Rental income
Both Latvian entities and foreign entities carrying out activities in Latvia through a permanent establishment are liable to corporate tax at a flat rate, which is 22% in 2002, 19% in 2003, and 15% from 2004. Business-related expenses are normally deductible.
Latvian law also includes the arm's length concept, and the tax authorities may demand that adjustments in transfer pricing be made in transactions between related parties in both domestic and cross-border situations. These provisions of law apply to foreign legal entities, as well as to Latvian entities benefiting from corporate income tax holidays.
Depreciation
Book depreciation is non-deductible. Capital allowances for tax purposes are granted instead.
Loss carryforward
Both branches and subsidiaries are entitled to carry their tax losses forward for five years, unless control over the entity in question has been transferred to a third party. Loss carryforward is not terminated in this situation if the company continues the same business activities for five years after the control is transferred. In case of merger or acquisition, tax losses incurred after 1 January 2001 can be taken over by the surviving entity, provided the merging companies were under common control prior to the merger or acquisition. In case of division, new entities are entitled to their share of tax losses, incurred by the company after 1 January 2001, provided all the entities remain under common control after division.
Withholding taxes
Generally, the following payments made by Latvian companies to nonresidents are liable to withholding tax at the following rates, with rates in parenthesis treaty rates.
• Dividends -10% (5%).
• Payment for consulting and management services -10% (0%)
• Interest payments, if the debtor and creditor are affiliated persons -10%.
• Payment for royalties - 5% to 15%. (5% or 10%)
• Payment for the use of property in Latvia - 5%.
• Payment for the purchase of real estate located in Latvia - 2%.
• Payments to statutorily designated tax haven countries/territories -25%.
Latvian taxpayers that have remitted funds to a non-registered permanent establishment, i.e., when a foreign entity has created a de facto permanent establishment in Latvia, but has not registered it, may be liable for charging 25% tax from the total payments made to such permanent establishment. No deductions are allowed.
When a permanent establishment is registered as a branch, it must withhold taxes on certain types of payments to its head office, to the extent that these are deductible for corporation tax purposes.
Capital gains on the sale of property
Capital gains are taxed as ordinary income. Losses arising from the sale of fixed assets to related parties are non-deductible. A loss from the sale of financial investment is not deductible, but it could be carried forward for five years and offset against profits on the sale of similar investments in future periods. Gains or losses on listed securities are tax-exempt.
Proceeds from the sale of real estate in Latvia paid to a non-resident are subject to withholding tax at a rate of 2%. If the gains are derived through a Latvian permanent establishment, the gains are taxed as regular income at the applicable corporate income tax rate.
Transfer taxes
No transfer taxes are charged, other than a stamp duty based on the transaction value. The duty rates vary from 0.5% to 3%, depending on the form of the transaction, such as sale or gift, and the status of the owners, e.g., the lower rate of 0.5% applies when the transaction takes place between family members. The maximum amount of stamp duty payable is capped at LVL 50,000.
Value added tax (VAT)
Any Latvian company or individual should register for VAT purposes if making taxable supplies in excess of LVL 10,000 in any given 12-month period. If within a 12-month period, only one taxable supply is made and this supply exceeds LVL 10,000, registration for VAT purposes is not mandatory, provided that the taxable supply made is not related to the regular trade of that company.
With respect to real estate, supplies could be taxable or exempt, depending on who is the recipient of the supply and the status of the building. Generally, residential leases are exempt while commercial leases are taxable.
The implications of exempt and taxable supplies is a significant concern in the property industry, particularly if major refurbishment work has been carried out. This should therefore be carefully considered in any business plan.
If a Latvian company or individual exclusively makes exempt supplies, it cannot recover any VAT on its costs. If exclusively taxable supplies are made, all of the VAT incurred on costs is recoverable, provided the costs are valid business expenses. However, when a company, or individual, makes both exempt and taxable supplies, it is likely that only a proportion of the VAT on expenses will be recovered based on the ratio of exempt to taxable supplies. There are, however, opportunities to allocate costs more specifically to specific supplies if this produces a more favorable result.
Unfortunately, there are no provisions in the legislation to opt for tax in the case of exempt supplies.
The VAT treatment of the sale of real estate is relatively complex. The general rule is that the sale of land and other immovable property is exempt, unless the immovable property consists of buildings, which have been newly built or reconstructed. The sale of such newly built or reconstructed property is taxable. Newly built or reconstructed is defined in the Latvian VAT legislation as the following.
• A newly erected building.
• A newly erected building sold within one year of the date on which the first user took possession.
• A reconstructed building sold within one year after completion of the refurbishment.
• An incomplete structure.
Refurbishment is defined as work that considerably improves the quality of a building or prolongs its useful life. Mere redecoration or minor repairs do not qualify as refurbishment.
On the disposal of a reconstructed building, VAT is due on the capital gain only, i.e., the difference between the proceeds of sale and the costs of acquisition. Otherwise, VAT is applied to the sale proceeds of the asset.
If any portion of the input tax has been recovered, and the building, whether erected or reconstructed, is sold within the period of one to ten years of completion, thus making any generated supplies exempt for VAT purposes, a portion of VAT originally recovered has to be repaid to the state. The repayable amount is calculated as 10% of the recovered input VAT times the number of full years left until the end of the said 10-year period. This amount generally is added to the sales price of the building, although the purchaser cannot record it as recoverable.
Real estate tax
Land is subject to real estate tax at 1.5% of its assessed value. The assessed value is officially determined, and is intended to approximate market value.
In respect of buildings and structures, real estate tax is levied at the rate of 1.5% of their average net book value in a calendar year. Formal assessment of buildings is to be accomplished by the end of 2002 and from 1 January 2003, tax will be levied at the rate of 1.5% of the assessed value of land and buildings. Real estate tax will no longer be applied to structures from 1 January 2003. Structures are defined specifically in the legislation, and are not the same as buildings.
From 1 January 2004, real estate tax will be levied at a rate of 1% of the assessed value of real property, that is, land and buildings.
From 1 January 2001, newly constructed or reconstructed buildings that are used for business purposes are exempt from real estate tax for one year of commencement of their use.
Financing the property Debt
Interest expenses are only deductible up to an amount calculated as the equity of the company at the beginning of the financial year, multiplied by the average short-term interest rate on credits in the last month of the financial year. This limitation does not apply to interest payments made to credit institutions registered in Latvia or in a country with which Latvia has a double tax treaty. If the actual interest expenses exceed the calculated amount, the difference can be carried forward as a deductible expense in subsequent financial years, provided that the expense limit is observed in the respective period, unless more than 50% of the company's shares change owners during the period concerned.
A loan issued by a Latvian company to a non-resident related party should bear the market rate of interest. If loans are taken for the purpose of construction or development, the interest paid before the completion of the building is not deductible from taxable income in the year incurred, but should be capitalized and added to the cost of the asset and depreciated. Loans expressed in a foreign currency should be re-valued using the official Bank of Latvia exchange rate applicable on the last day of the tax period. Profit, or loss, on re-valuation is taxable, or deductible, as the case may be, for corporate tax purposes.
Equity
The minimum share capital of a private company must be at least LVL 2,000, which must be contributed either in cash or in-kind. However, if equity is negative, then interest paid to lenders other than credit institutions registered in Latvia or in a country with which Latvia has a double tax treaty country becomes non-deductible for corporate tax purposes. A company with negative equity cannot capitalize its debts. With the inability to settle company liabilities, the negative equity could trigger insolvency proceedings.
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Property in Bulgaria - INFO FOR INVESTORS - Basis of taxation
