Latvia has already been selected by several multinationals groups as a location for their shared service centres (finance, IT, back-office functions) due to certain non-tax attributes (location in EU, available English speaking labor), and mainly due to the fact that it is considered as being far-less-expensive location if compared with more developed economies. To create Latvia’s recognition as a location for holding companies, the Latvian parliament has passed substantial amendments to corporate tax legislation aiming to compete with other commonly known holding companies jurisdictions in Europe.
Latvian holding company regime applies fully as from 2014. It is simple, with low compliance costs, easy to manage and does not require complex planning. This article will summarize the key tax and non-tax attributes that Latvia can provide and which are important when considering potential locations for a holding company.
A holding company is usually defined as a company that owns shares in other company or companies. Holding companies are often used by multinational groups to centralize the management function, to improve the treasury management (e.g. via cash pooling and allocation of profits) or to hold important assets (e.g. trademarks, licenses, and similar property). A holding company can also be a key component to increase a company’s tax efficiency and, in fact, usually, the tax benefits are considered as a decisive factor for creating a holding company. Thus, the investors’ decision is usually based on the set of tax and other considerations.
A “Wish List” of an attractive location for a holding company
- corporate income tax rate
- Access to strong network of double tax treaties and EU Directives
- No income tax on dividends, interest and royalties received by a holding company
- No income tax on capital gains
- No withholding tax (WHT) on dividends, interest and royalties paid to a holding company
- No witholding tax on outgoing dividends, interest and royalties paid by a holding company
- No local stamp duties, capital duties or similar taxes
- Anti-haven rules
- Tax efficient exit.
As from 2013/2014 Latvia’s tax laws provide most of these tax attributes as discussed further.
The corporate income tax rate
As of 1 January 2018, Latvian companies will apply a conceptually new Latvian corporate income tax. The new Latvian corporate income tax is payable upon the distribution of profits only. Until the Latvian company keeps the profits, 0% tax is payable. In other words, Latvian company does not pay tax on the annual profits until it distributes dividends, deemed dividends or notional profit
EU directive and double tax treaties
Under the terms of the EU parent/subsidiary directive, if a holding company owns at least 10% of the capital of another EU company, no WHT is levied on dividends paid by the subsidiary to its parent company. To qualify for the exemptions provided by the EU directives, tax residence in the EU is required. Companies should be subject to taxation in their jurisdiction and should agree with the legal form as prescribed for each country.
Currently, Latvia has concluded 64 double tax treaties (DDT), of which 56 conventions have been signed and 54 conventions are currently effective for application. DTT provide favorable WHT rates on payments made by entities outside EU. Most of the DTT ensures that WHT levied by the subsidiary does not exceed 5% on dividend payments provided that Latvian HC owns at least 25% of the capital of another company. The WHT rate on interest payments made to Latvian HC shall not exceed 10% based on provisions of DTT, while WHT on royalties is limited to 10%.
Tax credit in Latvia can be claimed on foreign withholding tax suffered via reduced tax payments in Latvia.
However, for foreign individual shareholders who are holding shares in a Latvian company upon the distribution of profit, the tax payable in Latvia will most likely not be credited against the dividend tax payable in their residence countries.
Income tax on dividends, interest and royalties received by Latvian HC
Since the main purpose of the HC is improvement of capital flow, the most important tax issue is availability of participation exemption (i.e. tax free dividends) rules. As from 1 January 2013 all dividends are exempt from taxation in Latvian HC but with the restrictions that remitter of dividends is a corporate income tax payer in the country of residence and is not registered in black listed jurisdiction. Dividends received from entities in tax haven countries are subject to 20% corporate income tax.
To apply exemption there are no restrictions on minimal shareholding or a holding period or shareholding.
A Latvian company can reduce the tax base by the capital gains the company has earned from the sale of shares, if the Latvian company has held the shares for at least 36 months at the moment of the sale. Of course, if a Latvian holding company sells the shares which it has owned for less than 3 years, the company should not pay tax. However, if the company has held the shares for 3 years, the company can distribute the capital gains as dividends tax-free.
In all other circumstances capital gain on the disposal of a capital asset is treated as ordinary income and is subject to a 20% corporate income tax only if profit is distributed.
Similarly, gains on disposal of securities quoted on the regulated markets of the EU or EEA countries and investment certificates in EU and EEA open-end investment funds are exempt from taxation in Latvia. Thus, Latvian company could be used for trading of such securities as a profit from such activities is exempt from taxation in Latvia.
Gains on the disposal of other investments are taxed at regular corporate income tax rate of 20%. Thus, it is recommended that such assets are disposed via sale of shares.
Repatriation of profit
To create an attractive tax regime in Latvia, WHT on payments made by Latvian entities are gradually removed:
- There is no withholding tax on dividends paid to foreign entities
- There is no withholding tax on interest payments made to foreign entities, if it’s within the limits that are set in Latvian legislation
- And there is also no withholding tax on royalty payments made to foreign entities
The exemption from withholding tax on dividends, interest and royalties is not applied on payments made to entities in tax haven countries. These payments will be subject to 20% WHT. According to new corporate income tax if dividends are paid to individuals (residents or non-residents) the personal income tax is not being deducted anymore. However, the interest income is taxed at 20% rate.
