Jānis Taukačs Partner janis.taukacs@sorainen.com
	Sabīne Vuškāne Senior Associate sabine.vuskane@sorainen.com
	Aija Lasmane Senior Associate aija.lasmane@sorainen.com
	Dace Everte Associate dace.everte@sorainen.com
	Aina Bambāne Associate aina.bambane@sorainen.com

We have summarised the most significant amendments to tax laws adopted by Latvian Parliament at the final (second) reading. These will come into force on 1 January 2014.

1. CORPORATE INCOME TAX
2. VALUE ADDED TAX
3. PERSONAL INCOME TAX AND SOCIAL SECURITY CONTRIBUTIONS
4. MICRO-ENTERPRISE TAX
5. SOCIAL SECURITY CONTRIBUTIONS CAP

1. CORPORATE INCOME TAX (CIT)

• Two favourable tax measures widely used by groups of companies are abolished from 1 January 2014:
• transfer of tax losses within a group of companies;
• deductibility of notional interest calculated on retained profits realized since 1 January 2009.
• Alternatively, a new tax allowance to facilitate research and development (R&D) is introduced as of 1 July 2014. Under the new provision, taxable income can be reduced by expenses directly attributable to personnel and costs of research services purchased from specialised scientific institutions, multiplied by 3. The result of the R&D process may not be disposed of for the following three years. These CIT Act amendments replace the previous regulation that allowed applying a 1.5 coefficient to expenses of activities resulting in registration of a new patent.
• The option to apply the 1.5 coefficient to the purchase value of new production plants for CIT purposes has been extended until 2020.
• CIT rebate for investment in supported investment projects has been extended until 2020, with the minimum investment qualifying for rebate up from LVL 3 million to EUR 10 million.
• If the 2% withholding tax (WHT) is applied to payment to a Latvian non-resident company for disposal of real estate located in Latvia, an alternative option will be available for tax residents of other European Union (EU) or Double tax treaty (DTT) countries. These qualifying non-resident persons will be allowed to recalculate tax payment as 15% CIT on the profit gained from the transaction, ie income generated from the sale of real estate reduced by related costs incurred, and adjust tax payment accordingly.
• Amendments are made with regard to WHT on payments to legal persons established in black-listed jurisdictions:
• custodians will be responsible for withholding tax from dividends paid on shares of publicly traded joint stock companies;
• payments for acquisition of goods will be exempt from WHT provided that the price in those transactions is arm’s length. The goods do not have to originate from the respective black-listed territory;
• payments made for acquisition of EU/EEA publicly traded shares will be exempt from WHT provided that the price in those transactions is arm’s length;
• the right to request a permit from the State Revenue Service (SRS) to exempt interest payments (WHT at 5% or 15% rate) or royalties (15% WHT) to black-listed jurisdictions is abolished. These payments will be subject to WHT without exception;
• in accordance with planned amendments to the Commercial Law on the option to pay interim dividends, 30% WHT should be withheld from interim dividends paid to legal persons established in black-listed jurisdictions.
• If a company distributes interim dividends and faces losses at the end of the financial year, the amount of interim dividends is considered non-business expenses for CIT purposes, thus a coefficient of 1.5 will be applied to those expenses.
• With reference to the amendments to the Personal income tax (PIT) Act (see more information in the section on PIT  below), costs incurred in relation to loans subject to PIT are deductible for CIT purposes.
• The interest rate used for thin capitalisation calculation has been amended. The average weighted interest rate on loans issued to domestic non-finance companies, published by the Bank of Latvia and multiplied by a rate of 1.57, must be applied to the company’s debt.
• Income from disposal of securities publicly traded in the EU/EEA including interest income related to bonds publicly traded in the EU/EEA will be exempt from CIT. It remains unclear whether the provision refers both to interest income upon disposal of bonds and to interest received during the holding period until settlement.
• Passenger motor vehicles worth at least EUR 50,000 (LVL 35,100) without VAT will be considered representative vehicles for CIT purposes.
• With regard to writing off debts, Section 9 of the CIT Act specifies that these provisions also refer to writing off unrecovered loans with calculated interest and unrecovered VAT amounts. This practice has already existed in relation to unrecovered VAT from previous taxation periods confirmed by SRS in rulings in several cases.
• In relation to fixed assets transferred and taken over during reorganisation, the parties must calculate depreciation of those assets proportionally to the number of months during which the assets were held.
• Private higher education institutions will not be taxed on their revenues from study fees, exhibitions, concerts and independent research.
• If a Latvian company realizes income from publicly traded securities via financial intermediaries and income tax is withheld at source, the tax paid can be verified by documents issued to the intermediary by the relevant EU or DTT country’s tax authorities.
• A company will be liable to minimum CIT of EUR 50 if its financial result in 2014 is a loss (except registration and liquidation years) and no PIT and social security contributions (SSC) are paid during the taxation period.  Thus, the minimum PIT is effectively payable as of 2015.

