Latvia becomes attractive for
establishing holding companies
To slightly rephrase
popular wisdom, business
is looking for a better tax
regime, as this helps a
company or group stem
the outflow of funds in the
form of taxes.
Some statistics
According to the official figures of foreign direct investment in the share capital of Latvian
companies over the period from 1991 to 2012,1 the absolute leader is Estonia with 807 million
lats, Sweden comes second with Ls 526m, including Ls 199m invested in the banking sector,
the Netherlands third (Ls 401m) and Cyprus fourth (Ls 291m). Russia lies seventh with Ls
209m. Germany (12th with Ls 101.5m) and Malta (13th with Ls 101m) are treading on each
other’s heels.
The actual owners of some of those foreign investments are living in Latvia, however there is
no publicly available data to confirm this. Among other things, the Latvian entrepreneur
prefers to invest in Latvia from another country, as this can reduce the tax charge (achieve a
lower rate) and defer the tax point (to when money is paid, rather than at the time of
transaction).
It is quite interesting to see Malta so high up on the list (13th out of 131 countries), right after
Germany. Malta is conquering the world with its especially attractive tax regime. And Latvia
has recently taken its first steps in the same direction.
Latvia hits the road in pursuit of happiness
In late 2011 the Latvian parliament passed significant amendments to the Corporate Income
Tax (CIT) Act, which, among other things, include provisions that will enable Latvia to
become an attractive country for establishing holding companies in 2013–2014.
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Latvia becomes attractive for
establishing holding companies
Share disposal
Income arising on the disposal of any shares other
than those in companies established in tax havens
will no longer attract CIT as from 2013. Accordingly,
losses will not be deductible for CIT purposes. The
law takes “shares” to mean shares in private and
public limited companies and cooperative societies,
as well as other documents that create a right to
receive dividends.
In fact the Latvian CIT Act is very liberal, as it does
not impose a minimum shareholding percentage
(10% in many countries including Malta) or a
minimum shareholding period, nor any other
restrictions. Even income from a 1% interest in a
company’s capital held for one month (speculative
income) will be exempt. Many countries classify
income arising on the disposal of shares held in the
short term (for less than a year) as taxable trading
income. This opens up opportunities for Latvia to
become an attractive country for establishing holding
companies and – like Estonia, Cyprus and Malta – to
attract foreign investment.
This allows a Latvian entrepreneur, who buys and sells various capital assets such as shares and
properties to achieve a lower tax rate on income earned, to use the saving for new investment,
and to put off paying tax to a later date. In other words, instead of paying 15% personal income
tax (PIT) on capital gains when an asset is sold, he can pay 10% PIT when a private limited
company he owns pays him dividends.
Dividends
According to the current wording of the CIT Act, tax is payable on dividends received from
Latvian companies enjoying CIT relief, such as free-port companies, from foreign (non-EEA)
companies in which a Latvian taxpayer owns less than 25% of capital and voting power, and
from tax havens. Only dividends received from tax havens will attract CIT as from 2013.
Only dividends paid to EU and EEA companies are currently free of withholding tax, while
dividends paid to other countries are taxed at a rate of either 10% or 5%. Dividends paid to any
non-residents other than tax havens will be exempt as from 2014. This amendment is especially
significant if a Latvian company’s shareholder is incorporated outside the EU or EEA, for
instance in Russia or the USA. Yet dividends paid by Latvian companies to tax havens will attract
a higher rate (15% instead of the current 10%).
Interest and royalties
Interest and royalties paid to foreign companies will be free of tax (currently 10%/5% or 15%/5%
respectively) as from 2014.
Latvia becomes attractive for
establishing holding companies
What else is going to change?
There is currently a different treatment under the CIT Act for dealings in public EEA securities
(publicly traded shares and bonds as well as all types of investment fund certificates) and for
dealings in all other securities (including public securities of third countries such as Russia,
Ukraine and the USA). In other words, profits arising on the sale of EEA public securities are not
taxable, and losses are not deductible in the year of disposal or later. “Securities” is a broader
term than “shares” and includes bonds and debentures as well as shares.
As from 2013 profits arising on the disposal of any securities other than shares will become
taxable and losses deductible in the year of disposal. This is in fact the complete opposite of the
current arrangement: it will no longer matter whether they are public or other EEA securities,
but rather whether they are shares (within the meaning of the law) or other securities (including
publicly traded EEA bonds etc).
Also, the clause that allows a company to carry forward losses arising on the sale of securities for
use in subsequent years will cease to apply as from 2013. This is both good news and potentially
bad news. It is good news in the sense that a company’s losses arising on the disposal of all types
of securities (other than shares) can be offset against taxable income generated by its other lines
of business. Yet this is potentially bad news for taxpayers that have accumulated substantial
losses on the sale of securities, because they can no longer be carried forward or offset against
profits arising on the sale of other securities as from 2013. Those losses will be forfeited unless
the Cabinet of Ministers’ rules for the application of the CIT Act include provisions that allow
accumulated losses on the sale of securities to be treated as “normal” tax losses and gradually
offset in subsequent years.
Conclusion
If you are currently contemplating how to arrange your group of companies and where to place
your holding company, then it is time to add Latvia to the list of potential countries. Latvia’s key
advantages are its very liberal legislation and comparatively low company formation and
maintenance costs.
Author:
Ingrida Dimina
Director, Tax and Legal Services, PwC Latvia
[email protected]
Direct: +371 67094424
Office: +371 67094400
www.mindlink.lv