Latvia

Group consolidation is not permitted for tax purposes.

Transfer pricing

Arm’s-length principle

In line with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, and the CIT Act adopted as part of Latvia’s tax reform in 2018, Latvian law requires related-party transactions to be at arm’s length. In other words, the conditions made or imposed between two related enterprises in their commercial or financial relations must not differ from those that would be agreed between independent enterprises engaging in similar transactions under similar circumstances. The difference between the transfer price and the market price is treated as deemed profit distribution that is taxable at 20% CIT (25% effective).

A tax audit may examine and adjust the price of a transaction in the following circumstances:

• A transaction between related parties.
• A transaction with companies or individuals situated or registered in a tax haven.
• Barters and set offs.
• A price deviation exceeding 20% of prices the taxpayer has applied to similar goods or services over a short period.
• Exports and imports.

Transfer pricing adjustments

If a taxpayer is unable to demonstrate that the price of a controlled transaction is at arm’s-length, it is liable to make transfer pricing adjustments affecting the amount of CIT due under Latvian law. The taxable base must be adjusted in line with section 4(2)(2)(e) of the CIT Act if the taxpayer incurs higher expenses or receives lower income within the controlled transaction. Retrospective negative (downward) transfer pricing adjustment is not included in the Latvian transfer pricing regulation; as such, it is possible only as a dispute resolution tool through a Mutual Agreement Procedure (MAP) based on DTTs.

With respect to transfer pricing adjustment, it is recommended to perform it via price adjustment during the financial year, as there is a risk of the SRS classifying the profit adjustment (transfer of residual profit) to a foreign related party as a deemed profit distribution. For better understanding, under the new CIT model in force as of 1 January 2018, the taxation of corporate profits is postponed until those profits are distributed as dividends or deemed to be distributed. The deemed profit distribution includes taxable objects of various nature, as well as transfer pricing adjustments. The taxable objects that may be classified as deemed profit distribution trigger the effective CIT of 25%.

We note that, in line with the local practice, if the parties have agreed to reduce or increase the price for the goods or services supplied earlier during the financial year, a credit note must be issued, specifying the goods or services whose value is being adjusted. Furthermore, the agreed price of goods or services supplied may be adjusted if the parties have agreed on this based on objective reasons, for instance, changes in functions, a substantial rise, or additional costs incurred in the provision of services. The SRS has indicated that in order for it to agree with the price adjustment, the taxpayer should provide sufficient proof for the increase in the cost base as well as confirmation that the result after the price adjustment falls within the arm’s-length range.

There is a general requirement to report the total amount of: 

• cross-border related-party transactions on line 6.5.1 of the CIT return, and 
• Latvian resident related-party transactions on line 6.5.2 of the CIT return.

If a taxpayer believes that a transfer pricing adjustment is relevant, the difference between the transfer price and the market price must be reported on the CIT return (line 6.5) for the last tax period of the financial year; consequently, paying CIT becomes a must in that month.

The SRS has the authority to examine the taxpayer’s transfer pricing policy. If the taxpayer does not have documentary evidence to show that one's transfer prices are at arm’s-length, the SRS may challenge this during an audit. In that case, the SRS will make an adjustment and assess an additional CIT liability.

Mandatory transfer pricing documentation

According to the new transfer pricing regulation covering financial years starting from 1 January 2018, the transfer pricing documentation elements consists of:

• Country-by-country (CbC) report.
• Master file.
• Local file.
• Simplified transfer pricing documentation.

It is important to note that the Master file must be prepared in the Latvian or English language. If the Master file is in English, the SRS may request to see a Latvian translation of all or parts of the documentation.

The Local file must be prepared in the Latvian language.

Country-by-country (CbC) report

A taxpayer within a multinational enterprise group is required to file a CbC report with the SRS 12 months after the end of the financial year or to notify the SRS of the group company filing the CbC report and of its tax residence by the end of the financial year starting with financial year 2016. Conditions that necessitate the filing and notification of the filing, as well as related matters, are determined by the Cabinet of Ministers.

Who is required to prepare and file the CbC report?

