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Latvia: Tax changes effective in 2018

Tax changes in Latvia, effective in 2018

Tax reform measures, including a revised rate of corporate income tax, will be effective in Latvia beginning 1 January 2018.

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Overview of corporate income tax law changes

New corporate income tax regime measures include:

  • The corporate income tax rate will increase from the current rate of 15% to 20%. 
  • The "tax point" will change from the date when the profits are earned to the date when the profits are distributed as dividends. 
  • New rules will apply for a "deemed profit" distribution, that is, for such items as non-business expenses, non-arm’s length transactions with related parties, loans to related parties, "doubtful debts," excess interest costs, etc. Such amounts will be treated as dividend distributions and, thus, will be included in the base for tax calculation and payment purposes. The deemed profit distribution amounts are to be treated as net dividends (i.e., profit after tax); and thus prior to calculating the tax of 20%, the amount must be divided by 0.8 to arrive at the profit before tax amount. Then, an effective tax rate of 25% (0.2/0.8) for any such payment will be imposed and due.

Due date for corporate income tax: Under the current corporate income tax regime, taxpayers have had to submit one annual corporate income tax return when adjustments were made to financial profit for the year (e.g., non-business expenses and tax relief measures) to arrive at taxable income. With the new regime, the taxation period will be the calendar month, and corporate income tax will be payable by the 20th of the following month if a taxable event occurred. The "tax point" is when the liability is created, e.g.. a non-business expense is booked or a shareholder decision for a dividend distribution is made.

Treatment of passthrough entities: The new corporate income tax law introduces new taxpayers—partnerships, individual companies and cooperative partnerships, entities that previously were transparent for tax purposes. From 2018, these entities  will have to calculate corporate income tax on deemed profit distributions made to their members or partners as if they were companies.

Transition rules: There are several transition rules between the current corporate income tax regime and the new corporate income tax model. Some of these transition rules are as follows:

  • Tax value of tax losses as of 31 December 2017 can be used against tax payments on dividend distributions until 2022 (the tax credit is capped at 50% of the amount of tax calculated on the dividends).
  • Companies with a financial year-end other than 31 December will have to submit interim financial statements as of 31 December 2017 together with a corporate income tax return pursuant to the former or “old” corporate income tax system.
  • Payments or provisions made before 31 December 2017, that were not deducted for tax purposes, if later reduced can be used to decrease the taxable base under the new tax regime. The reduction is 75% of the provision to account for the change in the corporate income tax rate.
  • Distributions of retained earnings as of 31 December 2017 do not attract additional corporate income tax on distribution as dividends. The tax treatment of dividends will follow the FIFO method (i.e., until retained earnings as of 31 December 2017 are distributed, no corporate income tax is payable on distribution of dividends assuming that after-tax profit under existing rules is distributed). 

Individual (personal) income tax

Changes made to the individual (personal) income tax measures include new "progressive" income tax rates, as follows:

  • 20% for annual income not exceeding €20,004
  • 23% for annual income from €20,005 to €55,000
  • 31.4% for annual income exceeding €55,000

The individual income tax rate on income from capital and capital gains is increased from the current rates of 10% and 15% to a unified rate of 20%.

Taxation of dividends

Because the changes to the corporate income tax and individual income tax systems will form a unified system, there are changes made to the taxation of dividends. The individual income taxation of dividend income and income from other profit distributions will not change when:

  • Corporate income tax is paid on the distributed profits in Latvia or 
  • Corporate income tax is paid in a foreign country where the tax was withheld at source

Since retained earnings as of the end of 2017 will not be subject to the new corporate income tax regime, there will be a two-year transition period so that in 2018 and 2019, distributions of such profits will be subject to an individual income tax rate of 10%, but from 2020 onwards, the rate will be 20%.

Changes in social security contributions and solidarity tax

The standard social security contribution rates will increase by 0.5% for both employees and employers, resulting in an 11% rate for employees and a 24.09% rate for employers. The additional income will be allocated to healthcare. The income on which social security contribution is paid is capped, with the cap being increased from €52,400 per year to €55,000. 

For income above the standard social security contribution cap, a "solidarity tax" is payable at the same rate as the standard social security contribution. From 2018, the solidarity tax revenues will be "split" with part being allocated to cover the upper tax rate increase of 8.4% (thus, employees will not be subject to extra tax from increase of tax rate) and part allocated to the taxpayer’s pension fund, resulting in what is being viewed as a personal benefit for the taxpayer and for what is hoped to be decreased motivation to avoid this tax. 

 

For more information, contact a KPMG tax professional in Latvia:

Ilze Berga | +371 67038027 | iberga@kpmg.com

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