Tax reform measures, including a revised rate of corporate income tax, will be effective in Latvia beginning 1 January 2018.
New corporate income tax regime measures include:
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:
Changes made to the individual (personal) income tax measures include new "progressive" income tax rates, as follows:
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%.
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:
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%.
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 | email@example.com
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