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];