Local stamp duties, capital duties or similar taxes
Unlike other countries, Latvia charges no stamp duty on share capital payments, apart from small stamp duties to the Enterprise Registry. Sale of real estate however is subject to 2% stamp duty, which (in case of non-residential building) is capped at EUR 42,686. Planning options are available to minimize the amount of stamp duty.
Controlled foreign corporation, thin capitalization
Latvian corporate income tax law does not provide CFC rules as only actual income is taxed and not consolidated profit.
Certain holding company jurisdictions have thin capitalization rules pursuant to which too high debt to equity ratio may prevent the HC from being deemed a structure to which the participation exemption rules apply. Latvian laws also impose the debt-equity ratio which is fixed at 4 to 1. According to the new rules, the excess interest over allowable is the notional profit distribution subject to tax (should be added to tax base).
However, thin capitalization rules do not apply to the loans received from the credit institutions (in Latvia, EEA or double tax treaty country) and other financing received from specialized finance institutions. Moreover, the new thin capitalization rules do not consider the average bank credit interest rates anymore. In practice this means that for the loan financing the shareholder should structure the adequate share capital and should comply with the arm’s length value of the loan interest.
Anti-haven rules (applicable to offshore companies)
Historically Latvia has established list of tax-haven countries and territories, which now comprises 25 locations and include most of tax haven countries and locations with certain exceptions. The payments to residents located in these countries and locations are subject to 20% WHT. WHT however does not apply, if specific permission is granted by the tax authorities or if goods of origin of tax haven country have been purchased.
Full list of tax havens is prescribed by the Cabinet of Ministers Regulations of 7 November 2017 No. 655 and is available here.
Tax efficient exit
If a foreign investor decides to close the Latvian operations, there is no specific exit taxes payable. Sale of Latvian HC is neither subject to Latvian WHT nor capital gains tax. However, if Latvian real-estate company is sold (more than 50% of its assets value is real estate in Latvia), 3% WHT may apply. This WHT may be effectively avoided by prior planning.
If the operations of Latvian entity are transferred toanother countryy, transfer-pricing aspects of the transaction should be considered to eliminate potential disputes with the tax authorities.
Advance rulings and clarifications from the tax authorities could be obtained within a month for free of charge.
Advanced transfer pricing agreements are also available from the tax authorities for a fixed fee of EUR 7,114.
The desired non-tax attributes for a HC location would usually include:
- Sound standing in the international and business community
- Politically and economically stable environment
- Ease of incorporation and closure of operations
- Minimal reporting requirements (accounting, consolidated accounts, audit)
- Minimal substance requirements and administration costs
- Approachable location
- Availability of well qualified and trained workforce at competitive salaries
Further are discussed some of these attributes applicable in Latvia.
Political and economic environment
Although Latvia suffered a lot from the global crisis, it showed remarkable ability to balance its economy and achieve stable growth. This is accompanied with introduction of euro as from 2014, invitation to join OECD and positive ratings issued by international credit rating agencies (e.g. Standard & Poor’s, Moody’s).
Incorporation / closure
Latvian laws do not have specific holding company rules, for establishment and operation of the HC the same rules apply as for the regular companies.
The activities of the holding company are carried out through either limited company, which usually is established for business operations or public limited company, which are usually established to satisfy specific business requirements (e.g. banks, insurance companies and certain other businesses required to be registered as public companies) or because the entity intends to trade shares publicly.
Setting up a holding company in Latvia requires a minimum share capital of EUR 2,800 and no great expense is involved in its ongoing maintenance. Incorporation is easy and can be carried out within a week.
Latvian companies need to apply local accounting standards, which are generally in line with IFRS. Accounting registers should be maintained in euros as from 2014.
Statutory audit is required only for companies if at least the following two criteria are exceeded:
- Balance sheet of EUR 400,000
- Turnover of EUR 800,000
- Average number of employees – 25
As from the above, Latvia can be considered as a reasonable location for a HC due to the attributes discussed above together with minimal substance requirements, availability of advance rulings and advanced pricing agreements, low maintenance costs. The fact that Latvia is not well-known location for holding companies in some cases may considered as advantage as may lead to less scrutiny by the tax authorities in other jurisdictions.
Latvian HC regime can be particularly useful for the following activities:
- For holding shares in a company, which intends to be sold without taxation
- As platform for new investments, especially if several investors are involved with minority shareholdings and each having its HC
- For centralizing management and back-office functions to benefit from new corporate income tax regime of 0% tax rate on undistributed profit.
- For cash pooling and centralizing financing
- As a tax-free platform for trading with or investing in listed securities traded in stock exchange located in EU or European Economic Area