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2. VALUE ADDED TAX

Real estate:

• The definition of unused real estate also includes a part of land, thus putting an end to the discussion whether the value of land and a building might be split.
• The definition of construction land has been supplemented to provide that a land plot cannot be considered as construction land if a construction permit was issued after 31 December 2009 and the purpose of use is changed with no intention to perform construction. 
• In sale transactions of combined real estate, when determining the VAT-able value the proportion of the used and unused parts of the property will be taken into account. VAT applies only to the unused part of real estate. The method of calculating the proportion of the unused part of the property is not specified, eg, whether the property value or the area should be used as the allocation key. The annotation to the VAT Act amendments provides that the result obtained should be logical, substantiated and proportionate.
• Real estate will not have to be registered with the SRS if:
• more than 99% of the property is used for taxable transactions; or
• it is used for provision of regulated public utilities; or
• it cannot be disposed of.

Vehicles:

• VAT is non-deductible for purchase, import and maintenance of representative passenger vehicles, so that the definition of representative vehicles is linked with the definition for CIT purposes (over EUR 50,000 excluding VAT).
• VAT is deductible for vehicles (including representative vehicles) plus maintenance for which routes are recorded in compliance with the requirements of the Companies’ passenger vehicle tax law, ie using the global positioning system (GPS) and reported to the Road Traffic Safety Directorate.
• Taxpayers are entitled to claim previously restricted input VAT for passenger vehicles if the vehicles are used for business purposes.

VAT exemptions set in the VAT Directive have been introduced:

• for services provided by a group of independent group of persons to its members (cost sharing associations) involved in exempt transactions;
• for product supplies where input VAT was not deducted, as these supplies are made for purposes other than taxable transactions. This includes supplies of luxury goods.

Other:

• VAT will be adjusted by losses that exceed the planned amount of losses according to CIT regulations.
• The proportion of VAT-able and exempt transactions is rounded upwards to a full per cent.
• A taxpayer is entitled to deduct input VAT on invoices from housing managers with utility service providers’ invoicing details.
• The limitations on low-value gifts do not apply to advertising or representation expenses.
• Third-country persons will have their rights restored to register in Latvia as VAT payers even without a fiscal representative.

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3. PERSONAL INCOME TAX AND SOCIAL SECURITY CONTRIBUTIONS

Tax rates:

• The PIT rate in 2014 will remain 24%, and will be further reduced in 2015 – 23%, and in 2016 – 22%. The employer's share of SSC in 2014 will be 23.59%, and the employee’s share – 10.50% (34.09% in total).
• As of 1 January 2016, the option to pay fixed PIT will be abolished (5% on income up to LVL 10,000 (EUR 14,229); 7% on income exceeding LVL 10,000). Starting 1 January 2014, the SRS will not register any new fixed PIT payers.

 “Minimum” PIT:

• With regard to self-employed individuals (including micro-enterprise tax (MET) payers)  the “minimum” annual PIT of EUR 50 will be payable to the State budget within 15 days after submission of the annual PIT return if:
  • those self-employed individuals have no turnover during the taxation period, or
  • their calculated PIT is less than EUR 50.

This regulation will not apply to taxpayers who have paid PIT or SSC for employees or themselves as self-employed during the tax year.

Payroll tax for board members:

• Payroll tax of at least one minimum salary a month is payable from a board member’s income, if:

• During the pre-taxation year the company’s turnover exceeds 12 minimum monthly salaries multiplied by the coefficient 3.3 (eg in 2013 – LVL 7 920 (EUR 11 269);  in 2014 – LVL 8,910 (EUR 12,678)); and
• During the pre-taxation year the company has no employees or board members who receive at least a minimum monthly salary during the whole pre-taxation year; and
• the company has turnover during the current month of the taxation year; and
• the company has no employees who receive at least a minimum monthly salary during the current month of the taxation year.

