Corporate - Income determinationLast reviewed - 17 January 2023
Distributable profits are measured according to financial statements drawn up in accordance with Latvian Generally Accepted Accounting Principles (GAAP) or International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS), and there are no adjustments to accounting profits for tax purposes (e.g. tax depreciation/capital allowances, tax loss carryforward/carryback).
The CIT liability associated with the distribution of dividends is recorded as an expense at the time the dividends are declared, regardless of when the profits were generated or distributed.
Dividends paid by Latvian companies are generally subject to a 20% CIT (after applying the 0.8 coefficient) at the level of the distributing company.
Certain domestic and foreign taxes can also be credited against the 20% CIT charge under domestic law or DTTs.
Deemed dividends are a part of share capital increase from retained earnings arising from 2018 onwards. They become subject to CIT once that part of share capital is reduced and distributed to the shareholders.
A gain arising on the disposal of a capital asset (except real estate sold by non-residents) is treated as ordinary income and is subject to a 20% CIT when profit is distributed.
If a taxpayer has received income from the sale of direct participation shares one has held for at least 36 months, then it is possible to reduce the dividends included in the tax base by the amount of income received from the sale of shares. This exemption does not apply in case of sale of real estate company shares.
If a non-resident sells real estate (or shares in a real estate company) located in Latvia, the sale will be subject to a 3% tax on gross proceeds. Residents of an EU/European Economic Area (EEA) member state or a country that has an effective DTT with Latvia may pay a 20% tax on the resulting capital gains instead (i.e. profit less expenses).
From 1 January 2022, companies investing in a closed alternative investment fund are allowed to exclude from their tax base any income the fund earns when selling shares in a company it owns, according to amendments to the CIT Act. To qualify, the fund will have to directly hold shares in the company for at least 36 months before their disposal. There is also a requirement that the investor should be the fund’s investor for at least 36 months during the holding period.
Dividends received from any foreign or Latvian company may be excluded from the CIT base, except for dividends from companies registered in blacklisted tax havens (a list of tax havens is provided in the Withholding taxes section) or if the structure may be considered artificial.
Interest income is treated as ordinary income and is subject to a 20% CIT only if profit is distributed.
Royalty income is treated as ordinary income and is subject to a 20% CIT only if profit is distributed.
Resident companies are taxed on their worldwide income. Any foreign tax paid on income included in the tax base is allowed as a credit against the CIT charged for the year. However, the credit must not exceed the Latvian tax attributable to the income taxed abroad. Any unused tax credit may be carried forward.