Jānis Taukačs Partner janis.taukacs@sorainen.com
	Ūve Zosārs Senior Associate uve.zosars@sorainen.com
	Alisa Šurko Associate alisa.surko@sorainen.com

This Tax Newsflash provides continuing information on tax amendments in force as of 1 January 2010, including amendments to the Law on Personal Income Tax (PIT), the Law on Corporate Income Tax (CIT), the Law on Value Added Tax (VAT), and the Law on Excise Tax (ET). Accountants will also be informed about changes concerning preparation of source documents and procedures for registering new employees with the SRS. We would like to hear from companies facing problems with recovery of VAT overpayments due to amendments to Section 16 Point 10 of the Law on Taxes and Duties (TD Law), as well as from companies wishing to organise a specialist seminar for their employees on the most important tax changes in 2010.

• PERSONAL INCOME TAX (PIT)
• CORPORATE INCOME TAX
• VALUE ADDED TAX (VAT)
• EXCISE TAX (ET)
• BOOKKEEPING
• A SORAINEN INVITATION
• SEMINAR OFFER ON TAX NEWS

1. PERSONAL INCOME TAX (PIT)

1.1. New procedure for taxing use of company owned or controlled passenger vehicles for personal purposes

On 22 January 2009, the Cabinet of Ministers (CM) adopted and confirmed Regulations No 1666 on the procedure for calculating PIT on the taxable benefit to individuals from using an employer owned or controlled passenger vehicle.

We previously stated that as of 1 January 2010 all company owned or controlled passenger vehicles (PV) are also presumed used for purposes unrelated to the economic activities of a company unless the company proves the contrary (Latvian Tax Newsflash No 18, December 2009). Thus, if a company’s PVs are not used for personal purposes, then the company should introduce a thorough system for accounting for the business kilometres travelled by each PV. In implementing the system, it is important to take into account the specifics of the work performed by the employee and their position. Namely, use of a PV to drive from work to home may not automatically be regarded as use for private purposes if it can be economically substantiated. This could be the case when due to the specifics of the employee’s work or position it is more economically beneficial if the employee goes to a client directly from their home (this could be very important for sales agents and similar cases).

If one PV is used for personal purposes by several employees, then the employer must specify the allocation of the above sums (the benefit) between those employees. However, if the PV is used by an employee’s family member, then the benefit is applied to the family member. Under the amendments to the Law on Personal Income Tax, the following persons are regarded as family members: parents, grandparents, spouse, children, and grandchildren (for some reason, relatives in the collateral line – sisters, brothers, and parents’ siblings are not taken into account in applying the law).

Each quarter, until the 20th day of the first month of the following quarter (namely, until 20 April, 20 July, 20 October, and 20 January), the employer should file a specific report with the Latvian State Revenue Service (SRS) (appended to the regulations) regarding the sum (the benefit value) whereby the employer has increased the employee’s taxable income. If the employer fails to file a report, the company’s PVs are presumed not used for personal needs.

The change in the law does not apply to:

1. PVs of persons who perform self employed economic activity
2. operative category PVs
3. passenger taxis
4. representative PVs
5. PVs used by farmers or on farms.

1.2. Day of income acquisition in cases of alienation of capital assets

In the December Tax Newsflash (to read, please click here), we advised on the procedure for determining the date that income from alienation of capital assets will be considered to be acquired by the alienator. On 22 December 2009, the CM adopted Regulation No 1638 on specifying the day of income acquisition in cases where:

1. the day when a contract for transactions with capital assets has been entered into, and
2. the day for receiving the money, and
3. transfer of title, and
4. the ancillary conditions for the contract to come into effect,

are not within the same taxation period. In these cases, the day of income acquisition will be the day when the income is actually received except where:

1. The person acquires the income in a period exceeding three taxation periods starting from the year when the alienation contract was entered into. In this case the income is considered to be acquired within the first three taxation periods.
   This means that, for example, if a contract for alienation of real estate is entered into in January 2010, then without regard to the fact that a person will earn income during five years under the contract, the person must calculate and pay tax on income to be received within the first three years (namely in 2010, 2011, and 2012). Moreover, in the third year tax must be calculated and paid for all the remaining sum irrespective of whether the income is actually received. Namely, tax is also payable for that part of the sale price which the person has not yet received but will receive under the contract during the two years following year three.
2. If an exchange of shares results in acquisition of other shares without payment of money and these shares are later disposed of, then in this case the income is considered to be acquired on the day when the shares received in the exchange are later disposed of.
   Namely, if person A acquires shares in company SIA “BB” on 5 January 2010 in exchange for shares they own in company SIA “AA” and A sells the SIA “BB” shares in 2011, then the day of acquiring income will be:
   • the day when the change in share owners is recorded in the commercial register, or
   • the day when A received remuneration for the SIA “BB” shares that he sold if payment is received before the changes are recorded in the commercial register.
3. If a person receives payment (deposit and other money) before the date when the contract is concluded. In this case, the day of income acquisition is considered to be the day when the income is received.

