A Q&A guide to tax on finance transactions in Latvia. This Q&A is part of the PLC multi-jurisdictional guide to Tax on Transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactionshandbook.
The main authority for enforcing taxes on finance transactions is the State Revenue Service.
The circumstances in which clearance may be claimed.
Whether obtaining clearance is mandatory or optional.
The procedure for obtaining clearance.
It is not mandatory to apply for tax clearances before completing a finance transaction.
Under generally applicable administrative law procedures parties can request a binding ruling from the tax authorities. This takes one to four months to obtain. The applicant (to whom the relevant law applies) must disclose all relevant facts relating to it.
It is also possible to request written guidance from the tax authorities which is not binding. This takes one month to obtain.
The circumstances in which disclosure is required.
The manner and timing of disclosure.
Generally applicable reporting requirements may require the full or partial disclosure of finance transactions to the tax authorities. For example, if payments are made to non-residents who are subject to withholding tax, the payments must be reported by the 15th day of the following month when the payments were made.
If double tax treaty benefits are to be applied to reduce or exempt payments from withholding tax, disclosure must be made to obtain and approve the necessary residence certificate, in order to be able to apply the tax treaty benefits.
Its key characteristics.
How it is calculated.
How it is triggered.
The applicable rate(s).
A Latvian resident lender is subject to corporate income tax of 15% on interest or other income receivable under a loan. The interest or other income is included in the lender's taxable income.
A Latvian resident paying interest payments to a non-resident related party lender may be required to withhold 10% tax on payment of the interest.
Its key characteristics.
How it is calculated.
How it is triggered.
The applicable rate(s).
Interest payable and other borrowing costs are tax deductible by a Latvian resident provided the expenses are business related. A Latvian resident company calculates taxable income based on its financial profit/loss, subject to statutorily designated adjustments which include items such as increasing taxable income by non-business related expenses, 60% representation expenses and reducing taxable income by items such as capital allowances.
Thin capitalisation rules limit the amount of interest and other economically similar borrowing costs that can be deducted for corporate income tax purposes. The allowable amount is the lesser amount as calculated on formulas based on both:
A 4:1 debt-to-equity ratio.
1.2 times the short term credit rate as determined by the Central Statistics Bureau applied to the aggregate of debt obligations of the taxpayer.
The thin capitalisation rules do not apply to borrowing costs paid to:
Latvian, EU or European Economic Area (EEA) registered banks and banks registered in a jurisdiction with which Latvia has concluded an effective double tax treaty.
Latvian, EU or EEA registered financial institutions and financial institutions registered in a jurisdiction with which Latvia has concluded an effective double tax treaty, which provide crediting and leasing services and which are regulated entities.
Its key characteristics.
How it is calculated.
How it is triggered.
Who is liable.
The applicable rate(s).
Any gains realised from the transfer of the debt under a loan are subject to corporate income tax of 15% (see Question 4).
No transfer, stamp or other similar types of taxes apply to the transfer itself.
When it applies.
The applicable rate(s).
Any exemptions.
Withholding tax applies to interest payments from a Latvian source to related party non-residents at 10% (5% for banks).
For qualifying EU-resident companies from 1 July 2009 the rate is reduced to 5% and from 1 July 2013 no withholding tax will apply. A qualifying EU resident company must:
Be tax resident in its jurisdiction.
Be subject to a similar corporate income tax in its jurisdiction.
Have a 25% capital or voting interest in the borrower (or vice versa).
Interest payments made to third parties (that is, non-resident or non-related parties) are not subject to withholding tax.
The parties may also benefit from an applicable double tax treaty.
For a comparative summary of withholding tax on interest, see table, Withholding tax on interest on corporate debt (www.practicallaw.com/7-385-8420), in this Handbook.
Income received for the issue of the guarantee is subject to corporate income tax at a rate of 15%. For example if a fee is received by the guarantor for issuing the guarantee, the fee would be included in the guarantor’s taxable income subject to 15% corporate income tax.
Payment of a guarantee cannot be used to reduce taxable income.
Bonds are not treated differently from standard corporate loans (see Questions 4 and 5).
Its key characteristics.
How it is calculated.
How it is triggered.
Who is liable.
The applicable rate(s).
There are no stamp, transfer or similar taxes payable on the issue or transfer of bonds.
This is not applicable (see Question 10).
Similar criteria are used as for accounting purposes and international financial reporting standards to determine the ability to claim capital allowances, including the lease's:
Ownership.
Possession.
Use.
Type.
Length.
The entity claiming capital allowances for plant and machinery must use the assets for its business activity.
Capital allowances are calculated on a double declining basis (that is, depreciation in the first year is double that using the straight-line method, and that percentage is used in the following years) at the following rates:
Category 1. Buildings, structures, perennial plants (5%).
Category 2. Railway rolling stock and technological equipment, sea and river fleet vessels, fleet and port technological equipment, power equipment (10%).
Category 3. Computing devices and related equipment; including printing devices, information systems, software products and data storage equipment, means of communication, copiers and related equipment (35%).
Category 4. Other fixed assets, except the fixed assets referred to in category 5 (20%).
Category 5. Oil exploration and extraction platforms together with the equipment necessary for their functioning located on the platforms, oil exploration and extraction ships (7.5%).
There are no special rules for leasing to lessees that do not carry on business in Latvia.
Rental income is taxed at the corporate income tax rate of 15%. The lessor is entitled to claim capital allowances for the assets rented. The lessee can obtain a deduction or rental payments made if the payments are business related.
Rental payments made to a non-resident for property located in Latvia are subject to 5% withholding tax. Double tax treaties may be applied to reduce or eliminate the withholding tax.
Rulings or clearances are not necessary for rental or leasing transactions.
Corporate entities must account on an accruals basis (which reports income when earned and expenses when incurred (as opposed to when paid)). Therefore, even if interest or capital is deferred, the tax treatment does not change.
If interest payments subject to withholding tax are deferred, the withholding tax is only charged when the payment is actually made.
If interest and capital remain unpaid, subject to certain criteria the amounts may be written off for tax purposes (see Question 18).
Written off or released (wholly or partly)?
Replaced by shares in the borrower (debt for equity swap)?
If a loan is written off or released, the borrower recognises taxable income in the amount (or part thereof) of the loan and/or accrued interest which was written off or released. The lender may be able to reduce its taxable income by part of the written off amounts if certain criteria are met including if:
Income pertaining to the debt was previously included in taxable income calculations.
The amounts are written off from reserves for bad debts or expensed in the profit/loss accounts.
The debtor is a Latvian or EU resident, or resident of a country with which Latvia has an effective double tax treaty.
A court has issued an order to pay the debt and a bailiff’s order attesting to the inability to recover the debt.
Debt can be converted to shares in companies subject to certain procedures required for an investment-in-kind. If accrued but unpaid interest is converted as part of the debt, and if the interest would have been subject to withholding tax when paid, the tax must be paid at the time of the conversion.
Other corporate tax implications do not arise from the conversion.
There are no specific tax regulations applicable to securitisations. Securitisation structures are subject to the same generally applicable tax rules and must account for their financing flows including interest payments, dividend distributions and gains from the disposal of securities or similar financial instruments.
In relation to financial support provided to the Latvian government through a consortium of international lenders including the International Monetary Fund and European Commission, the Latvian government has been asked to develop a long term, comprehensive tax policy. As a result, it is possible there could be some significant changes in corporate income tax law in the future.