Corporate income tax (CIT)
Due to the CIT reform, the approach to calculating CIT has changed fundamentally in 2018. Under the new model, taxation of corporate profits is postponed until those profits are distributed as dividends or deemed to be distributed. The main highlights are the following:
- 20% CIT on payment of dividends to individuals and entities.
- 0% CIT on retained earnings.
- 20% CIT on entertainment and non-business expenses and other deemed profit distributions.
- Tax losses do not accrue/are not available.
- No capital allowances for investment in non-current assets.
- CIT should be paid and reported for each tax period by the 20th day of the next month. Monthly filings are not required if there is no taxable item.
- The taxable base is divided by coefficient 0.8 before applying the standard CIT rate.
Availability of existing tax relief/tax attributes
Large investment relief (LIR) and reliefs for special economic zone (SEZ) and free port companies may still be claimed by reducing CIT on declared dividends.
Profits accumulated before 2018 can be utilised by declaring dividends free of CIT indefinitely.
Accrued tax losses can be offset by reducing CIT on declared dividends for five years (with several limitations).
Micro-business tax (MBT)
The tax reform has changed certain MBT criteria and administration procedures for MBT payers. The main highlights are as follows:
- The standard rate of 15% on revenue continues.
- The revenue cap is lowered to 40,000 euros (EUR) a year.
- A person can be employed only in one MBT payer.
Controlled foreign company (CFC) rules
The CFC rules apply from 1 January 2019.
The CIT Act prescribes that a Latvian company owning a substantial share in a foreign company (owning more than 50% of a foreign company's shares directly or indirectly or being entitled to more than 50% of its profit) should pay CIT on profit in proportion to that share if the foreign company is a non-genuine (artificial) arrangement established to obtain CIT advantage and no substantial business is carried on by the CFC. If these criteria are met, then any profit made by a CFC that is based or incorporated in a tax haven will be taxable in Latvia from the first eurocent, while a CFC registered elsewhere will not attract CIT unless its profits reach EUR 750,000 and passive income exceeds EUR 75,000.
Transfer pricing rules - new legislation from 2018
Introduced changes are to bring Latvian transfer pricing requirements into line with:
- the Organisation for Economic Co-operation and Development (OECD) guidelines for preparing transfer pricing documentation, and
- the new CIT Act adopted as part of Latvia’s tax reform.
The changes introduce the Master file and the Local file as well as mandatory submission of transfer pricing documentation to the State Revenue Service (SRS).
As a result, the transfer pricing requirements face a number of changes, of which the following are key:
- a modified range of taxpayers governed by the requirements for preparing mandatory transfer pricing documentation
- a substantially increased amount of information to be disclosed
- an obligation to file annual transfer pricing documentation with the SRS if certain criteria are met, and
- requirements for preparing and filing mandatory transfer pricing documentation.