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%.
- 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).
- 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.
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.
For bad debts, there is no CIT to pay on the allowance if the debt is recovered within 36 months. An exemption is also available if several conditions of the CIT Act are satisfied.
For excess interest payments, only one method applies up to EUR 3 million (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.
Lending to related parties will be 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)
The Micro-business Tax Act permits existing and newly-formed businesses to acquire micro-business status and register for MBT if they meet the following criteria:
- Their shareholders are individuals.
- Their revenue does not exceed EUR 40,000 in a calendar year.
- The number of employees does not exceed five at any time.
- One person is employed in one MBT payer only.
- Members of the board of the MBT payer are performing their duties based on the employment agreement.
- Remuneration of each employee does not exceed EUR 720 a month.
The standard rate is based on a micro-business’s revenue of up to EUR 40,000 and covers payroll taxes, business risk duties, and CIT.
Revenue of up to EUR 40,000 is subject to a 15% MBT.
The standard rate may be increased in the following cases:
- If the quarterly headcount exceeds five, then 2% per extra employee will be added to the standard rate.
- If a person is employed in more than one MBT payer, then 2% per extra employee will be added to the standard rate.
- If revenue exceeds EUR 40,000 in a calendar year, the excess will attract a 20% MBT.
- If an employee’s net income exceeds EUR 720 a month, the excess will also attract a 20% MBT.
There is no extra rate if the MBT payer has reported a steady revenue growth in the financial statements over the last two tax years, capped at 30% a year in comparison to the turnover of the pre-taxation year or the turnover of such year, which is before the pre-taxation year. Similar rules apply to a micro-business`s headcount growth, capped at one to two employees a year.
If a micro-business has reported no revenue or if its MBT charge for the tax period (calendar year) does not exceed EUR 50, the MBT payer has to pay a charge of EUR 50 within 15 days after the date of filing the tax return for the fourth quarter of the tax year.