{"id":7546,"date":"2017-09-20T08:46:46","date_gmt":"2017-09-20T08:46:46","guid":{"rendered":"http:\/\/breicis.com\/en\/?p=7546"},"modified":"2023-10-22T10:07:14","modified_gmt":"2023-10-22T10:07:14","slug":"changes-in-latvia-tax-laws","status":"publish","type":"post","link":"https:\/\/breicis.com\/en\/changes-in-latvia-tax-laws\/","title":{"rendered":"Changes in the Latvia tax laws effective as of 1 January 2018"},"content":{"rendered":"

Corporate income tax<\/strong><\/h2>\n

In the new Latvian Corporate Income Tax Act\u00a0(hereinafer – the Act) a conceptually new regime for payment of the corporate income tax was established. The act intends to postpone payment of the tax until the profit is distributed or in other way redirected to the expenses that do not ensure further development of the taxpayer, i.e. taxation is transferred from the moment of the derivation of profit to the moment of the distribution of profit. Thus the tax shall be paid notwithstanding the amount of income gained within the year only in a case that the taxpayer distributes profit in dividends or comparable expenses, carries out tasks unrelated to economic activity, increased interest payments, provides loans to related persons, etc.<\/p>\n

Taxpayers<\/strong><\/h3>\n

The tax is paid only by inland companies (including partnerships), institutions funded by the state or municipality\u2019s budget, the income of whose economic activity are not intended for the budget, permanent establishments and foreign corporate companies and other foreign persons that generate\u00a0income in Latvia.<\/p>\n

The tax is paid also by individual (family) companies (including farms and fisherman\u2019s households) that draw up annual report according to the Act on the Annual Financial Statements and Consolidated Financial Statements.<\/p>\n

However, the tax is not paid by physical entities (individuals), societies and endowments, religious organizations, trade unions, political parties, as well as private pension funds, investment funds, alternative investment funds, etc.<\/p>\n

The Act maintains the special tonnage tax payment routine.<\/p>\n

Taxable base<\/strong><\/h3>\n

Article 4 of the Act defines base taxable by enterprise income tax, made up of distributed profit, and conditionally distributed profit.<\/p>\n

As a distributed profit are considered the following:<\/p>\n

1) calculated dividends, including extraordinary dividends;<\/p>\n

2) expenses equalized to dividends;<\/p>\n

3) conditional dividends (calculated according to the Article 7 of the Act).<\/p>\n

Dividends received from other corporate companies are not liable to a tax, thus the standards of the Act provide for a possibility to lower the dividends included in the taxable base of the taxation period, in an amount that the taxpayer, within the relevant period, has received dividends from another taxpayer. In addition, the taxpayer is entitled to attribute the margin which originates if the sum of received dividends is higher than the sum of dividends calculated within the taxation period that is included in the liable base, for the next taxation periods.<\/p>\n

Considering that separate subjects distribute profit, the expenses of which, are not defined as dividends for the participant, a wider list of dividends has been included in the Act, meaning, expenses equalized to dividends in relation to profit of cooperative partnership, individual (family) company and farms or fisherman\u2019s household profit, part of partnership\u2019s profit disbursement, and permanent establishment of a non-resident.<\/p>\n

The conditionally distributed profit included in the taxable base (i.e. is taxed), is made up of:<\/p>\n

1) expenses not related to economic activity, calculated according to Article 8 of the Act;<\/p>\n

2) insecure debtors\u2019 debts, calculated according to Article 9 of the Act;<\/p>\n

3) increased interest payments, calculated according to Article 10 of the Act;<\/p>\n

4) loan to the related person, calculated according to Article 11 of the Act;<\/p>\n

5) income that the taxpayer would have received or expenses that the taxpayer would not have incurred if the commercial and financial relationship would had been formed or established according to the provisions that would be valid between two independent persons and if among these related persons (one of which is the taxpayer), the value of the transactions concluded would be consistent to the market price (value), the methods for calculation of which, are established by the Cabinet of Ministers.<\/p>\n

6) goods that the non-resident allocates to their employees or members of the board (council), notwithstanding weather the beneficiary is a resident or a non-resident, if they are attributed to operation of a permanent establishment in Latvia;<\/p>\n

7) liquidation quota.<\/p>\n

The taxable base includes (i.e. the tax is paid) expenses unrelated to ensuring economic activity and other expenses listed in Iten 2 of second Part of Article 4 of the Act. The taxable base does not include (i.e. is not taxed) representational expenses and expenses for events for sustainability of personnel, not exceeding five percent of pre-taxation year\u2019s gross wage of which the national social insurance contributions have been paid, if these expenses are accounted, divided from other expenses.<\/p>\n

