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 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% CIT (20/80 on the net amount of the profit distribution), resulting in application of an effective 25% 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 accumulated prior to 2018 can be offset by reducing CIT on declared dividends for five years up to 2022 (with several limitations). Currently there is no information on whether it is planned to extend the relief period.
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.
Exit tax and hybrid mismatches
To complete the adoption of the Anti-Tax Avoidance Directive 2016/1164 (ATAD), a set of rules related to exit tax and hybrid mismatches were added to the CIT Act effective as of 12 February 2020. The CIT Act was supplemented with new rules on the tax treatment of assets a taxpayer moves abroad free of charge. There also has been adopted a new section of the CIT Act laying down the tax treatment of transactions that create hybrid mismatches.
Latvia has implemented Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (DAC6). The Taxes and Duties Act was amended, giving rise to the Cabinet of Ministers’ regulation concerning the Automatic Exchange of Information on Reportable Cross-Border Arrangements.
DAC6 applies to cross-border tax arrangements that are entered into by a European Union (EU) taxpayer with other entities in the European Union or non-EU countries. Such arrangements have to be reported to national tax authorities if certain criteria (hallmarks) are met.
The Latvian legislation is effective from 1 July 2020, and reports will retroactively cover arrangements implemented between 25 June 2018 and 1 July 2020.
Latvia has implemented Council Directive (EU) 2021/514 (“DAC7”) on administrative cooperation in the field of taxation, to extend the EU tax transparency rules and reporting obligations to digital platforms and platform operators. Digital platforms and platform operators are required to provide information on the income of sellers using digital platforms from 2023. These rules impose a reporting obligation on digital platforms operating within and outside the EU.
The Latvian legislation is effective from 1 January 2023. Digital platforms and platform operators will have to file their first reports to the member states for 2023 by 31 January 2024.