Corporate income tax (CIT)
Latvia is regarded as offering a relatively favourable income tax regime, as due to the CIT reform, the approach to calculating CIT has changed fundamentally in 2018. Under the current model, taxation of corporate profits is postponed until those profits are distributed as dividends or deemed to be distributed. Distributed profits are subject to 20% corporate tax (20/80 on the net amount of the profit distribution).
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 accumulated prior 2018 can be offset by reducing CIT on declared dividends for five years (with several limitations).
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.
Changes in the CIT Act have been proposed to adopt the rules of the Anti-Tax Avoidance Directives 2016/1164 and 2017/952 that have not yet been implemented in the local law, namely, relating to exit tax and hybrid mismatches. The draft law also propose adding new rules to clarify the CIT treatment of prepayments to suppliers of goods or services, procedures for correcting irregularities detected on a tax audit, methods for determining the acquisition cost of an executive luxury vehicle and a non-Latvian resident’s income from the sale or lease of real estate in Latvia and provisions for bad debts.