(g) The 5% withholding tax rate is imposed on gains derived by nonresident companies in Latvia from the rent of Latvian real estate. A 20% rate can be applied on profits realized from rent of real estate located in Latvia if a taxpayer is resident of an EU country or a country with which Latvia has concluded a double tax treaty.
B. Taxes on corporate income and gains
Corporate income tax. Under the Corporate Income Tax Law, corporate income tax is payable at the time when profit is distributed. As a result, the taxable base comprises distributed profits and notional distributed profits.
Distributed profits include the following:
• Dividends, including extraordinary dividends
• Expenses that are equivalent to dividends
• Notional dividends (a notional dividend is a profit share [for example, undistributed profit of current or previous years on which corporate income tax was not paid] for which equity is increased; tax is paid at the moment of decrease of equity [including the case of a company liquidation] or at the moment when a legal entity is registered as a payer of micro-enterprise tax)
Notional distributed profits comprise the following:
• Non-operating expenses
• Doubtful receivables
• Increased interest payments
• Loans to related parties
• Adjustments for transactions with related parties below the arm’s-length value
• Liquidation quotas and other specific items
• Value of assets transferred in the course of a reorganization
• Value of assets that a Latvian resident transfers to its foreign permanent establishment if the local tax base is reduced (exit taxation)
• Value of assets that a Latvian permanent establishment transfers to a nonresident if the local tax base is reduced (exit taxation)
• Outcomes of a hybrid mismatch
Resident companies are companies registered in Latvia and companies incorporated in foreign countries that are registered in Latvia as branches or permanent establishments. All other companies are considered to be nonresident companies.
Payments made by a permanent establishment to a nonresident that owns the permanent establishment are treated as expenses that are equivalent to dividends (except expenses that are necessary for the economic activity of the permanent establishment and justified with third-party supporting documents, expenses related to the permanent establishment’s operations or general administrative and operational management expenses, to the extent of 10% of the eligible costs). Taxable income of nonresidents is income from business activities or related activities in Latvia. Tax is withheld from payments that residents (except natural persons) and permanent establishments make to nonresidents, if such payments are not subject to personal income tax (including remuneration for management and consultancy services, fees paid for the alienation of real estate located in Latvia, rental income and
dividends, interest payments, royalties and other payments to lowtax or tax-free countries or territories).
Tax rates. Resident companies are subject to tax at a rate of 20% on the gross taxable amount. The net taxable base (distributed profits and notional distributed profits) is divided by coefficient of 0.8 when determining the gross taxable base for the tax period. Tax surcharge for credit institutions and consumer credit service providers. Under the Corporate Income Tax Law, starting from 1 January 2024, credit institutions and consumer credit service providers in Latvia must pay a corporate income tax surcharge at a 20% rate of the previous year’s profit after tax. Taxpayers must submit their tax surcharge calculations within four months after the statutory due date for filing of the annual financial statement. The surcharge amount must be paid by the 23rd day of the month following the submission of the tax surcharge calculation. At the moment of profit distribution in dividends, the corporate income tax payable can be decreased by the corporate income tax surcharge paid.
Capital gains. Capital gains derived by resident companies are included in the taxable amount. The Latvian legislative acts provide an exception; the amount of distributed profit can be reduced by the portion of income derived from the alienation of shares if the holding period is at least 36 months (not applicable to the transfer of shares of an entity whose real estate proportion in the total amount of assets exceeds 50%). Withholding tax is not applied on capital gains derived by Latvian nonresidents without a permanent establishment in Latvia (except capital gains from real estate). For nonresident companies without a permanent establishment in Latvia, a final withholding tax at a rate of 3% is imposed on proceeds received from the sale of Latvian real estate, as well as from the sale of shares of a company if in the tax year of the sale or in the preceding year, 50% or more of the company’s assets, directly or indirectly, consists of real estate located in Latvia. A taxpayer who is a resident of an EU country or a country with which Latvia has concluded a double tax treaty may choose to tax gains realized due to the sale of real estate located in Latvia or the sale of shares of a real-estate-rich company under the standard taxation regime. In this case, 20% tax applies to the profits gained from the sale of real estate.
