Tax Reform: New year – new life
Starting this year extensive changes enter into force with respect to taxation, including completely new Corporate income tax law. It will bring to Latvia a very different CIT application model, where CIT liabilities mostly will occur only at the moment of profit distribution. Also, personal income tax has experienced significant changes regarding rates and a progressive taxation system has been introduced.
The new CIT law was adopted last July, and in November it was supplemented with Cabinet of Ministers Regulations No.677 «Regulations on application of Corporate income tax law». These regulations explain practical aspects on certain provisions of the law, such as determining of taxable base of branches. The new CIT model has changed approach with respect to taxation of motivation of employees and staff events, i.e. expenses for which were treated as non-business expenses up till now, but regulations explain when such expenses can be considered as normal business costs.
- New CIT regime is based on cash-flow taxation model, which provides that CIT is payable at the moment of profit distribution (including deemed profit distribution) – at the moment when decision on dividend pay-out is made. In case of reinvestment of profit CIT shall not be applied, but CIT rate is increased from the current 15% to 20%.
- For several expenses that would be treated as non-business costs CIT will be payable on a monthly basis, but for expenses such transfer pricing differences or thin cap CIT will be payable on annual basis.
- According to the new regime tax losses do not occur, however, within 5-year transitional period companies will be entitled to reduce CIT on dividends for losses accumulated until 2018, but amount of reduction shall not exceed 50% of tax to be paid.
- The law includes so called anti-avoidance rules, e.g. loans issued to related parties, excluding loans to companies in which creditor has any participation, might be considered as deemed profit distribution, however, the law lists exemptions as well.
- Companies will be entitled to distribute profit gained until the year 2018 without application of new CIT for unlimited period of time.
- CIT law includes new rule with respect to withholding tax and sale of real estate in Latvia. In case real estate is sold by non-resident to other non-resident, seller of real estate is obliged to calculate and pay tax, besides, the current rate in amount 2% is replaced by 3% rate.
- «Holding regime» that previously allowed to exempt certain capital gains is now stating that sale of shares will be CIT exempt only in case at the moment of sale the period of holding of shares is not less than 3 years.
- On received dividends CIT will not be payable once more in case the initial remitter of dividends is a CIT payer in the country of residence and is not registered in black listed jurisdiction.
CHANGES IN PAYROLL TAXES
- Previous PIT at flat rate 23% is replaced by progressive tax. It is set at the following rates: 20% rate on income up to 20 004 EUR per year, 23% rate on income over 20 004 EUR per year, and 31,4% effective rate (consisting of 23% PIT and 11% solidarity tax) on income over 55 000 EUR per year.
- The total rate of social security contributions is increased from 34,09% to 35,09%, where the employers’ part of social contribution is 24,09%, while the employees’ - 11%.
INCOME FROM CAPITAL
- Previously dividends derived by private individual were subject to PIT at 10%. The new regime provides that PIT on capital income is set at 20%. At the same time there is an exemption, namely, there will be no PIT on dividends in case CIT is paid for such dividends. Thus, depending on source, type and timing of dividends PIT in amount 20% might or might not be applicable.
- In addition, 10% and 15% rate for other income from capital is replaced by 20% flat rate, including interest income, profit from sale of real estate or sale of shares.
Do not hesitate to contact us for more information regarding the changes and the impact it could have on your company.