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Check your loans to related parties

From 1 January 2018, signficant changes in Corporate Income Tax (CIT) law come into force. The changes are a part of changes taxation principles that affect several taxes referred to as "Tax Reform". According to the new CIT law loans issued to related parties may be treated as conditional profit distribution and taxed at the rate of 25% from the amount transferred in the month of transfer.

According to Clause 11 (1) of the CIT law, loans issued to related parties is considered as conditional profit distribution and is taxes at the rate of 25% from the amount transferred as loan.

Clauses 11 (3) and 11 (4) provide several exceptions from this rule.

To the companies that plan to issue loans to related parties we recommend to run each loan through the list of the exceptions in order to understand if such loans should be taxed.

The list of exceptions is as follows:

  • loans issued by a shareholder [Clause 11(3)1)];
  • loans issued to the company's representative office abroad [Clause 11(3)2)];
  • loans issued by a company in the amount equal to the amount received by the company from a non-related party [Clause 11(4)1)];
  • loans issued in the year when the company does not have undistributed prior year's undistributed profit [Clause 11(4)2)];
  • loans issued in the reporting year in the amount which does not exceed registered share capital at the beginning of the reporting year less total amount of loans issued and not received in the prior years, excluding loans mentioned in Clauses 11(4)1), 11(4)4) and 11(4)5). [Clause 11(4)3)]
  • loans with maturity less than 12 months [Clause 11(4)4)];
  • loans issued by a company that received a Social company status that comply to certain conditions [Clause 11(4)5)].

At the date of writing this text the law text was not available in the site www.likumi.lv. We used the law text published on www.vestnesis.lv/op/2017/156.2.

Starting from 2018, CIT is paid not annually but at profit distribution

At the moment, and until the end of 2017, companies pay Corporate Income Tax (CIT) in the amount of 15% every year when they have taxable profits. As a part of Tax Reform, from 2018 CIT is payable at profit distribution. This means companies do not have to pay CIT every year when they have taxable profits. Instead, they have to pay tax at the rate of 20% when they distribute dividends.

For profit making companies and international groups, it becomes very favorable to use a Latvian company for accumulation of profits. On the contrary, the loss-making companies suffer, since they have only 5 years to use their accumulated tax losses and they will be able to use only 50% of their accumulated tax losses.

Currently, before getting to the owner Company's profits are taxed at the effective rate of 23.5%. Profit is taxed at 15% CIT and then the remaining profit is taxed at 10% dividend tax. From 2018, these two taxes are replaced by 20% CIT that is payable at distribution of dividends. So, effectively tax rate has been decreased and payment is delayed until distribution date. This means that it is favorable to keep profits undistributed and reinvest them.

To avoid tax avoidance the law foresees that the tax is payable not only at distribution of dividends but also other items that can be deemed as indirect profit distirbution. In the law such items are classified as:

  • expenses equated to dividends [Clause 4(1)b]
  • conditional dividends [Clause 4(1)c];
  • conditional distribution of profits [Clause 4(2)];

Main items that are considered as profit distribution can be specified as follows:

  • non-business expenses [Clause 4(2)2)a];
  • doubtful debtors [Clause 4(2)2)b];
  • interest payments under thin capitalisation conditions [Clause 4(2)2)c];
  • issuing loans to related parties (with some exceptions, see Artilce Check your loans to related parties) [Clause 4(2)2)d];
  • transations not at the arms-length principle [Clause 4(2)2)e];
  • benefits to employees appropriated to non-residents permanent establishment in Latvia [Clause 4(2)2)f];
  • liquidation quota [Clause 4(2)2)g];
  • decrease of share capital [Clause 7(1)1)b];

At the date of writing this text the law text was not available in the site www.likumi.lv. We used the law text published on www.vestnesis.lv/op/2017/156.2.

Taxes on the Board Members' alleged income

A company has to pay payroll tax from minimal salary in a month when both of the following conditions applies:

  • the company does not have any employees who receive at least minimal salary;
  • the company has monthly sales exceeding 5 minimal salaries.

For 2018, the minimal salary is EUR 430 a month, therefore monthly sales treshold is EUR 2,150.

In this case, the company will have to pay approximately EUR 235 for the month when the above conditions apply. The aforementioned tax amount is calculated as follows:

Minimal salary: A 430.00
Employee's part of social security contributions (10.5%1 of A): B 45.15
Taxable income: A-B 384.85
Corporate income tax (23%) of A-B: C 88.52
Social Security Contributions (34.09%1) of A: D 146.59
Total tax: C+D 235.11

It is important to know that if a company has several board members, by default the tax should be paid on each of the board members.

There is a legal way to limit the tax to one board member. If this is applicable to you, please contact us for consultations and help.

1 Clause 18 (1) of the Latvian Law on Social Security. Law edit that sets in force on 1 January 2018.

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Requisites for tax payments

Corporate Income Tax

Beneficiary: Valsts Kase
Beneficiary's Bank: Valsts Kase
SWIFT: TRELLV22
IBAN: LV08TREL1060000121000
Purpose of payment: UIN par [year or month]

Personal Income Tax

Beneficiary: Valsts Kase
Beneficiary's Bank: Valsts Kase
SWIFT: TRELLV22
IBAN: LV91TREL1060000110000
Purpose of payment: IIN par [month]

Social Security Contributions

Beneficiary: Valsts Kase
Beneficiary's Bank: Valsts Kase
SWIFT: TRELLV22
IBAN: LV37TREL1060000220000
Purpose of payment: VSAOI par [month]

Value Added Tax

Beneficiary: Valsts Kase
Beneficiary's Bank: Valsts Kase
SWIFT: TRELLV22
IBAN: LV37TREL1060000511000
Purpose of payment: PVN par [month or quarter]

Requirement to register a business location (struktūrvienība)

According to Latvian law "On taxes and duties" (likums Par nodokļiem un nodevām") Clause 15.1 7 and MK Rules Nr. 537 "Rules on taxpayers and taxpayers business location registration in SRS" dated 22 September 2017 (2015. gada 22. septembra MK Noteikumi Nr. 537 "Noteikumi par nodokļu maksātāju un nodokļu maksātāju struktūrvienību reģistrāciju Valsts ieņēmumu dienestā") companies have to register in SRS each location where they conduct business. This means that if a company has any operations outside its legal address, it needs to register it in SRS as a business location.

So, please check the following non all-inclusive list of most common types of operations that may require registration of a business location, if they are not conducted at a legal address:

  • office;
  • warehouse;
  • shop;
  • internet site accepting payments;
  • location of fixed assets rented or used for provision of services to Clients, e.g.,
    • coffie machines;
    • authomatic car washes
    • power and heating stations

The business location should be registered within 10 days from the date of taking respective decision on creation of such business location.

See more information on SRS website Struktūrvienības reģistrācija.

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