Administration. The tax period is a calendar month. Tax returns must be filed by the 20th day of the following month. However, the income tax must be paid by the 23rd day of the following month.
Foreign tax relief. A foreign tax credit is available to resident companies for foreign tax paid on taxable income earned abroad. The amount of credit may not exceed an amount equal to the tax that would be imposed in Latvia on dividends from the income earned abroad. Resident companies are allowed to decrease the dividend amount included in their taxable base by dividends that are received from a dividend payer who is a corporate income taxpayer in its country of residence or by dividends received from which tax was withheld. This does not apply to dividends received from low-tax or tax-free jurisdictions or territories.
• The BEPS Local File must be prepared and submitted if the amount of related-party cross-border transactions exceeds EUR5 million.
For transactions carried out on or after 1 January 2018, the following transfer-pricing documentation must be prepared within 12 months after the end of the respective financial year and submitted to the tax authorities within one month after request:
• The BEPS Master File must be prepared and filed after request if the annual amount of related-party cross-border transactions does not exceed EUR15 million and the taxpayer’s net turnover does not exceed EUR50 million, but the annual amount of related-party cross-border transactions exceeds EUR5 million.
• The BEPS Local File must be prepared and filed after request if the amount of related-party cross-border transactions exceeds EUR250,000, but does not exceed EUR5 million. The Local File must include all transactions that exceed EUR20,000 in the particular financial year.
The Country-by-Country Report notification applies to all resident entities that are part of a qualifying group (the threshold is EUR750 million). The Country-by-Country Report for the financial year should be filed at the end of the respective financial year.
Transfer-pricing disclosures regarding the total amount of transactions with related parties during the financial year must be included in the 12th month’s corporate income tax return, which is due on the 20th day of the following month.
The generally accepted practice for transfer-pricing issues is based on the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Taxpayers can enter into an advance pricing agreement (APA) with the tax administration on the establishment of an arm’slength price (value) for a transaction conducted with a related foreign company if the transaction annual value is planned to exceed EUR1,430,000. If a taxpayer complies with an APA, the tax administration may not adjust in a tax audit the arm’s-length price established for the transaction.
BEPS 2.0 – Pilar Two. Latvia has adopted BEPS 2.0 – Pillar Two measures. For the latest information, please see the BEPS 2.0 –Pillar Two Developments Tracker (https://assets.ey.com/content/ dam/ey-sites/ey-com/en_gl/topics/tax/tax-pdfs/ey-beps-2-0-pillar-two-developments-tracker.pdf).
F. Treaty withholding tax rates
The domestic withholding tax rate for dividends, interest and royalties is 0% (with certain exceptions, but these exceptions do not apply to treaty countries). The following table lists the withholding tax rates under Latvia’s tax treaties.
5/10 (a) 5/10 (p) 5 Armenia 5/15 (a) 10 10
Austria 5/10 (a) 10 5/10 (b)
Azerbaijan 5/10 (a) 10 5/10 (b)
(a)
(a)
(c)
(a)
(a)
(b)
(k)
Cyprus 0/10 (u) 0/10 (u) 0/5 (v)
Czech
(a)
(a)
(a)
(a)
5/15 (h)
(b)
5/10 (b)
(b)
(b)
(g) 5 5 Germany 5/10 (a) 10 5/10 (b)
Greece 5/10 (a) 10 5/10 (b)
Hong Kong SAR 0/10 (z) 0/10 (w) 0/3 (x) Hungary 5/10 (a)
5/15 (a)
(c)
(m)
(q)
(c)
5/15 (a)
5/15 (g)
(w)
5/10 (b)
(b)
(b)
(b)
5/10 (b)
(b)
(y)
(i) 5/10 (b)
(b)
(b)
5/10 (b)