These provisions will not apply if a board member receives monthly remuneration as a board member of at least five minimum monthly salaries in another group company within the meaning of the CIT Law.

Loans and reduced interest rates:

• Starting 1 January 2014, loans granted to individuals and not repaid within 6 months after the loan maturity date (but not later than 66 months from the loan issue date), will be considered comparable to taxable income and thus subject to PIT. Benefit gained from reduced interest rates will also be subject to PIT at the standard 24% rate, except for loans provided by individuals.
• Under the new PIT Act amendments, the following loans will be exempt from PIT:
  • a loan up to EUR 1,500;
  • a loan issued to cover medical treatment or education costs;
  • loans from spouses or relatives up to the third degree;
  • loans where the lender is a credit institution or a savings company that has received a special permit (licence) to provide consumer financing services.
• Starting 1 January 2014, the lender (if the lender is a company, individual company, cooperative, fixed establishment of a non-resident, society, establishment, organisation, self-employed individual, consortium) must notify the SRS about loans granted  to individuals when the amount of financing provided exceeds EUR 15,000 per individual. If the lender is another individual, it will be the borrower’s obligation to notify the SRS about loans received exceeding EUR 15,000 (except for loans received from spouses and relatives). To calculate the total amount of loans per individual, loans issued before 1 January 2014 must also be taken into account.
• Individual borrowers must notify the SRS by 30 June 2014 about non-repaid loans with outstanding amounts exceeding EUR 15,000 per lender as at 31 December 2013. If a taxpayer notifies, a loan received before 31 December 2013 will not be considered comparable to taxable income and thus not subject to PIT. In turn, if the borrower does not notify the SRS, these loans will be subject to PIT under the new amendments to the PIT Act. The notification form to be submitted to the SRS will be prepared by the Cabinet.
• If an individual borrower is the lending party’s employee (including a Micro enterprise taxpayer’s employee), management or supervisory board member on the day when a loan is issued, both 24% PIT and the additional 22% rate will apply to the amount of a loan considered comparable to income.
• If a lender performs business activities (companies, fixed establishments, self-employed individuals), the lender will be responsible for withholding PIT. If the lender is an individual or non-resident, the borrower will be responsible for calculating and paying tax.
• Benefit is gained from reduced loan interest if the interest rate is lower than the notional market interest rate. The calculated difference (also applicable to interest payments calculated but not actually paid) between the two values will be subject to PIT at a standard 24% rate. The notional market rate is calculated by multiplying the annual average weighted interest rate on loans issued in the respective currency to domestic non-financial companies by a coefficient of 0.7.
• If loan transactions are also subject to transfer pricing (TP) requirements, the lower of the TP adjustment and the difference mentioned above will be considered to be the benefit obtained from a reduced interest rate.
• The new PIT regulations for benefits gained from reduced interest rates will also apply to loans issued before 1 January 2014 (except loans from individuals). The procedure mentioned will not apply to loans issued by credit institutions and savings companies.

Transactions with real estate:

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4. MICRO-ENTERPRISE TAX

• The additional MET rate of 2% for each additional employee will not apply if the number of employees in a tax year exceeds five persons, and the number of employees increases by one or two persons compared to the pre-taxation year (only those employees who have been employed for at least six months will be taken into account).
• The present additional MET rate of 20% specified in the MET Law will not apply to excessive turnover exceeding the LVL 70,000 (EUR 99,601) threshold if the increase of turnover constitutes less than 30% compared with the pre-taxation period.
• As from 1 January 2015, if the turnover of a micro-enterprise in a calendar year exceeds EUR 7,000, the following additional MET rates will apply to the excess:
  • in 2015 – 11%;
  • in 2016 – 13%;
  • starting 1 January 2017 – 15%.

The MET rate of 9% will still continue to apply to turnover up to EUR 7,000.

• It is planned to introduce an additional obligation to inform the SRS about hours worked by employees of a micro-enterprise.

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5. SOCIAL SECURITY CONTRIBUTIONS CAP

Under draft amendments to the Cabinet Regulations, it is planned to set a maximum SSC cap of EUR 46,400 (LVL 32,600) in 2014. This means that as soon as an employee's gross annual salary reaches the specified ceiling, SSC will not be payable from the excess part of the salary.