Latvian parliament passed a new corporate tax law on 28 July 2017. The law will enter into force on 1 January 2018.
Unlike the current corporate income tax (CIT) regime, the proposed CIT regime is based on a cash-flow taxation model, which provides that CIT is payable at the moment of profit distribution (including deemed profit distribution). In the case of profit reinvestment CIT will not be applied. The applicable CIT rate will increase from the current 15% to 20%.
Under the new law, 20% tax will apply to dividends paid by a company, but personal income tax will not be charged on dividends received by individuals. The rest of the profit that is not reinvested will also be subject to the 20% corporate tax. The new Corporate Tax Law does not require companies to make advance tax payments, except for a transition period from January 1 to June 30, 2018, which will substantially improve companies’ cash flows.
The payment of corporate tax will be postponed until the moment a company’s profit is distributed or spent on other purposes that do not contribute to further growth of the company. The taxable period will be one calendar month, as compared to 12 months at this time. The law also incorporates several provisions intended to prevent tax evasion.
The Latvian State Revenue Service (SRS) on 08 August 2017 announced the Country-by-Country (CbC) reporting regulations, which were approved by the Latvian Cabinet in July following an amendment to the Law on Taxes and Duties to require CbC reports. The regulations are principally in line with BEPS Action 13.
A parent company of an international group that is tax resident in the Republic of Latvia must submit by 31 December 2017 to the State Revenue Service an overview of the group’s economic activities and finances in 2016. The SRS is inviting enterprises to notify the SRS before August 31 whether the report will be submitted as a parent company, an alternate company or as a multinational enterprise group entity.
In Latvia the obligation to prepare and submit a CbC report applies to a taxpayer who is a tax resident of the Republic of Latvia, if it is a parent company of the group and the consolidated turnover of the group is at least 750 million Euros. Also a tax resident of Latvia may be appointed as a substitute company for submission of the CbC report if there is an obstacle to the group parent company submitting a report in another country.
The CbC report for the previous year has to be submitted by December 31, 2017, using the form for completion of the report available in the Electronic Declarations System (EDS). The relevant form will be placed in the EDS during the fourth quarter of this year.
According to an IRS announcement on its website, the competent authorities of U.S. and Latvia have concluded an arrangement on the exchange of Country-by-Country Reports. The competent authority arrangement (CAA) for exchange of country-by-country reports is on the basis of a double tax convention (DTC). The agreement was signed on 21 June 2017.
Under the arrangement, the first fiscal year for which the U.S. and Latvia intend to exchange CbC reports is the fiscal years of MNE Groups commencing on or after January 1, 2016. The CbC report is intended to be exchanged as soon as possible and no later than 18 months after the last day of the fiscal year of the MNE Group to which the CbC report relates. CbC reports with respect to fiscal years of MNE Groups commencing on or after January 1, 2017 are intended to be exchanged as soon as possible and no later than 15 months after the last day of the fiscal year of the MNE Group to which the CbC report relates.
The Competent Authorities intend to exchange the CbC Reports automatically through a common schema in Extensible Markup Language (XML).
The Federal Council of Switzerland adopted the dispatch on a revised double taxation agreement (DTA) with Latvia on 28th June 2017 regarding taxes on income and capital. The dispatch was submitted to Parliament for approval.
Switzerland and Latvia signed a protocol of amendment to their DTA on 2nd November 2016. It contains several provisions from the OECD and G20 project to combat base erosion and profit shifting (BEPS project). Specifically, the protocol of amendment contains an abuse clause. This clause to prevent unwarranted claims of treaty benefits is consistent in its basic features with the abuse provisions agreed by Switzerland in most of its DTAs in recent years. Legal certainty will be increased for taxpayers with the inclusion of an arbitration clause. Furthermore, the DTA contains an administrative assistance clause in accordance with the current international standard for the exchange of information upon request. In particular, the agreement will introduce lower taxation of levies and distributed profits on qualified participations.
The Japanese Ministry of Finance issued a press release on 5 July 2017, announcing that the exchange of diplomatic notes between the Government of Japan and the Government of the Republic of Latvia for entry into force of the Convention between Japan and the Republic of Latvia for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (signed on January 18, 2017) has taken place in Tokyo.
On 7 June, the Foreign Minister signed, on behalf of Latvia, the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which is to close loopholes in the current bilateral tax treaties and lessen the opportunity for tax avoidance.
At the same time, the signing of the Convention also implies making amendments to a large number of bilateral tax conventions which are outdated and not adapted to cross-border operations of modern companies.
The government signed a Protocol amending the Agreement for the Avoidance of Double Taxation with Singapore on 20 April 2017. The signing took place in Washington D.C. between Senior Minister of State for Finance and Law, Ms Indranee Rajah, and Latvia’s Minister of Finance, Ms Dana Reizniece-Ozola.
The Protocol lengthens the threshold period for determining the presence of a permanent establishment, and lowers the withholding tax rates for dividends, interest, and royalties. These changes, and other changes, are expected to enhance cross-border investment, and boost trade and economic flows between the two countries.
The Protocol will enter into force after its ratification by both countries.