As of 1 January 2019 Latvia has introduced controlled foreign company rules by amending the Corporate Income Tax Act. According to the rules a Latvian company has to apply the controlled foreign company rules, if it:

  • has qualifying holding in the foreign company (or has a permanent establishment abroad), and
  • the above foreign company has carried out non-genuine transactions the essential purpose of which is obtaining a tax advantage.

For the above artificial transactions the profit share (increase in the value of assets) of the foreign company or permanent establishment should be included in the Latvian holding company’s tax return. In applying this, the foreign company should calculate the profit share (increase in the value of assets) in proportion to the participation of the Latvian holding company in the share capital, voting rights or other rights of the foreign company, which ensures substantial participation or the right to participate in the distribution of the profit (increase of the value of assets).

What is qualifying holding company?

The criteria to qualify as a holding in a foreign company:

  • the Latvian company owns, directly or indirectly, more than 50% of the shares or voting rights of the foreign company.
  • the Latvian company is entitled to receive more than 50% of the profits of the foreign company.Controlled Foreign Companies Latvia

A foreign company is considered to be:

  • any foreign legal entity which is an independent taxpayer in the respective country;
  • any group of persons related to the contract established in accordance with the procedures specified in the law of the foreign state;
  • assets that have been transferred to another person under the contract in accordance with the procedures prescribed by the laws of the foreign state.

What is non-genuine transaction?

The non-genuine (artificial) transaction (including also a batch of transactions) is the transaction, the principal cause of which is to obtain tax benefits to the extent that a foreign company or permanent establishment would not assumed risks or purchased assets, if this foreign company were not controlled by a company, which undertakes significant management functions in relation to the risks assumed and assets used to obtain such income.

In other words, the Latvian company will have to apply the controlled foreign company rules, if it retains the functions related to the carrying out the transaction by its foreign subsidiary. The principle that the risks assumed and assets used should be separated from the functions undertaken in relation to this risk/asset, follows from the newest edition of the OECD transfer pricing guidelines. If the Latvian company wishes to shift the risk pertaining to the transaction (e.g. market risk) to another country, this means that it is not sufficient to establish a company in a low tax jurisdiction, without transferring a function related to such risk (e.g. sales manager), so the company with a secretary and nominal director will not do.


The CFC rules do not apply if the foreign companies or permanent establishments during the reporting year:

  • has generated profit not exceeding EUR 750 000;
  • has earned income not related to the sale of goods and services not exceeding EUR 75,000.

The exception refer do not apply to a foreign company or permanent establishment established in the low-tax jurisdictions.