Latvia

Under the new CIT model in force as of 1 January 2018, all undistributed corporate profits are exempt. This exemption covers both active (e.g. trading) and passive (e.g. dividends, interest, royalties) types of income. It also covers capital gains arising on the sale of all types of assets, including shares and securities, except for the sale of immovable property by non-residents. This tax regime is available to Latvian-resident companies and non-resident companies’ permanent establishments (PEs) registered in Latvia.

The taxation of corporate profits is postponed until those profits are distributed as dividends or deemed to be distributed.

The CIT rate is 20% applicable to the taxable base. However, before applying the statutory rate, the taxable base should be divided by a coefficient of 0.8. As the taxable base is increased by the coefficient, the effective CIT rate is 25%.

From January 1, 2024, credit institutions and consumer crediting service providers are obliged to pay a tax surcharge of 20% in the taxation year (regardless of the profit distribution), the tax surcharge is calculated by using the financial data of the pre- taxation year and by taking into account profits distributed and the amount of tax paid thereof in the taxation year, simultaneously providing that the tax surcharge paid  is further taken into account when calculating the tax payable on the distribution of profits in dividends. CIT calculated on other tax objects (except for dividends, deemed dividends, and conditional dividends) cannot be used to reduce this tax liability.

Profit distributions:

• Dividends (including interim dividends).
• Payments equal to dividends (i.e. profit share-outs by [a] cooperative societies, [b] sole traders, [c] partnerships, and [d] PEs).
• Deemed dividends (i.e. the reduced amount of share capital that has been previously increased using part of earnings being added to share capital).

Deemed distributions:

• Non-business expenses.
• Bad debts.
• Excess interest payments.
• Loans to related parties (with several exclusions).
• Transfer pricing adjustments.
• Surplus assets on liquidation.
• Benefits a non-resident gives to employees of its PE.
• Assets transferred abroad. 
• Hybrid mismatches. 

For non-business expenses, a non-taxable cap on representation expenses and staff sustainability expenses is calculated as 5% of the company’s total gross wages for the past year.

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. If a company has made provisions up to 31 December 2021 and if debtors are going through the insolvency process, the period for recovering debts could be extended to 60 months.

The CIT Act provides special provisions for provisions made under IFRS 9. The exceptional conditions a company has to meet before it can take an exemption are as follows:

• The company holds an appropriate auditor’s report.
• Each trade receivable included in the provisions (credit losses) can be traced.
• Procedures for recognising, recovering, and derecognising receivables (financial assets) are in place.

However, if a provision made in this way applies to a truly bad debt the company has expensed and will not have been recovered within 60 months after it arose when the customer was supposed to pay the supplier, and the receivable is ineligible for an exemption under section 9(3) of the CIT Act, then provisions made under IFRS 9, too, will have to be added to the tax base.

For excess interest payments, only one method applies up to 3 million euros (EUR) (i.e. a debt-equity ratio of 4:1). A second method (30% of earnings before interest, taxes, depreciation, and amortisation [EBITDA]) is applicable if interest payments exceed EUR 3 million. Due to COVID-19, the Latvian legislation has been amended to state that excess interest payments are not subject to CIT and thin capitalisation rules are not applicable for the years 2021 and 2022. 

Lending to related parties is considered a profit distribution with several exclusion (i.e. the parent’s loans to a subsidiary; short-term loans for up to 12 months; a loan not exceeding one received from an unrelated party or not exceeding a certain level of registered share capital; if the lender has no retained earnings at year-start, etc).

The definition of 'related party' includes Latvian companies with at least 20% shareholders.

From a Latvian perspective, this tax is considered a CIT, not a withholding tax (WHT), so the rate is not affected by an applicable double tax treaty (DTT).

In Latvia, resident companies are taxed on profits distributed from their worldwide income, while PEs of non-residents are taxed only on profits distributed from Latvian-source income. Other Latvian-source income derived by non-residents may be subject to a final WHT or CIT by way of assessment.

Micro-business tax (MBT)

Only a sole trader, an individual undertaking, a farm or fishery operation, and an individual registered with the State Revenue Service (SRS) as a trader, if they are not registered for value-added tax (VAT), can become an MBT payer.

From 1 January 2024, a single micro-enterprise tax rate of 25% has been set, regardless of the turnover of the micro-enterprise.

Only the shareholder of the company having MBT status will be considered an MBT payer, whereas the remuneration of the employees of such a company will be subject to payroll taxes at the standard rates.