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Amendments to the Corporate Income Tax Law
According to the latest amendments to the Corporate Income Tax Law taxes on in-bound and out-bound dividends, interest payments and payments for the use of intellectual property will be gradually reduced.
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As of 1 January 2013 dividends paid by Latvian residents to non-residents will be corporate income tax (CIT) exempt. As of the same date also the dividends received by a Latvian company from a non-resident will be CIT exempt unless the payer of the dividends is a resident of low-tax or no-tax jurisdiction. As of 1 July 2013 tax exempt will be interest payments and payments for the use of intellectual property paid to a related EU company and as of 1 January 2014 tax exempt will be interest payments and payments for the use of intellectual property to any party, except the payments to residents of low-tax and no-tax jurisdictions. The amendments provide that as of 1 January 2013 it will be possible to reduce the taxable income by income from the sale of shares, unless the company whose shares are sold is a resident of low-tax or no-tax jurisdiction. Positive development has taken place in respect of carrying forward losses. According to the amendments it will be possible to carry forward losses accrued as of 2008 for indefinite period of time (instead of current 8 years). Several provisions of the law have been clarified to introduce more certainty in their application. Inter alia, it is specified that costs of a credit institution incurred during the debt collection process and related to exercise of pledge and maintaining it qualify as deductible expenses related to commercial activities of the credit institution. The provisions of law dealing with reduction of taxable income by lost debts in case of insolvency of the debtors or by debts written-off within the framework of judicial protection process of debtors are amended to bring them in line with the wording of the new Insolvency Law. The amendments expand the scope of application of corporate income tax allowances for the initial long term investments. The minimum amount of investment has been reduced from 5 million Latvian lats to 3 million Latvian lats and the term for investment has been increased from 3 to 5 years. The list of companies eligible for tax allowances within the framework of initial long term investments projects has been supplemented by companies producing furniture, processing and tinning fish, crustaceans and mollusks, as well as companies operating in dairy industry. Amendments to the Personal Income Tax Act
The amendments to the Personal Income Tax Law eliminate different treatment of the social benefits paid in Latvia and in other EU Member States or EEA states. Namely, from now on personal income tax (PIT) exempt will be not only benefits received from the Latvian state budget, but also benefits paid from the state budget of other EU Member States and EEA states.
Important are amendments aimed at prevention of tax avoidance in connection with payment of micro-enterprise tax. Upon fulfillment of certain criteria, manpower services by micro-enterprises shall be regarded as services of personnel lease. It means that the persons receiving the said services from payers of micro-enterprise tax can be faced with an obligation to pay PIT and social security contributions similarly as in case of personnel lease. The list of capital assets is expanded to include investment gold and transaction objects of money markets or commodity exchange markets. The law also specifies mechanism for determination of taxable income with regard to individual management of investor’s financial instruments -or so-called portfolio management services. The Law provides that the taxable income is a difference between value of the assets transferred by the client to portfolio manager during the validity period of the investment management agreement and value of the assets withdrawn by the client from the portfolio either during the term of the agreement or after its expiry. Detailed provisions are set out with regard to the application of PIT to insurance indemnities paid out under life insurance agreements (with savings) entered into for the benefit of the insured person by the employer (or other legal person). Insurance indemnity is to be divided in two parts: the amount of insurance premiums paid by the employer is subject to the payroll taxes and the amount exceeding insurance premiums made is subject to capital gains tax. If the life insurance agreement (with savings) provides for partial payment of savings the taxable income is the positive difference between the amount of current partial payment of savings plus all previously made partial payments of savings and amount of all insurance premiums paid under the agreement. The amount thus calculated shall be further decreased by the total amount of taxable income calculated at a time of the previous partial payments of savings. In order to eliminate different treatment of similar sources of income (i.e. income from capital and income from property), it is envisaged that income from property (e.g. lease or rent of real estate) shall qualify as income from capital and thus subject to 10% capital gains tax. So far it was subject to 25% personal income tax. In case of sale of an agricultural land consisting of agricultural land and forest exemption from PIT is to be applied in proportion to the part of the real estate consisting of agricultural land. The Law has been supplemented with the provisions which aim to ensure tax avoidance in case the agricultural land has been obtained with the sole purpose of further sale. The amendments set out the actions to be taken and sanctions to be applied in case the payers of fixed PIT expand their commercial activities by undertaking professional activities or hiring employees which is not permissible for payers of fixed PIT. Amendments to the Micro-enterprise Tax Law
The amendments to the Micro-enterprise Tax Law clarify provisions that previously have caused numerous misunderstandings between tax payers and tax authority and reduce the possibility to abuse micro-enterprise tax regime.