Tax rate<\/strong><\/h3>\n

The tax is not payable on undistributed profits.<\/p>\n

The tax on calculated dividends are imposed at the level of a company, applying a 20 percent tax rate, i.e. dividends received by physical entities (individuals) shall not be imposed with personal income tax. The rest profit that is diverted for covering such expenses that do not ensure a further development of the company, shall also be imposed with a 20 percent rate.<\/p>\n

Note that in the calculation of the tax, determining the taxable base, the taxable object\u2019s value is divided at a 0.8 ratio. For example, if the dividends calculated for payment are 100, the tax shall be 25 (100 \/ 0.8 x .02).<\/p>\n

Tax rate of a non-resident\u2019s income is determined according to Article 5 of the Act. The tax, at the moment of payment, has to be withheld from\u00a0such payments to non-residents:<\/p>\n

1) reimbursement for managing and advisory services \u2013 20 percent of reimbursement amount;<\/p>\n

2) from a reimbursement for sale of immovable property \u2013 three percent of the reimbursement sum;<\/p>\n

3) payments to persons located, formed or established in low-tax or tax-free states or zones \u2013 20 percent of payment sum.<\/p>\n

Taxation period<\/strong><\/h3>\n

In general case, the taxation period is a calendar month. Meaning, the tax declaration has to be submitted and tax paid once a month \u2013 until the 20th<\/sup> date of the next month.<\/p>\n

For separate taxpayers, the taxation period is a quarter if, according to Article 8 of the Accounting Act, they are entitled to record source documents once per quarter.<\/p>\n

Tax relief<\/strong><\/h3>\n

Tax relief for contributors is set out in the Act (Article 12) that can be applied by a taxpayer who donates to a public service organization, budget institution or a state corporation that carries out the state\u2019s culture functions delegated by the Ministry of Culture. The taxpayer may choose one of these tax reliefs:<\/p>\n

1) not to include the donated sum into taxable base of the taxable period, but no more than the amount equal to five percent of the profit of previous financial year after calculated tax;<\/p>\n

2) not to include the donated sum into base taxable by enterprise income tax of the taxable period, but no more than the amount equal to two percent of the total employees\u2019 gross wage payment, of which national social insurance contributions have been paid within the previous financial year;<\/p>\n

3) decrease the calculated enterprise income tax of the dividends calculated in the taxation period of the previous financial year by 75 percent of the donated sum, but no more than 20 percent of the calculated enterprise income tax sum for the calculated dividends.<\/p>\n

Limitation mentioned in item 1, 2 or 3, applies to the total amount of donations within the financial year.<\/p>\n

Tax relief for taxpayers carrying out the agricultural activity (Article 14), is applied by lowering the taxable base of the financial year by 50 percent of the sum received as state aid for agriculture or European Union\u2019s aid to agriculture and development of the country.<\/p>\n

A taxpayer is entitled to lower the amount of dividends included in the taxable base of the taxation period for income gained from the sale of direct participation, if the period of holding these shares is at least 36 months at the moment of the sale(Article 13).<\/p>\n

The taxpayer, the enterprise income declaration of which on 31 December 2017 shows a loss, may lower the tax calculated for dividends of the financial year (starting in 2018) by the sum calculated in 15 percent amount of the total loss sum not covered. If this sum is not completely used in 2018, the remaining sum of loss may be applied to the tax which is calculated from dividends in the next four financial years. The sum of mentioned tax decrease cannot exceed 50 percent of the tax calculated from the dividends in the relevant financial year (Paragraphs 13 and 14 of transitional provisions).<\/p>\n

Taxpayer whose aided investments project has been accepted by the Cabinet of Ministers by 31 December 2017, in accordance with the Article 17.2 <\/sup>of the Corporate Income Tax Act, is entitled to continue to apply the unused enterprise income tax discount by decreasing the tax from dividends during the taxation period (Items 20-22 of transitional provisions).<\/p>\n

The corporation is entitled to lower the tax calculated from dividends for the financial year by the sum of enterprise income tax\u2019s discount, calculated in accordance with the Act on Application of Taxes in Free Ports and Special Economic Zones (Items 23-25 of transitional provisions).<\/p>\n

Submission of tax declaration<\/strong><\/p>\n

The taxpayer submits a single declaration to the SRS for the period from January to June of 2018, and pays the enterprise income tax by 20 July 2018. During the rest months of 2018, the declaration is submitted and taxes paid monthly by the 20th<\/sup> date of next month.<\/p>\n

