New corporate income tax in Latvia starting from 2018

The most significant change as from 2018 will be the application of tax exemption to reinvested profits
or, in other words, corporate income tax (CIT) will be paid only when a company pays dividends or
makes other payments with the aim of actual profit distribution. In the meanwhile, individuals who
receive these dividends will not be required to pay personal income tax.

New effective CIT rate is 20% from gross profit. However, since CIT will be applied to net payments in
order to calculate CIT payable to the budget the net amount of payable dividends or other payments
with the aim of actual profit, a distribution will be multiplied by 25%.

The following payments are subject to 25% CIT:
• dividends (also interim dividends),
• deemed dividends,
• non-business expenses,
• loans issued to related parties,
• interest payments subject to thin capitalization rules,
• bad debts to be written off,
• transfer pricing adjustments,
• liquidation quota.


Dividends and interim dividends are subject to 25% CIT rate.

Pass-through dividends
Dividends are not subject to tax if a company has received a respective amount of dividends from a
foreign entity which pays profit tax in the respective country (except for dividends received from
offshore companies) or if these dividends were subject to withholding tax in the respective country.

Distribution of profit accumulated before 2018
Distribution of profit (dividends) accumulated before 2018 is not subject to CIT. However, if such
dividends are paid to individuals then these dividends are subject to personal income tax at the
following rates:
• 10% personal income tax if dividends are paid in 2019 or 2020,
• 20% personal income tax if dividends are paid starting from 2021.
If dividends are paid by micro enterprise, then these dividends are always subject to personal income
tax at the rate of 20% regardless of whether these dividends are paid from profit accumulated before
or after 2018.


The following payments are considered to be deemed dividends, which are subject to 25% CIT:
• a decrease in the share capital (also in the case of company liquidation) that was previously
increased by retained earnings on which CIT was not paid under the new CIT regime,
• part of the share capital which was previously increased by retained earnings in case a company
becomes a payer of micro enterprise tax.


A number of nonbusiness expenses will be subject to 25% CIT.
Below are some examples of nonbusiness expenses stipulated by the law:
• any expenses which reduce turnover or taxable base which are incurred on company’s or
shareholder’s own initiative,
• costs of employees’ leisure activities which have not been taxed with payroll taxes,
• gifts or loans transferred to gifts,
• donations exceeding prescribed limits,
• costs of assets acquired starting from 2018 which is not used for company’s business
• depreciation of assets acquired before 2018 which are not used for company’s business
• representation expenses and HR motivation costs exceeding 5% of the gross salary fund in the
previous year,
• cost of representatives’ cars,
• penalties and late payment interest,
• consumed fuel exceeding prescribed limits,
• bad debts write-off.


Loans issued to related parties are treated as deemed profit distribution and are subject to 25% CIT.
This provision, however, does not apply to:
1) the loans issued by a shareholder to its daughter companies,
2) the loans issued by a company to its permanent establishment,
3) a number of loans issued during the year, if there is no retained profit from previous years,
4) a number of loans issued which does not exceed the amounts of loans received from
unrelated parties,
5) short-term loans (up to 12 months),
6) a number of loans issued during the year so that they do not exceed the equity value as at
the beginning of the year, which is decreased by retained earnings, a non-current asset
revaluation reserve and other reserves which have not originated from profit distribution.
At the moment when an issued loan that has been taxed with 25% CIT is repaid, the taxpayer is
allowed to reduce the taxable amount to the extent of the repaid loan.


As of 2018, the following thin capitalization rules will apply:
1) the debt/equity ratio exceeds 4 to 1,
2) the amount of interest paid exceeds EUR 3 million and it exceeds 30% of EBITDA.
If any of the thin capitalization rules is exceeded, the interest payment will be treated as deemed
dividends and will be subject to 25% CIT.
The thin-capitalization rules do not apply to interest on loans obtained from credit institutions that are
residents of the EU or the European Economic Area (EEA) or a country with which Latvia has entered into a double tax treaty and the relevant financial institution provides crediting or financial leasing services and is under the supervision of credit institutions or financial monitoring agency.


Distributed profit from the sale of shares (except for shares of offshore companies) is not subject to
CIT unless the company has held the relevant shares for less than 36 months. The exemption will not
apply in case the main purpose of setting up of the taxpayer or the structure is to benefit from the
holding regime (i.e. tax optimization or avoidance of taxes has taken place).
Tax exemption will not be applied to profits from the sale of financial instruments (e.g. investment
fund notes, securities, bonds, etc.) as well as to royalties and interest received.


Losses accrued till 31 December 2017 may be utilized over the following five taxation years (i.e. till
Companies may use 15% of these losses to decrease CIT payable for dividends but not more than 50%
of CIT payable on dividends.


Companies will be allowed to apply one of the following tax incentives for donations to public benefit
• to decrease CIT payable on dividends by 75% of the donated amount but not exceeding 20% of
CIT payable, or
• to make tax free donations not exceeding 5% of the profit from the previous year; or
• to make tax free donations not exceeding 2% of the gross salary fund.
The aforementioned tax rebate is also applied in case donations are made to non-governmental
organizations registered in a member state of the European Union or the European Economic Area
with which Latvia has concluded a double tax treaty.


Interest payments
There are no changes with respect to interest payments, i.e., no withholding tax will be imposed on
interest payments however thin capitalization rules (see above) will be observed.

Management and consulting fees
Management and consulting fees paid to non-residents are subject to 20% withholding tax.
This tax may be reduced or eliminated subject to provisions of respective double tax treaties.

Disposal of real estate
3% withholding tax will be applied to remuneration paid to a foreign company for the disposal of real
estate located in Latvia or shares of an SPV carrying real estate located in Latvia.

Payments to offshore companies
Payments to offshore companies are subject to 20% withholding tax.


Permanent establishments will pay tax as Latvian companies do, i.e. at the moment when the profit of
the permanent establishment is transferred to the main company.


Starting from 2018 partnerships will become payers of CIT. Distribution of profit of partnerships will be
subject to 25% CIT.


CIT advance payments will be eliminated starting from July 2018.


The new CIT taxation period will be one month. As a transitional provision, only one CIT return will be
filed for the period Jan – Jun 2018.
The CIT taxation period of permanent establishments is one year.
The CIT return will be filed till the 20th date of the following month.
Companies whose current financial year differs from the calendar year will be obligated to prepare
interim financial statements as at 31 December 2017 and submit their CIT returns and calculate CIT for
a period till 31 December 2017 (according to the current CIT provisions).