Prepayments.
From 12 February 2020, advances for supplies of goods or services (including guarantee and deposit) shall be included in the taxable amount if the transaction is not made during 12 months, starting the month in which relevant advances payment is made. But hereby, if the transaction is initiated within 36 months, the company will be able to make the appropriate tax base adjustments.
Employee sustainability costs and operating expenses.
Transport costs for the transportation of workers from home to work and vice versa are excluded from employee sustainability costs, while retaining the responsibility of the company to assess its economic efficiency. From 12 February 2020, these expenses, like funeral benefits, will be classified as company’s operating expenses, not as employee sustainability. Meanwhile, sustainability expenditures will have to include the impairment of the assets of the social infrastructure objects or the residual value if the asset is written off (applicable for assets purchased from 1 January 2020).
Determining the acquisition value of a representative car (RC).
The acquisition value of the RC remains unchanged (EUR 50,000 excl. VAT), but it is specified that this includes other car refinement costs and additional equipment costs, incurred within 12 months starting the month of purchase, whether these costs are capitalized or not. Expenses related to the mandatory annual maintenance of the car are not included in the acquisition cost of the RC. Like advances, this provision is adopted to deal with rather 'creative taxpayers'.
CIT Exemption for profits from the sale of shares owned for more than 36 months.
This exemption shall continue to apply in respect of the proceeds of the disposal of shares in 2020, however, as of February 12, this will not apply to shares of companies whose assets (more than 50%) in the year of sale (or previous year) consists of real estate in Latvia. It is to be hoped that in the future this rule will not be extended, applying to indirectly held shares of a real estate holding company.
5% tax on non-resident remuneration for rental/lease of property in Latvia.
From 12 February 2020, 5% should be withheld from particular payments to non-residents. No tax reliefs or tax exemptions are provided for non-resident rental income (at least in standard tax conventions with Latvia). This tax has been in Latvia before but was abolished a couple of years ago. Everything new is well-forgotten old..
Hybrid mismatches.
If in transactions with foreign affiliates there is a deduction in one jurisdiction without the inclusion of income in the other or a double deduction of expenses in both jurisdictions involved, the company will have to increase its tax base on CIT. Transfer pricing policy will not solve the issue since the transaction will be judged not on the market value, but on whether any of the parties to the transaction have obtained an undue tax advantage.
Exit tax.
20% of exit tax shall be paid if a Latvian company or a non-resident permanent establishment (located in Latvia) transfers part or all of its economic activity to a permanent establishment (or head office) outside Latvia. Depending on the particular situation and circumstances, the tax on the market value of the assets transferred will have to be included in the tax base in the month in which the assets are disposed of or dividends are calculated, or in the month of reorganization. Hybrid mismatches, like the Exit tax, were introduced into the CIT law as of February 12, 2020, by complying with EU directive No 2016/1164/EU setting out rules to prevent tax avoidance practices directly affecting the functioning of the EU internal market. Besides, a new requirement is expected in the near future for taxpayers themselves or their consultants to report on cross-border tax planning schemes that have resulted in a tax advantage for the taxpayer. The new reporting requirements arising from so called DAC6, which is an EU directive 2018/822/EU, will be implemented in Latvia in the near future by adopting amendments to the Law on Taxes and Fees.
In conclusion, a few words about digital tax. Although the Latvian government has taken an opposition related to this tax, the digital tax will likely be introduced in the future. The author of the idea is the OECD (Organization for Economic Co-operation and Development), to which Latvia is a member, and which wants to introduce this tax globally, fighting for fairer tax collection from Google and other US corporations.
If you have specific questions regarding taxes described in our news flash, please contact the Head of Baker Tilly Baltics tax services Anna Vilka, e-mail: anna@bakertilly.lv
Related content