If the taxpayer does not have a taxable object in the month, it is entitled not to submit the declaration (excluding declaration for the last month of the financial year).<\/p>\n

If the taxpayer has not submitted a declaration for taxation period by 20th<\/sup> date, it is considered that that during the taxation period, the taxpayer\u2019s taxation period has not made a base taxable with enterprise income tax, and declaration is submitted, but the declaration submitted after the 20th<\/sup> date is considered a correction of the declaration of taxation period, except declaration for the last month of financial year.<\/p>\n

The taxpayer whose financial year does not comply with the calendar year, draws up a financial (mid-period) statement and enterprise income tax declaration for calculation of tax:<\/p>\n

1) in accordance with provisions of the Corporate Income Tax Act and according to the Cabinet of Ministers\u2019 regulations from 29 September 2015, no.548 \u201cRegulations on declaration of enterprise income tax taxation period and advance payment calculation\u201d for the period from the start of the financial year to 31 December 2017 and submits it to the SRS by 30 April 2018;<\/p>\n

2) in accordance with the Corporate Income Tax Act together with balance and calculation of profit or loss for the period from 1 January 2018 until the end of the financial year, is submitted to the SRS, but no later than four months after the financial year has ended.<\/p>\n

Tax advance payments<\/strong><\/h3>\n

The Act does not provide for paying the advance payment except during the transitional period from 1 January until 30 June 2018.<\/p>\n

Taxpayer executes advance payment of enterprise income tax into the state budget until 20th<\/sup> date of each month for the period from 1 January to 30 June 2018 that corresponds with one-twelfth of the tax calculated for the taxation period of 2016 (without applying the discount to donators stated in Article 20.1<\/sup> of the Corporate Income Tax Act).<\/p>\n

The advance payments mentioned are taken into account when executing tax payment calculated in accordance with declaration for the taxation period from 1 January to 30 June 2018.<\/p>\n

Amendments to the Micro-enterprise Tax\u00a0Law<\/strong><\/h2>\n

On the 28 July 2017, Saeima adopted the Law on Amendments on Micro-enterprise Tax Law that was published on 8 August 2017 in \u201cLatvijas V\u0113stnesis\u201d No.156 (5983), and shall enter into force on 1 January 2018.<\/p>\n

    \n
  1. \n

    On Micro-enterprise turnover<\/strong><\/h3>\n<\/li>\n<\/ol>\n

    The set limitation of turnover for micro-enterprise taxpayers has been changed. The acceptable turnover in a calendar year cannot exceed 40\u00a0000 euros<\/em>.<\/p>\n

    Law\u2019s transitional conditions state that the micro-enterprise taxpayer is allowed in the taxation years 2018 and 2019 to not apply the 20 percent micro-enterprise tax rate for exceeding the turnover limitation up to 52\u00a0000 euros<\/em> if the micro-enterprise taxpayer\u2019s pre-taxation yearly turnover or its turnover that exceeded 40\u00a0000 euros <\/em>before the pre-taxation year.<\/p>\n

      \n
    1. \n

      For employing an employee in a micro-enterprise<\/strong><\/h3>\n<\/li>\n<\/ol>\n

      A physical entity as an employee of micro-enterprise taxpayer can only be employed in one micro-enterprise. From 1 January 2018, the State Revenue Service shall not register a micro-enterprise employee as a worker in a micro-enterprise if he is employed in another micro-enterprise.<\/p>\n

      The State Revenue Service has an obligation to inform the micro-enterprise<\/em><\/strong> taxpayers about employees that are also employed with another micro-enterprise<\/em><\/strong> taxpayer on 31 December 2017 in the Electronic Declaration System.<\/p>\n

      If the micro-enterprise taxpayer\u2019s employees, who are employed in several micro-enterprises at the same time on the 31 December 2017, shall be employed in such a way in 2019, then while calculating the micro-enterprise tax, the micro-enterprise shall add two percentage points to their 15 percent micro-enterprise tax per every such employee, and starting 2020, shall lose their status of micro-enterprise taxpayer.<\/p>\n

      The essential amendments in the Law on Personal Income Tax<\/strong><\/h2>\n

      On 28 July 2017, the Saeima adopted the Law on Amendments of the Law on Personal Income Tax that shall enter into force on 1 January 2018.<\/p>\n

      Progressive personal income tax rate<\/strong><\/p>\n

      1. The tax rate that has to be paid for the taxable minimum is:<\/p>\n