Amendments have been made to the Cabinet of Ministers regulation (Cabinet Regulation) that governs technical requirements of cash registers (effective from 30 December 2015 is Cabinet Regulation No 743 that amends Cabinet Regulation No. 95 of 11 February 2014 “Regulation on technical requirements for electronic devices and equipment that registers taxes and other payments”).
It is laid down in Cabinet Regulation No. 743 that cash registers, hybrid cash registers and cash systems that meet the new technical requirements must be put into use on 1 January 2017.
In short, the new technical requirements detailed in Cabinet Regulation No. 743 are that cash registers need to have a built-in application that registers payment transactions and total amounts in cash in a “power independent” memory or a fiscal memory module and is able to print documents and reports. Only cash register firmware can access this memory to store information on transactions. Whereas access to the cash register firmware is limited only to the manufacturer or its authorised representative in order to replace it as a whole rather than update or modify it. For control purposes, the firmware will be secured with registered seals issued by the State Revenue Service (“the SRS”).
These amendments were made to prevent fraud committed by tampering and manipulating data on electronic systems in order to avoid recording revenue and paying value added tax and corporate income tax.
Good news is that companies that take part in the ‘In-Depth Cooperation Programme’ (Cabinet Regulation of 26 July 2012 No. 459) are permitted to register with the SRS cash registers, hybrid cash registers and/or cash systems that meet the current requirements by 31 December 2016 and continue using these systems until 31 December 2018.
Please note that all tax payers who use cash registers and cash systems that meet technical requirements specified in the current legislation are required to continue keeping cash register journals for each cash register and cash system until 31 December 2016 but companies that take part in the in-depth cooperation programme and delay installation of the new specification cash registers must do it until 31 December 2018.
As a word of advice to those companies that find it important to postpone the implementation of the new technical requirements we recommend joining the in-depth cooperation programme. However, if such an alternative arrangement is not sought after we recommend signing contracts with service companies as soon as possible regarding sealing, programming and installing of cash registers, cash systems, specialised devices and equipment to ensure compliance with the new requirements as they become effective.
On 14 July 2016 in the State secretary meeting the draft regulation ‘Amendments to Cabinet Regulation No. 556 of 4 July 2006 ‘Regulation on the application of the provisions of the law on corporate income tax’’ (hereinafter referred to as “the Cabinet Regulation”) was announced. The proposed amendments cover areas such as data exchange, disposal of real estate, receipt of dividends, and donations. Below is a short overview of changes to be introduced to the Cabinet Regulation.
In response to Council Directive 2011/16/EU regarding an automatic system for exchange of information in the EU, the State Revenue Service (“the SRS”) implemented the required information system for the exchange of data with other Member States. The objective of exchanging information with foreign tax authorities is to reduce the number of instances when tax is not paid in any Member State on profits.
The existing provisions of the law on corporate income tax (“the CIT Law”) do not stipulate that CIT is applicable to intellectual property and interest and dividend income paid by Latvian companies to non residents who are not registered in low tax or tax haven territories. Consequently, Latvian companies are no longer obliged to declare such payments and the SRS does not receive information on payments made to non-residents.
In order to secure that the SRS receives the above information and data on other payments made to non-residents that reduce taxable income of a Latvian tax payer the draft Cabinet Regulation includes a requirement for tax payers to provide data also on payments made to non-residents which are not subject to CIT withholdings.
As part of these amendments, Annex 181 to the Cabinet Regulation was supplemented with an additional income code “21 - other income”. This code is applicable and a payment must be shown on the form if the total amount of payments made to a particular non-resident during the taxation period exceeds EUR 5,000.
Disposal of real estate
It is stated in Article 18(1) of the current Cabinet Regulation that when a non-resident disposes of real estate located in Latvia, shares of a real estate company or other interest in a real estate company or property to a CIT payer registered in Latvia, CIT of 2% should be withheld from the purchase payment.
A new amendment to Article 18(5) of the Cabinet Regulation provides that CIT is to be withheld also in the case where a non-resident disposes of real estate registered in Latvia by contributing it into the share capital of another company. This, however, poses the question of how the receiving Latvian company is going to withhold the tax if the non-resident receives shares rather than cash.
These proposed provisions appear to further complicate the application of the withholding tax rather than improve it, i.e. the discriminatory tax treatment of non residents remains as non-residents selling shares of a real estate company to a Latvian buyer suffer CIT withheld of 2% (Article 3(4)(7) of the CIT Law). EU residents/residents of a country with whom Latvia has concluded a double taxation treaty may chose to pay 15% CIT from the profit of disposal of a real estate company (Article 3(4)(8) of the CIT Law) if lower than 2% of the purchase payment. Whereas, Latvian taxpayers are exempted from paying tax on sales of shares, of any type of Company.
According to Article 11(1) of the CIT Law dividend income received by a Latvian taxpayer is not subject to CIT. Article 80(2) of the draft Cabinet Regulation prescribes that taxable income shall not be decreased (i.e. dividends will not be exempted from taxation in Latvia) by the amount of dividends received that decreases taxable income in the country of residence of the payer of the dividends.
This provision addresses one of the recommendations formulated as part of the OECD Base Erosion and Profit Shifting (“BEPS”) Project. In particular, the objective of this provision is to introduce the recommendation formulated in BEPS Action 2 - Neutralising the Effects of Hybrid Mismatch Arrangements2 to address situations where a profit sharing payment is not taxed in any country. For example, in one country the payment is treated as deductible expenses (e.g. interest payment) and in the recipient country the payment is treated as dividend income and thus exempted from taxation.
The proposed provisions of the Cabinet Regulation include the following changes regarding tax reliefs on donations:
1. According to Article 20(1)(4) the CIT Law, a donor is not eligible to tax relief for donations if the amount of its tax liability on day 1 of the second month of the taxation period exceeds EUR 150. The existing provisions permit a company to still apply tax reliefs if the taxpayer adjusts its previous CIT returns and pays the calculated amount of tax and late penalty charges even if the effective date of payment of the tax would have been before the day the test is made. This reasonable concession was not applied to retrospectively created tax debts of other taxes. The new wording of Article 125(1) of the Cabinet Regulation permits tax reliefs for donations also if tax returns other than CIT returns are amended, provided the additional tax and late payment charges are paid.
2. According to Article 20(1) of the CIT Law tax relief is not applicable if the recipient of the donation conducts remunerated activities directed towards providing benefit to the donator. Only donations that are philanthropic by nature qualify for CIT relief. In some cases, by making donations to public benefit organisations taxpayers receive certain services in return such as placement of the donator’s logo on the recipient’s website. The present “best practice” is to strictly separate the amount of donation and the amount of benefit received in two individual agreements.
It is laid down in a new Article 125(3) of the draft Cabinet Regulation that when donations are made to public benefit organisations and counterperformance is received it is required to sign a separate agreement on the amount of donation and the consideration for services. Thus, the Cabinet Regulation approves the separate agreements approach to ensure that the donation part is eligible for CIT relief.
1 “Corporate income tax overview concerning income generated and tax paid by a non-resident in the Republic of Latvia”
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