During the coronavirus pandemic, among the numerous and fast legislative changes and economic measures rolled out by governments, Latvia has also introduced other changes to Latvian tax laws in the last two months that are independent of the pandemic. One important amendment is the implementation of the DAC6 Directive into Latvian tax laws, while another affects the country’s CIT Law.
Transposition of the DAC6 Directive into Latvian tax laws
On 25 June 2018 Council Directive (EU) 2018/822 on administrative cooperation in the field of taxation, known as the DAC6 Directive, came into force. Member States were obliged to transpose the EU Directive into their laws by 31 December 2019 and apply the provisions complying with it from 1 July 2020.
Cabinet Regulation No 210 aims to implement the DAC6 Directive into Latvian tax laws. It was published on 17 April 2020 and will be effective from 1 July 2020, however, reports will cover arrangements retrospectively too. This new element of Latvian tax laws imposes an obligation on any company to notify the State Revenue Service of Latvia (SRS) if the company has received any tax advice on a cross-border scheme (i.e. a transaction or company structure), or has introduced such a scheme since 25 June 2018. But what exactly has to be notified? Let’s take a look at some practical examples.
Notification indicators and special cases
The SRS has to be notified about a cross-border scheme if at least one of the notification indicators applies. These indicators have two categories:
- one of the main benefits of a transaction or structure is taxes,
- a scheme that has to be notified irrespective of whether one of the main benefits of a transaction or structure is taxes.
Among the indicators regarding one of the main benefits being taxes, the EU especially highlights the desire to tackle consultants who have ready-made, standard solutions/schemes to hand and who sell them “in bulk”. An indicator that would trigger notification also includes a consultant’s “success fee” that depends on the company’s tax savings.
Indicators where it is not important whether tax is one of the main advantages would be cross-border payments between related companies, where, for example, the payment is completely exempt from taxes in the country or territory where the payee is a tax resident, or payment is subject to a tax benefit regime in a country or territory where the payee is a tax resident. So related companies should be particularly careful about the notification obligation!
For example, Germany applies a more detailed interpretation: the distribution of dividends without withholding tax constitutes a cross-border scheme that needs to be notified if these dividends are exempt from taxes in the payee’s country. Latvia, in turn, does not have a withholding tax on dividends paid in Latvia (except payments to offshore). So many companies will have to check whether their dividends are taxed or remain exempt in the payee’s country, and take a decision about notifying the SRS.
They should start with an algorithm to determine whether the transaction or structure comprises a cross-border scheme according to the definition. If so, they need to check whether the transaction or structure reveals any of the indicators that trigger the notification obligation under Section 3 of the new Cabinet Regulations. Some of the indicators may require notification even if the company has not gained any tax benefit from the scheme.
Amendments to the Cabinet Regulations on application of the CIT Law
Another amendment to the Latvian tax laws affects the CIT Law. On 5 May 2020, Cabinet Regulations were adopted stipulating:
- a report form and a procedure to complete it with regard to income gained by a non-resident in Latvia from leasing or renting immovable property;
- documents to be submitted by the non-resident together with the report.
Currently, the Regulations provide an option to deduct special designated core company expenses that can be linked to a permanent establishment in Latvia, in the amount of 10%, unless they are included in the product prime price, i.e. indirect costs, such as a share of the salary paid to the accountant or such like.
The amendments to Latvian tax laws described above have been supplemented by an explanation that assets which are included in the share capital of the acquiring company as a result of reorganisation comprise deferred CIT until the share capital is decreased. They specify the same tax declaration and payment period for other taxpayers (20th of the next month) for taxpayers carrying out a liquidation or reorganisation.