In calculating taxable income (if acquired in several taxation periods), costs related to capital acquisition are included in the calculation proportionally to the amount of income declared. For income acquired before concluding the contract (namely, in the case of deposit and other money), costs related to the capital acquisition are included in the calculation proportionally to the remainder of the unpaid income.

It is important that in relation to alienation of real estate, if:

1. it is registered with the Land Book, and
2. a contract was concluded by 31 December 2006, but
3. the income is acquired as of 1 January 2010, then

the day of income acquisition is considered to be the day when the contract was concluded.

1.3. New rules regarding PIT return and procedures for completion

Together with amendments to the PIT law in relation to imposing PIT on income from capital, new CM Regulation No 1660 applicable from 1 January 2010 details the form of capital income statement and the procedure for completion.

Under this regulation, if tax has not been withheld at the point of payment, then upon receiving income from a capital increase (namely, from disposal of real estate, shares, enterprise, and the like) a person must file with the SRS a declaration on capital income received  no later than the 15th day of the following month (using the DK1 form in Regulation No 1660).

If acquired income does not exceed LVL 500 (approx EUR 711), then the statement can be filed once each quarter (by the 15th day of the month following the quarter – namely until 15 April, 15 July, 15 October, 15 January).

If a capital transaction started in a taxation year but is not yet completed, then the person must also file (by 1 April of the year following the taxation year) the appendix to the DK1 form of CM Regulations No 1660. Non-residents must file the statement only for uncompleted real estate transactions. This means that even this year persons must file with the SRS an appendix to the statement by 1 April for all transactions started during previous years and not yet completed.

We draw to your attention that all residents and non-residents must file statements with the SRS by 31 March 2010 regarding interest income earned in January and February 2010 if:

1. PIT on interest paid has not been withheld at the place of payment (this norm refers more to interest paid by credit institutions), and
2. the amount of PIT payable on interest exceeds LVL 5 (approx EUR 7).

1.4. Licence (patent) payment regulations

On 22 December 2009, the CM adopted Regulation No 1646 on the procedure for applying licence fee payments to a sole person’s economic activity in particular professions. As mentioned in the December Tax Newsflash (read here), members of particular professions (for example, weavers, hairdressers, locksmiths, tattooists, and others):

1. whose income in the prior taxation period did not or in the current taxation period is estimated will not exceed LVL 10,000 (approx EUR 14,230)
2. who are not registered in the VAT payers’ register, and
3. who operate only in professions indicated in these CM Regulations,

will be allowed to choose to pay monthly licence payments (which currently vary from  LVL  30  to  LVL 50  (approx EUR 43 to EUR 71) depending on the municipality where the person performs their economic activity). In order to register as a licence payment payer, the person must apply (Appendix No 2 to the CM Regulations), must pay the licence payment for the chosen period (namely, 1, 3, 6, or 12 months) within two days after applying to the SRS. The SRS will decide whether the person can be registered as a payer of the licence payment within five business days after receipt of the licence payment in their account.

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2. CORPORATE INCOME TAX

Together with the new procedure on  taxing  a  person’s  benefit  from  use  for  private  needs  of  a  company  PV, on 2 February 2010 amendments were introduced to Regulations No 556 “Regulations on Application of Norms of the Law on Corporate Income Tax” of the CM. Under these amendments, if PIT and mandatory social insurance contributions have been paid in relation to use of a vehicle for private needs, fuel purchase costs can be included in business expenses of the enterprise on the basis of:

1. number of kilometres actually covered each month (for which PIT  payments and contributions have been made), and
2. a norm specified by the enterprise for fuel consumption on 100 kilometres that does not exceed by more than 20% the fuel consumption norm specified by the manufacturer of the car.

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3. VALUE ADDED TAX (VAT)

3.1. Changes to Regulation on procedures for application of VAT law

Together with amendments to the VAT law that came into effect on 1 January this year, new regulations for applying the VAT law have also been laid down. The following are among the most significant amendments:

1. An application for registration in the VAT payers’ register no longer has to be filed in person. The application can be filed electronically with a secure electronic signature, being an electronic signature that complies with the requirements of the Electronic Documents Law. These signatures are currently issued by the sole provider of this service in Latvia: Latvijas Pasts (Latvian Post).
2. State and municipal subsidies received and not directly related to the taxable price of goods or services should not be included in the proportion calculation for determining deductible input VAT.
3. VAT now applies to the whole value of a contract for sale of unused real estate which includes part or the whole of underlying land.
4. A procedure is now laid down for registration of a VAT group with the SRS in the VAT payers’ register, as well as for adding a new member to a VAT group.
5. It has been explained what should be understood by a “series of serial numbers” as taxpayers are now allowed to independently choose a procedure for identifying their invoices (by letters, numbers, and the like), as well as to arrange invoices according to their own chosen order.
6. New norms have been laid down defining, for example, the place of provision of services.