Under the Cabinet Regulation, the CbC report filing requirement applies to a Latvian taxpayer who is part of a multinational group with total consolidated revenues exceeding EUR 750 million for the financial year and meets one of the following criteria:

• one is the parent of the group, or
• one is a Latvian tax resident entity within the group that is not its parent if one of the following conditions applies:
  • the parent is not required to prepare or file the CbC report in its chosen country of tax residence
  • there is an effective international agreement with the country where the parent is tax resident, but there is no effective agreement with the competent authority for preparing and filing the CbC report (i.e. the SRS cannot receive the CbC report because Latvia has not entered into an automatic information exchange agreement with the country where the CbC report has been filed)
  • one is the group’s surrogate parent (a company to whom the parent has delegated the task of preparing the CbC report), or
  • the country of tax residence chosen by the parent has suffered a system failure (the SRS has not received the CbC report since the other country has not forwarded it because of an IT system error or any other failure) and the SRS has notified the Latvian taxpayer accordingly.

The deadline for filing the CbC report with the SRS

A Latvian taxpayer meeting the filing criteria is required to file the CbC report within 12 months after the last day of the financial year. The first financial year for CbC report purposes began on 1 January 2016, and so the Latvian taxpayer’s CbC report for the financial year 2016 was due by 31 December 2017.

The Latvian taxpayer is also required to notify the SRS by the last day of the financial year about whether one is the parent, surrogate parent, or entity required to prepare the CbC report. A Latvian taxpayer who is not required to file the CbC report should notify the SRS of the identity and tax residence of the entity filing the CbC report.

Penalties in case of non-timely or incomplete or incorrect filing

The SRS has the right to impose a penalty of up to 1% of the taxpayer’s annual turnover in the financial period (capped at EUR 3,200) if the taxpayer has failed to submit the CbC report within the time limit or has not complied with the procedures for the preparation and submission of the aforementioned report.

Master and Local files in Latvia

The amendments introduce mandatory submission of Master and Local file for financial years starting from 1 January 2018 to the Latvian tax authorities within 12 months after the financial year-end if certain transaction amount threshold(s) set out in the regulation are met. Moreover, significant penalties will also apply in case of late submission and/or non-compliance with the transfer pricing regulation.

According to Latvian transfer pricing regulations, if a taxpayer, resident, or PE enters into a transaction with a:

• related foreign company
• related private individual
• company in offshore country, or
• related Latvian-resident company and the transaction is economically linked to transactions with a related foreign entity or with an entity registered in a tax haven under the single supply chain transaction,

then the requirements may apply, and one should look at the amount of the transaction.

Local file submission requirements

* The transaction has economic relation to the transaction with a related foreign entity or with an entity registered in a tax haven.

** Total absolute amount of the incoming and outgoing related-party transactions within the financial year (i.e. goods purchased + goods sold + services received + services rendered + loan received or issued***).

*** The SRS has issued a special explanation on the determination of ACT for loan transactions, which is included in its prepared methodological material, 'Transfertcenu dokumentācija'. According to the information provided in the methodological material, when determining the compliance of the transfer price with the arm’s-length principle in loan transactions, not only the loan interest payments shall be assessed, but also the amount lent, as it is one of the factors significantly affecting the transaction price. Thus, with respect to the determination of ACT for different types of loan transactions, the SRS explains that:

• ACT of a controlled-term loan (long-term, short-term) in the relevant financial year is the value of the loan received and the interest recognised.
• ACT of a controlled credit line and a loan from a cash pool in the relevant financial year is the loan balance at the end of the year and the recognised interest.

While for the purpose to determine the ACT and, consequently, the taxpayer's obligation to prepare transfer pricing documentation, all controlled transactions performed with No. 1, No. 2, and No. 3 are counted together, only material transactions (that are above EUR 20,000 for a year) should be documented.

Master file submission requirements

* The transaction has economic relation to the transaction with a related foreign entity or with an entity registered in a tax haven.

** Total absolute amount of the incoming and outgoing related-party transactions within the financial year (i.e. goods purchased + goods sold + services received + services rendered + loan received or issued***).

