On the 4th and 11th of July, 2017 the Cabinet of Ministers of Latvia approved a number of draft laws providing for the significant changes in the tax legislation of the country which will enter into force on January 1, 2018. The most significant of them will be the application of the CIT 0% rate for the reinvested profits. In other words, the enterprise will be subject to the corporate income tax only if it pays dividends or other payments for the purpose of actual distribution of the profits (conditionally distributed profit).

Therefore since 2018, the company's profits are exempted from CIT, but it has to pay 20% of the income tax from the amount of dividends. At the same time, the shareholders will not have to pay personal income tax (PIT). Although, according to the bill, the CIT rate is 20%, and the tax base should be divided by a factor of 0.8, the effective tax rate actually equals 25%. It is notably that CIT will be applied not only to the dividends in the traditional sense, but also to the "deemed dividends", which are considered a new concept in Latvian tax legislation, and comparable with the dividends to the costs. Here it is important to note that the last ones include the credits to the related companies, with the exception of cases provided for by law. The conditional dividends make up the reduction of the authorized capital (including in case of the liquidation of the enterprise), previously increased due to retained earnings, tax-exempt in accordance with the current CIT regime.

The new taxation system supports a number of existing tax benefits, as well as it provides for the possibility to distribute the profits "backdating" without paying 20% ​​of corporate tax and use accrued tax losses. As for the last ones, the companies will be allowed to use only 15% of CIT losses for a period of 5 years, beginning since 2018. These losses can facilitate in reducing the corporate tax on dividends, but not more than 50%.

Similarly, a slightly modified version of the best international advantages of Latvia will be retained: the received dividends will not be taxed within the framework of the Latvian legislation if they are taxable in the country of registration. The share disposals will not be subject to CIT unless the company has held the disposed-of shares for less than 36 months.

According to the new taxation system, the tax period will make up one month (some deviations are stipulated regarding the conditionally distributed profit that will be calculated and included in the tax return for the last month of the reporting year). That is, it is assumed that the tax returns for the previous month should be filed by the 20th of the current month. The companies which reporting period differs from the calendar year will be required to prepare an intermediate report as of December 31, 2017.

Rigensis Bank

Ukrainian clients of Latvian banks have received letters demanding to talk about his tax residence. These data are the local State Revenue Service promises to transfer FTS. Latvia Banks sent Ukrainians requirements to disclose tax and financial information about themselves.

In one of these letters, which received a bank customer Rigensis (have RBC), said that since January 1, 2016 Latvia acceded to the standard automatic exchange of financial information (Automatic Exchange of Information or AEOI). In a letter to his client Rigensis Bank warns that it must pass the data of the State Revenue Service of Latvia (SRS). And that, in turn, is obliged to send this information to the tax authorities of the relevant jurisdiction. In other words, in those countries where the owners Rigensis bank accounts - tax residents, written in the letter. The first reports on the new (opened in 2017) and large accounts (balance at 31 December 2015 of more than $ 1 million) Rigensis transmit SRS in 2017, stated in the letter. For all the rest - in 2018. At the same time Ukraine is likely to begin to exchange tax information with Latvia within the AEOI, said in response to the SRS request RBC spokesman.

The letter Rigensis Bank attached form, which must fill in the recipient. In it, among other things it is necessary to enter your tax residence and tax identification number. In completing this questionnaire Rigensis bank gives its clients a month. A spokesman for the Latvian bank Rietumu Eleanor Gajlish told that their clients must also report on their tax residency.

Identify their customers, banks are forced to because of the innovations in local legislation, says the press service of the State Revenue Service of Latvia. This refers to the rules of the Cabinet of Ministers № 20, which came into force in January 2016. It says that all Latvian financial institutions must determine which jurisdiction linked open their account. Press service of the State Revenue Service stressed that this requirement applies to all customers - not just to foreigners or Ukrainians specifically.

Baltic false start

Require customers Latvian banks are now, but to share tax information with Ukraine, the country will begin no earlier than 2018 - and if there is a bilateral agreement, says an international financial consultant FCP (Financial Management) Ltd Isaac Becker. While such agreements Ukraine does not have with any other country, he added. Partner UFG Wealth Management Dmitry Maples has no doubt that in 2018 Ukraine and Latvia will sign such an agreement. He added that up to this point FTS can only request information about specific accounts of citizens in Latvia.

