurate record of new bad debts arising after 1 January 2018. This will allow the company to select information about the age of a provision from its accounting records and to consider claiming an exemption in the case of writing off that provision.
Lending to related parties
From 1 January 2018, lending to related parties is treated as a profit distribution subject to a 20% CIT. This rule has been adopted as an anti-avoidance measure to prevent taxpayers who want to pay a dividend from making a loan instead, which is essentially a hidden dividend.
The law lays down criteria for loans that are not treated as a profit distribution, such as a short-term loan maturing in up to 12 months or one that does not exceed the amount borrowed from an unrelated party. It is therefore necessary to revise the conditions for cash movements between related companies and define internal criteria for recording related-party loans by keeping a separate record of loans that are deemed distributions and on which CIT has been paid.
When repaying a loan that was included in the tax base for a past tax period, any repaid amount of the loan can be used to reduce the tax applicable base for the current tax period.
Donations exceeding the statutory criteria are taxable. Donations paid to charitable institutions, non-profit making foundations, churches, monasteries, and various other welfare institutions may qualify for tax relief if certain criteria are met (see the Tax credits and incentives section).
All costs associated with luxury vehicles (i.e. light passenger cars worth more than EUR 50,000, excluding VAT) are considered non-business expenses and subject to a 20% CIT. These rules do not, however, apply to special purpose vehicles (such as emergency vehicles and special passenger vehicles).
Under the new CIT model, any movement of provisions in accounting records after 2017 will no longer affect the tax base.
Special clauses of the transition rules should be followed in order to write off any provisions on the balance sheet as at 31 December 2017 that have been added to taxable income in past tax periods.
Any provisions on the balance sheet as at 31 December 2017 to be reduced after 2017 can be deducted from the tax base and attract a coefficient of 0.75, subject to the following conditions:
- The provisions were included in the tax base in the period they were recognised.
- They are recorded separately from other provisions after 2017.
In respect to provisions recognised in the financial year 2017 exceeding provisions recognised in the financial year 2016, any reduction in these provisions can be deducted only from dividends or deemed dividends included in the tax base.
Accordingly, the transition rules do not restrict the period for reducing the tax base, but they do restrict the tax base a company can reduce, in certain cases, to dividends paid. The administrative burden will also increase considerably, given the transitional obligation to separately record provisions recognised before 2018 and after 2017, as well as provisions recognised in the financial year 2017.
Net operating losses
There is no such concept as a tax loss under the new CIT model, and utilising tax losses is subject to a five-year restriction. A company can utilise 15% of its loss, capped at 50% of the CIT charge on dividends for the taxation period. Thus, losses brought forward can be utilised only if the company distributes profits arising after 31 December 2017.
Payments to foreign affiliates
Any payments to foreign affiliates that are not arm’s length may be considered a profit distribution and subject to a 20% CIT.
Companies registered in tax havens are also considered affiliates. Such payments may be subject to WHT (see the Withholding taxes section).