*** The SRS has issued a special explanation on the determination of ACT for loan transactions, which is included in its prepared methodological material, 'Transfertcenu dokumentācija'. According to the information provided in the methodological material, when determining the compliance of the transfer price with the arm’s-length principle in loan transactions, not only the loan interest payments shall be assessed, but also the amount lent, as it is one of the factors significantly affecting the transaction price. Thus, with respect to the determination of ACT for different types of loan transactions, the SRS explains that:

• ACT of a controlled-term loan (long-term, short-term) in the relevant financial year is the value of the loan received and the interest recognised.
• ACT of controlled credit line and a loan from a cash pool in the relevant financial year is the loan balance at the end of the year and the recognised interest.

While for the purpose to determine the ACT and, consequently, the taxpayer's obligation to prepare transfer pricing documentation, all controlled transactions performed with No. 1, No. 2, and No. 3 are counted together, only material transactions (that are above EUR 20,000 for a year) should be documented.

Specific requirements to the content of the Local and Master files are outlined in the Cabinet of Ministers rules No. 802 and are aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2022.

Penalties for late submission and non-compliance with the requirements for preparation of transfer pricing documentation

The new law introduced penalties for late submission and non-compliance with the requirements for preparation of transfer pricing documentation at the amount of 1% from the controlled transaction amount but not exceeding EUR 100,000.

The local law does not permit the SRS to extend the statutory filing deadline of transfer pricing documentations, so missing it poses a risk that the SRS will exercise its power to charge a penalty for failure to file transfer pricing documentation on time.

In September 2023, Latvian tax authorities published new guidelines on charging fines for transfer pricing documentation breaches. The guidelines aim to drive uniform administrative practices and provide a common understanding of the statutory criteria for charging fines and achieving proportionality, as well as to avoid charging an identical fine for breaches of different significance.

The guidelines classify transfer pricing breaches as material, less material, and immaterial (please see the visual).

The guidelines provide that the SRS will determine the amount of a fine according to the breach and the taxpayer’s individual assessment (please see the visual).

If two or more breaches (immaterial, less material, or material) are detected for the financial period, the SRS will assess each breach on its merits and charge a fine for each separately. The guidelines state that the total fine for all breaches charged by the SRS will not exceed EUR 100,000.

Note that the above-mentioned information highlights the main points of the amendments. The changes in the transfer pricing regulations include other specific matters and nuances that have to be taken into account and carefully evaluated by the taxpayers.

Simplified transfer pricing documentation

The amendments in the Tax and Duty Act introduced on 28 November 2018 and information in Cabinet of Ministers Regulations on 18 December 2018 No. 802 permit a taxpayer not to prepare a simplified transfer pricing file for low-value adding services. The taxpayer should prepare a simplified transfer pricing file within 12 months after the end of the financial year and submit it to the SRS within a month after receiving a request. The Cabinet of Ministers prescribe criteria that should be met to qualify for the simplified arm’s-length pricing and documentation as well as details the taxpayer should include in the simplified transfer pricing file.

Requirements for preparing and filing simplified transfer pricing documentation

If a taxpayer (resident or PE) enters into a transaction with a:

• related foreign company
• related private individual
• company in offshore country, or
• related Latvian-resident company and the transaction is economically linked to transactions with a related foreign entity or with an entity registered in a tax haven under the single supply chain transaction,

and the total amount of the related party transactions within the financial year exceeded EUR 250,000, then instead of a Local file the taxpayer may prepare the simplified transfer pricing documentation about transactions to which the simplified approach applies.

In accordance with the Government Regulation 677 paragraph 18.2, services are classified as low-value-adding and could be documented within simplified transfer pricing documentation if they adhere to the following criteria:

• They have supportive nature.
• They do not form a part of the international group’s core business, but this shall not preclude the situation whereby low-value-adding services forms a part of the core business of a multinational corporation that provides such services to other commercial entities of the same multinational enterprise group.
• The provision of services does not require the use of unique and valuable intangible assets, nor does such intangible property result from the provision of services.
• The taxpayer by provision of the services does not assume or control any significant risks associated with the services and the provision of them does not create any such risk for the taxpayer.

If the above criteria have been met, the application of a mark-up of 5% may be appropriate from a tax perspective and a simplified documentation (without separate benchmarking analysis) may be sufficient for transfer pricing compliance purposes.