"Demanding report on tax rezidentctve now Latvia is running ahead of the engine" - says Becker. He believes that since Latvia wants to improve its reputation. Local banks have repeatedly drawn attention not always money to the account they acted according to the rules, explains Becker.

However, Latvia is not the only country, which began collecting tax data in advance. In particular, such information is requested from existing clients, Swiss banks, said Maples of UFG Wealth Management. In addition, banks in Cyprus, Switzerland and the United Kingdom (although there is not a common practice) required to disclose tax information when opening an account, adds Becker. The AEOI standard says that they have every right to do.

Penalties for failure to report to the bank last establishes himself, said the press service of the State Revenue Service of Latvia. The letter Rigensis Bank said that such customers may refuse further cooperation. In addition, the bank will inform the State Revenue Service on customers who do not have documented their accounts, it said in the same letter.

If you do not respond to the question of tax residence, bank, obviously just to close your account, notice of Maples UFG Wealth Management. Difficulties at the client may also arise if the bank compares the already known and new information about the customer and the final picture will be controversial, adds Gajlish.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

It has been signed an agreement on avoidance of double taxation between Hong Kong and Latvia on 13 April, Riga. This is the 35th contract that Hong Kong has signed with its trading partners. The Treaty establishes a clear allocation of taxation rights between the two jurisdictions and it helps investors better assess their potential tax liabilities.

Hong Kong - Latvia

It has been signed an agreement on avoidance of double taxation between Hong Kong and Latvia on 13 April, Riga.

This is the 35th contract that Hong Kong has signed with its trading partners. The Treaty establishes a clear allocation of taxation rights between the two jurisdictions and it helps investors better assess their potential tax liabilities.

In the absence of an agreement on avoidance of double taxation the profits of Hong Kong companies which operate through a permanent establishment in Latvia, were taxed in both places if the income comes in Hong Kong. Similarly, revenues received Latvian residents in Hong Kong are subject to tax in Latvia.

Under the new agreement, the tax rate in Latvia for royalty (currently different rates to 23 per cent in some cases) will be reduced to zero percent for companies and a maximum of three percent in all other cases. The tax rate on dividends will be reduced to zero percent for companies and up to 10 percent in all other cases.

The avoidance of double taxation agreement between Hong Kong and Latvia also included an article in accordance with international standards for the exchange of information in tax matters.

The Agreement will enter into force after completion of ratification procedures on both sides.

Author: Sergey Panov

managing partner Finance Business Service

Corporate tax in 2016

UK - The Corporation Tax main rate for 1 April 2016 is set at 20%. This rate will fall to 19% for the year beginning 1 April 2017, and to 18% for the year beginning 1 April 2020.

Hong Kong - Profits tax levied at rate of 16,5% for companies carrying on business in Hong Kong (and 15% for unincorporated businesses) on relevant income earned in or derived from Hong Kong.

Ireland - Standard corporation tax rate on trading income is 12,5% and 25% on non-trading income.

Cyprus - Corporate tax rate is 12,5%. Certain types of income subject to Special Contribution for Defense at rates of 17%(dividends), 30%(interest) and 3%(rents).

Latvia – Rate is 15%.

Belize - All non-CARICOM residents, who have any taxable receipts originating from Belize, or in respect of any service provided in Belize, are required to pay business taxes as follows: Dividends - 15%, Insurance Premiums - 25%, Interest on Loans - 15%, Management fees - 25%, Rental of plant and equipment - 25%, Technical Services - 25%.

British Virgin Islands - No income tax.

United Arab Emirates - Income tax decrees currently enforced on oil and gas companies and branches of foreign banks. Oil and gas companies subject to rates of 50%55%, depending on Emirate.

Panama - Standard rate is 25% of net income, alternative minimum tax is 1,17% of gross taxable income.

Seychelles - Taxable income up to Seychelles revenue commission (SCR) 1 million taxed at 25%, income above SCR 1 million taxed at 33%. Businesses with turnover below SCR 1 million taxed at 1,5% on turnover, unless they opt for normal regime. Special rates apply to certain businesses.

Czech Republic - Rate is 5% for basic investment funds and 0% for pension funds (with certain exemptions).

Estonia - rate is 20%.

Author: Sergey Panov

managing partner Finance Business Service