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Dear clients and cooperation partners,
In this tax newsflash, we draw your attention to some recent and not-so-recent topicalities in the tax sector that we and our clients most often meet in our daily work.
CHANGES IN APPLICATION OF TAX CONVENTION ALLOWANCES
From 1 May this year, positive changes are introduced to application of allowances under tax conventions. Amendments to Cabinet Regulations No 178 “Procedure for applying tax allowances specified in international treaties on avoidance of double taxation and prevention of tax evasion” (Cabinet Regulations No 178) require that a Resident’s Certificate – an application to apply tax allowances or a similar document – should be obtained up to the day when the company’s tax returns are to be filed for the reporting period (instead of up to the payment date, as before). Likewise, some editorial specifications have been introduced in the Resident’s Certificate form. The procedure remains the same: the Resident’s Certificate must be submitted to the tax administrations of both countries for approval and is usually valid for five years after approval.
We remind you that corporate income tax is currently withheld from the following payments to non-resident companies:
- income obtained from shareholding in partnerships – 15%,
- profit distributed to members of a cooperative company – 15%,
- compensation for management and consulting services – 10%,
- compensation for use of property located in Latvia – 5%,
- compensation for disposal of real estate or shares in a real estate company located in Latvia – 2%,
- payments to persons who are located, placed or established in low-tax and tax-free countries and territories determined in the Cabinet Regulations – 5% to 30% depending on the type of payment.
The list of payments to non-resident individuals subject to personal income tax is even larger and is available in Section 17(12) of the law On Personal Income Tax.
On concluding an agreement with a non-resident, an assessment should be made of the tax deduction obligations at the moment of payment and what allowances can be applied under the tax conventions, taking into account the transaction partner’s country of registration and their legal status. For example, a transaction partner that is a foreign partnership from country X but is not a taxpayer in country X (a so-called transparent partnership) will have no right to apply the allowances set in the tax convention. That right will be for members who are tax residents of country X. In this situation, information should be obtained about members of the partnership, their respective share of income, their countries of residence, as well as Residence Certificates from their respective tax residence countries. In practice, this is usually limited-access information, so that application of the allowances set in the tax convention will be limited. We have previously written about limitations in applying allowances set in tax conventions with regard to transparent partnerships, with suggestions how to solve them: http://www.ifinanses.lv/lat/nodokli?doc=5885. Unfortunately, the latest amendments to Cabinet Regulations No 178 will not help to solve these situations.
However, timely planning and structuring transactions with non-residents can make these situations and additional tax burdens avoidable. SORAINEN - your partner in planning transactions with non-residents.
TAXES MUST BE PAID BEFORE ANNOUNCING PUBLIC PROCUREMENT
On 16 October 2014, amendments to the Public Procurement Law came into force requiring tenderers to have no tax debts as early as the advertising day of the tender. Although these amendments will apply only from 1 August 2015, they are highly significant because they disclose the legislator’s intent to exclude from public procurement those tenderers and sub-contractors that have liabilities (outstanding taxes) to the state. The annotation to the amendments reads: “…these amendments are required to facilitate payment of taxes from among companies that participate in state or municipal procurements, so that all tenderers would have an equal position in procurements and persons who fail to pay taxes would not gain an advantage in comparison to honest taxpayers. Two main targets of the amendments are to ensure that all tenderers are inspected and that all are motivated to pay taxes regularly. Thus checking all tenderers at the qualification stage would enable Contracting Authorities to exclude non-payers from further participation in the tender, whereas the present wording allows a tenderer to pay taxes only when announced as the winner. If everybody knows that they would be excluded from the tender because of outstanding taxes, then this would serve as motivation to pay taxes. Likewise it is necessary to check that taxes have been paid on the day of announcing the procurement or during the last update before that day. At present, the law allows debts to be paid after the Procurement Commission has detected the debt and plans to conclude a contract with the particular tenderer - all the other tenderers can continue tax evasion until they happen to win some tender.”
FROM NOW ON, WE ARE TRANSPARENT – OTHER CHANGES TO TAX ADMINISTRATION
- As of 1 January 2016, providers of leasing and credit services (except banks) will report to the SRS about leasing and/or loans granted to a natural person and related interest payments if the amount exceeds EUR 360 a month or EUR 4,320 in a calendar year.
- From 1 October 2015, by 1 April each year the SRS will publish taxes and duties paid by taxpayers (companies) during the previous taxation year and the average number of employees, and will also ensure public access to the receipt database registered by the SRS.
- In the case of surcharges on taxes and duties, together with announcing the audit decision the SRS will be allowed to prohibit a taxpayer from making cash transactions.
ON CORPORATE INCOME TAX
- In CIT returns, partnerships will show separate income obtained from:
- disposal of shares,
- dividends received,
- disposal of publicly listed securities in the European Union or European Economic Area.
This means that partnership members who are natural persons will pay PIT on this income in the same way as when this income is obtained outside the partnership.
- An option has been provided for non-residents to file a CIT adjustment for income obtained from consultancy services or use of property located in Latvia after taking into account the costs related to that income and applying a 15% CIT rate.
- The same CIT regime applies to development finance institutions as to credit institutions.
PERSONAL INCOME TAX
- Non-residents’ taxable income will not include interest income, income similar to interest, as well as income related to interest on publicly listed financial instruments.
- Compensation for moral damage which is paid to a victim on the basis of a court judgment or voluntarily in criminal proceedings will not be subject to PIT.
- Upon investing real estate in a company's share capital, the payer's income (the difference between the nominal value of the shares allocated and remaining value of the real estate) is subject to CIT at the moment when the newly obtained shares are disposed of. This means that taxpayers need not pay tax before funds have actually been received.
Exempt income is indicated in the annual income statement only if its value exceeds EUR 4,000 a year (until now, this threshold was lower – four times the annual non-taxable minimum). In turn, there will no need to report certain exempt income paid from the state budget.
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