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Tax Reform – new beginning
On July 28 the draft of Corporate income tax Law, as well as amendments regarding salary taxes has been approved by Parliament on second and final hearing. Next they will be submitted for approval to the President.
We have previously informed about the upcoming changes and the concept of the new regime. As there were additional proposals, which were submitted after the first hearing and were approved at the second hearing, please see the final version, which would enter into force starting January 1, 2018.
NEW LAW – NEW CONCEPT
- Unlike the current CIT regime, the proposed 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). In case of reinvestment of profit CIT shall not be applied. The applicable CIT rate is increased from the current 15% to 20%.
- The draft law lists several expenses that would be treated as profit distribution, e.g. representation costs, penalties, non-business costs for which CIT will be payable on a monthly basis, but for transfer pricing differences or thin cap CIT will be payable on annual basis.
- With the tax reform several tax reliefs will be abolished, including depreciation for tax purposes, extra tax allowances for new equipment, support for research and development costs, as well tax relief for large investments.
Please see the main aspects starting 2018:
- According to the new regime tax losses do not occur, however, a 5 year transitional period is set for losses accumulated until 2018. Thus, companies will be entitled to reduce CIT on dividends and the amount for reduction is 15% of total accumulated tax losses. However, the companies will be entitled to reduce not more than 50% of tax to be paid.
- Please be aware that there are changes approved at the second hearing with respect to withholding tax and sale of real estate in Latvia. Current regulations do not apply tax in case real estate is sold by non-resident to other non-resident. New amendments state that a seller of real estate is obliged to calculate and pay tax. Besides, the current rate in amount 2% is replaced by 3% rate.
- The draft law includes anti-avoidance rules, which stipulate that loans issued to related parties are considered as deemed profit distribution, however, loans to companies in which creditor has any participation are exempt. Besides, such restriction does not apply in the following cases: financing is received from third parties, the amount of the loan does not exceed the amount of equity minus retained earnings for previous years and there are no retained earnings from previous years on the balance sheet of the company at the beginning of the year. Likewise, there will be no CIT in case the loan will be repaid before the end of taxation year. In addition, at the second hearing, it was decided that loans are CIT exempt in case the maturity does not exceed 12 months.
- «Holding regime» is kept with a restriction, which means that sale of shares will be CIT exempt in case at the moment of sale the period of holding of shares is not less than 3 years.
- By receiving 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.
- Companies will be entitled to distribute profit gained until the year 2018 without application of new CIT for unlimited period of time.
- CIT will be payable in case bad debts are written off directly to expenses and for accruals for debts that are not recovered within 3 years.
CHANGES IN PAYROLL TAXES
- As previously informed, the current PIT at rate 23% will be replaced by progressive tax. It is set at the following rates: 20% rate on income up to 20 000 EUR per year, 23% rate on income over 20 000 EUR per year, and 31,4% effective rate (consisting of 23% CIT and 11% solidarity tax) on income over 55 000 EUR per year.
- The total rate of social security contributions will be increased from 34,09% to 35,09%. The employers’ part of social contribution will be 24,09%, while the employees’ - 11%.
INCOME FROM CAPITAL
- Current regulations state that dividends derived by private individual are subject to PIT at 10%. The new regime provides that PIT on capital income is set at 20%.
- However, dividends will be PIT exempt in case CIT is paid for such dividends. As there might be circumstances that CIT is not paid (e.g. dividends are received from another company), private individual might be obliged to pay PIT in amount 20%.