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Inter alia, it is now stated that persons acting per procura on behalf of the micro-enterprise will be deemed to be employees of micro-enterprise. The requirement for all owners of the micro-enterprise to serve on the management board of the company is canceled. The amendments list the types of payments made by the employer to the employees (e.g. funeral allowance, compensation for use of employee’s car for business needs, business trip compensation) which will not be included in the taxable income of the employee. The amendments also clarify that compensation due to termination of employment agreement or compensation for unused vacations upon termination of employment shall not be counted towards the maximum limit of income of employee of micro-enterprise(500 Latvian lats per month). Amendments to the Value Added Tax Law
The amendments to the Value Added Tax Law mainly deal with the application of reverse value added tax („VAT”) to the construction services and sale of real estate.
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According to the amendments the reverse VAT will be applicable to construction services supplied pursuant to the construction services agreements concluded after 1 January 2012 and construction services supplied after 1 January 2013 on the basis of construction services agreements concluded prior to 31 December 2011. Application of reverse VAT regime allows the supplier of construction services issue invoice for the construction services without VAT. In such case the recipient of the construction services is liable for the payment of VAT into the state budget. The sellers of real estate that have acquired real estate prior to 27 July 2011and are selling it in 2012 may benefit from the recent amendments to the law. VAT shall be applied only to the first sale of unfinished construction objects and calculated on difference between the price at which the construction object is sold and its acquisition value. However, it has to be taken into account that already earlier the State Revenue Service has provided interpretation according to which (and contrary to express wording of the law) sale of unfinished construction objects is subject to VAT notwithstanding whether it is the first or repeated sale. Currently it is not clear whether such interpretation will be upheld. Therefore, it is advisable to request advance binding rulings from the State Revenue Service in each specific case. Amendments to the Real Estate Tax Law
The amendments to the Real Estate Tax Law clarify the list of real estates which are exempt from the application of real estate tax (RET). Thus, tax exempt are social houses and social apartments. As of year 2012 auxiliary buildings of the residential buildings (e.g. garages, basements, sheds, etc.) larger than 25m2 will be subject to RET. RET will be imposed also on areas used as pay parking lots, in case if provided by the municipality in its binding regulations issued until 1 October of preceding taxation year.
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Starting from 1 January 2013 municipalities will have a right to set RET at the rate from 0.2% to 3% from the cadastral value of the real estate. In order to apply such rates, municipality has to issue binding regulations no later than until 1 October of preceding taxation year. In case the municipality does not use this opportunity, the standard statutory rates are applicable, i.e. 1.5% from the cadastral value of land, engineering constructions and buildings, with exception of residential buildings to which, depending on their cadastral value, RET from 0.2% to 0.6% is applicable. According to the amendments, in case the tax payer has not declared its place of residence as required under the law and has failed to inform the tax authorities about its address and notify the tax authorities within the statutory term that he has not received the tax payment order, tax payment order will not be sent but the tax calculated will be effective as of 22 March of then current taxation year. Law on Declaration of Assets and Unreported Income of Individuals
On 15 December 2011 the Law on Declaration of Assets and Unreported Income of Individuals came into force. According to this Law certain persons are obliged to file declarations on their assets reflecting situation as at 24:00 on 31 December 2011.
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Declaration on assets must be filed by the persons who are tax residents of Latvia and citizens of Latvia or foreigners residing in Latvia on the basis of permanent residence permits or permanent residence certificates. Declaration shall not be filed by foreigners residing in Latvia on the basis of temporary residence permits, as well as by citizens of Latvia that are tax residents of another country. Latvian citizens who are not tax residents of Latvia and pay taxes on their income in another country must notify the State Revenue Service respectively. The following criteria trigger obligation to file the declaration:
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