Advance pricing

Latvian taxpayers can apply to the SRS for an Advance Pricing Arrangement (APA) regulated by the Cabinet of Ministers Regulation No. 802. The APA is an administrative instrument issued by the SRS to address a taxpayer’s request for establishing transfer pricing conditions and methodology in one’s related-party transactions for a maximum period of five years for both future periods and previous years.

This option is available to companies whose annual transactions with foreign related parties are expected to exceed EUR 1,430,000.

An APA application fee of EUR 7,114 is payable to the SRS as follows:

• 20% on submitting the application to the SRS.
• 80% after the SRS issues an official decision to initiate an APA with the taxpayer.

If the SRS refuses to initiate an APA with the taxpayer, the SRS reserves the right not to refund the 20% down payment.

The rules governing the application of the CIT Act state that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations may be used for Latvian transfer pricing purposes.

Mutual Agreement Procedure (MAP)

Latvian taxpayers can initiate the MAP governed by the Taxes and Duties Act in order to solve international double taxation disputes. The SRS has put together Guidance on the Elimination of Double Taxation of Profits and Capital of Enterprises and Guidance on Dispute Resolution under the Mutual Agreement Procedure with Non-EU Countries. Detailed information is also provided in the MAP profile prepared by the OECD.

Public CbC report

The Law on Income and Income Tax Disclosure in force from 11 October 2023 introduces a Public Country-by-Country Report of Multinational Enterprise Group (public CbC report) that requires certain Latvian-registered parent companies and subsidiaries of multinational enterprise (MNE) groups to prepare, file, and publish a report on revenues, income taxes, and business operations in the residence country of each group company and by tax jurisdiction. The new rules apply, meaning the public CbC report has to be published for the financial years beginning on 22 June 2024 or later. The public CbC report must be filed by the parent company, subsidiaries, and branches in the EDS of the SRS and posted on the parent company’s website if the group’s total consolidated revenue at the ultimate holding company’s balance sheet date exceeds EUR 750 million for two consecutive financial years. The public CbC report must be filed and published no later than 12 months after the date of the balance sheet for the financial year.

It’s important to add that unlike the non-public CbC report rules that are currently in force, Latvian subsidiaries and branches will have to file the public CbC report along with the parent company. The only exception is subsidiaries that are not medium or large companies under section 5(4–5) of the Company and Consolidated Accounts Act and branches with revenues below EUR 8 million.

The new Act makes it possible to waive particular disclosure requirements for a certain period. One or more particular items of information may be excluded temporarily from the public CbC report if disclosing those items is likely to seriously harm the commercial interests of the entities covered by the report. Yet it’s important to remember that any unpublished information will have to be included in the report no later than five years after its initial suppression.

The public CbC report rules imply that nearly all Latvian companies and foreign company branches that are currently posting statements on the EDS about submission of the CbC report prepared by the group’s parent company in its residence country will have to not only report but also translate and file this report on the EDS. The SRS will then have five working days to pass this report for publication on the official website of the Latvian Company Register Lursoft.

Thin capitalisation

Thin capitalisation rules apply to interest payments exceeding a specified amount.

Only one method is available for interest payments of up to EUR 3 million: a debt-to-equity ratio of 4:1 (interest in proportion to the excess of the average liability over an amount equal to four times shareholders’ equity at the beginning of the tax year less any revaluation reserve).

A second method (30% of EBITDA) is available for interest payments exceeding EUR 3 million. Applying this method, a company can calculate net interest (i.e. the difference between interest payments and interest revenues [if any]).

The higher amount of interest that exceeds these calculations should be added to the tax base.

The following interest payments are exempt from thin capitalisation rules:

• Interest paid on borrowings from credit institutions resident in Latvia, EEA member states, or countries that have an effective DTT with Latvia.
• Interest paid to the Latvian Treasury, Finance Development Institution, Nordic Investment Bank, European Bank for Reconstruction and Development, European Investment Bank, European Council Development Bank, or the World Bank Group.
• Interest paid on Latvian or EEA debt securities in public trading.
• Interest expenses directly or indirectly paid to government finance, foreign trade, or guarantee organisations in a country that have an effective DTT with Latvia.

Controlled foreign companies (CFCs)

A CFC regime currently applies to individual shareholders; for more information, please see Latvia’s Individual tax summary.

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 is 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.