3.2. Regulations for refund of VAT from other EU Member States

We have previously advised the new procedure for Latvian taxpayers to electronically recover VAT paid in a different EU Member State from that state’s tax authorities (to read, please click here). On 1 January this year, CM Regulation No 1639 came into force specifying the procedure for recovery of VAT. Under the Regulations, a Latvian taxpayer must file an electronic application which the Latvian SRS will send to tax authorities in the other EU Member State. A Latvian taxpayer can file a refund application if:

1. The taxpayer has not performed economic activity in the country from which the tax will be recovered (namely, neither performing the taxpayer’s primary business, nor having a permanent entity established in the relevant country within the meaning of the VAT law), and in this country the taxpayer has not declared its place of residence or it is not its permanent place of residence.
2. The taxpayer has not supplied goods or services in the country from which the tax will be recovered, except for:
   • supply of goods transportation services within the EU
   • supply of services related to goods transportation within the EU if VAT is not applicable to those services under the laws of the country from which the tax will be recovered
   • supply of goods or services to persons responsible for payment of VAT under the laws of the country from which the tax will be recovered.
3. The repayment period for which tax repayment is requested is:
   • not longer than one calendar year (namely, from 1 January to 31 December) and not shorter than three calendar months, or
   • shorter than three months if these are the last months of a calendar year (namely, the input tax was incurred in October, November, or December).
4. The total sum requested to be repaid is not less than:
   • EUR 400 (or an equivalent sum in the currency of the Member State) if the period of repayment is shorter than one calendar year, but not shorter than three calendar months (for example, if input tax accumulated in the eight calendar months from January to August),
   • EUR 50 (or an equivalent sum in the currency of the Member State) if the repayment period is:
     • one calendar year (namely from 1 January to 31 December), or
     • the final months of a calendar year (namely, October, November or December).
5. The application for repayment is filed with the SRS no later than 30 September following the repayment period.

3.3. Regulations regarding VAT declarations

We draw your attention also to the fact that from 1 February 2010, VAT payers will have to file a new form of VAT declaration. Requirements for completing the new declarations are regulated by new CM Regulation No 1640 “Regulations on Value Added Tax Return”.

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4. EXCISE TAX (ET)

Under amendments to the Law on Excise Tax, starting from January 2010, CM Regulation No 1597 came into force amending CM Regulation No 521 “Regulations on Forms of Excise Tax Returns and Procedure for Completion”. As a result of the amendments the following tax declarations are changed:

1. Appendix No 1 (for lead free petrol if it contains 70-85% of ethyl alcohol by volume).
2. Appendix No 6 (for cigarettes and the applicable excise tax rate).

In addition, a new procedure for calculating ET for oil products is in force.

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5. BOOKKEEPING

5.1. New regulations related to book keeping documents

Together with amendments to the Law on Taxes and Duties (TD Law) which removed the requirements for using waybills invoices with numbers registered at the SRS, amendments to the regulations on keeping and organising book keeping came into force as of 1 January 2010.

5.2. Changed procedure for registering new employees with the SRS

As of 6 February 2010, employers must register new employees with the SRS not later than one day before they begin work. The changes aim to reduce illegal employment. Relevant amendments were made to MC Regulation No 942 of 2008 on registration of persons making mandatory payments of state social insurance and reports on mandatory payments of state social insurance and personal income tax.

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6. A SORAINEN INVITATION

On 15 January 2010, the Latvian  Constitutional  Court  admitted  for  hearing  a  case  regarding  compliance of Section 16 Point 10 of the TD Law with Sections 1 and 105 of the Latvian Constitution. This case was instigated by the Sorainen Tax team.

The case concerns amendments to the TD Law whereby Section 16 Point 10, in force from 2003, introduced a taxpayer’s right to receive repayment of overpaid VAT from the state, subject to a three-year time limit. As Section 16 Point 10 also applied to overpayments accrued prior to the amendments coming into force, a situation arose that taxpayers who did not manage to apply within the period (namely, in a little more than three months) between cancelling of the old norm (which did not allow a time limit for claiming recovery of overpaid VAT) and the new one (namely, the law now specifying a three-year limitation period) lost their overpaid taxes. This is the SRS view and policy.

The issue to be decided by the Constitutional Court is whether repayment of overpaid VAT incurred before the introduction of Section 16 Point 10 can continue to be claimed for an unlimited period because the attempt by Section 16 Point 10 of the TD Law to change this is not in compliance with Sections 1 and 105 of the Latvian Constitution.     

Having established this case, SORAINEN would gladly hear from readers who have encountered similar difficulties in recovery of VAT overpayments accruing before the coming into force of the change in the law. We are ready to assist you as well!

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7. SEMINAR OFFER ON TAX NEWS

SORAINEN Tax team lawyers are ready to organise specialist seminars on tax amendments operative from 1 January 2010 for employees of our client companies. The topic of the seminars depends on each client’s interest in a particular theme and on the specific character of their business. An agenda will be tailored specially for client needs and most important issues. For additional information or applications for these seminars, please contact Jānis Taukačs by e-mail.