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. Undistributed profit in Latvia is exempt from CIT
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.