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Dear clients and cooperation partners,
In this Tax Newsflash, we continue providing information on changes to Latvian taxes. This time, we explain news on support to employees on low incomes and increase of tobacco excise tax, along with some case law. The SORAINEN news section contains the most recent publications by lawyers from the Tax & Customs Team.
1. SUPPORT TO EMPLOYEES ON LOW INCOMES
On 1 January 2011, Cabinet Regulations No 1097 come into force so that:
- the monthly non-taxable minimum will be LVL 45 instead of LVL 35 (approx EUR 64 instead of EUR 50);
- the monthly allowance (for maintenance of a minor, an unemployed spouse and other persons) will be LVL 70 instead of LVL 63 (approx EUR 100 instead of EUR 90).
2. TOBACCO EXCISE TAX TO INCREASE
On 1 January 2011, new amendments to the Law on Excise Tax come into force. Among the most significant amendments, the following should be mentioned:
- the excise tax rate for smoking tobacco increases;
- a procedure is set for calculating the weighted average retail price and conditions for its use.
3. CASE LAW
PIT payable on income from capital earned before 2010
The memory is still fresh about the many amendments of December 2009 to tax laws, among others, as well as amendments to the PIT law. These introduced payment of PIT on dividends, also interest earned from bank deposits. Notwithstanding the seeming illegality of the obligation to pay PIT on interest payments earned before the coming into force of the amendments to the PIT law, on 6 December 2010 the Constitutional Court ruled that the amendments comply with the Constitution. This means that PIT (10%) will still be payable.
The question of the legality of subjecting income from capital increase to PIT if earned before 2010 is still open. However, the Constitutional Court case – especially the court’s reference to possible extraordinary measures – causes concern about real options to achieve a positive outcome in Latvia.
Systematic sale of real estate was a business activity subject to PIT!
A couple of years ago Section 9 of the PIT Law provided that PIT is not applicable to income acquired from sale of one’s immovable property if the person owned real estate for at least 12 months. Nevertheless the SRS considers that if a person sells several properties then this amounts to business operations so that the income is subject to PIT.
On 3 December 2010, the Senate of the Supreme Court finally expressed its opinion on this issue in judgment No SKA-526/2010. The Senate ruled that the words “own property” included in the legal norm should be interpreted as property bought by a person for personal use. If a property is obviously bought for sale to others instead of for personal use, sale of the property cannot be regarded as sale of one’s own property: the property is purchased and sold within the scope of business operations.
The court also confirmed that the day of purchase (sale) of immovable property is the day when the contract is concluded (irrespective of the terms as to when the buyer pays the purchase price) to fix the moment of accounting when to start calculating the twelve month term that the person owned the property. The respective clauses of Cabinet Regulations cannot be interpreted more broadly than that upon fixing the day of selling immovable property they would also determine the day of gaining income. On the basis of simple entry and bookkeeping principles applicable to natural persons, the court considers that income is accounted for only when payment is received for transactions. Finally, the court indicated that losses can be included in expenses only to the extent determined by the court.
These findings of the Senate could be interesting for those who keep challenging the SRS on the issue. This would not be important for others because under the presently effective wording of the PIT Law, PIT is not applied only to income obtained from real estate owned by a person for more than five years and the declared place of residence (not the additional address) for 12 months until the day of disposal.
What data should the SRS receive as a basis for calculating income subject to PIT?
On 2 December 2010, the Senate of the Supreme Court announced judgment No SKA-661/2010 indicating that only if the taxpayer does not declare income and expenses or if the information raises doubts as to truth, the SRS determines income subject to the PIT on the basis of the calculation. Therefore the general basis for calculation of tax is income declared by the taxpayer.
Moreover, the Senate indicated that income and expenses fully and correctly declared by a person are the maximum objective indicator, but those determined by the SRS are assumptions based on particular criteria. That is, if a person can credibly substantiate the correctness of their data against the SRS calculation, the person’s information should be used for calculating tax. If the person has content-wise credibly (ie, objectively) declared data on income and expenses, calculation by the SRS (ie, the assumptions) should be unnecessary.
4. SORAINEN news
Most recent publications by the Tax & Customs Team:
- Partner Jānis Taukačs’ commentary in the article “By using a micro-enterprise, salary taxes were circumvented” (in the newspaper Neatkarīgā Rīta Avīze Latvijai in Latvian) and the most recent blog “Dream farce ‘How Peter wanted to become a micro-entrepreneur’” (in portal Db.lv in Latvian).
- Senior associate Diāna Kļuškinas’ commentary in the article “For whom is it gainful to pay micro-enterprise tax?” (in newspaper Bizness&Baltija in Russian).
- Follow SORAINEN daily Twitter tax news here. Recent tweets:
- As of 1.1.2011 postal deliveries will be VAT-exempt if their value does not exceed EUR 10; exemption for customs duty (EUR 150) remains. For non-commercial deliveries/gifts the exempt (both VAT and customs) threshold of EUR 45 remains.
- Up to 31.01.2011 one may apply to the SRS for using the cash accounting principle (pay VAT when received, not invoiced) – up to LVL 70k.
- As of 1.1.2011 most businesses will be able to file tax returns only electronically, so that an EDS agreement has to be concluded.
- The government decided that as of 1.1.2010 the minimum salary will increase from LVL 180 to 200 a month (~ EUR 285).
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