Russian – Latvian tax convention will enter into force in 2013
Tax convention between Russia and Latvia will enter into force On 1 January 2013. Main issues regulated by this tax convention:
Lower withholding tax rates
The table below shows withholding tax rates to be applied on payments from Russia to Latvia and vice versa. It shall be noted that in certain cases Latvian Corporate Income Tax Law will offer lower tax rates starting of 2013.
|Object||From Latvia to Russia||From Russia to Latvia (not more than)|
|Dividends||0% according to Section 100 of Transition Regulations of the Latvian CIT Law||– 5%, if the true holder of dividends is Latvian capital company directly holding at least 25% from the capital of Russian company, and the invested capital exceeds USD 75,000 or
– 10% from total amount of dividends in all other cases.
|Interest payments||By October, 2012:
– 5% from total amount of interest paid between banks on any kind of loans; or
– 10% in all other cases.
Starting from 1 January 2014 according to CIT Law no withholding tax will be applied to payments to Russia.
|– 5% from total amount of interest paid between banks on any kind of loans, or
10% in all other cases.
|Royalty||By 31 December 2013 if the true holder of copyrights is Russian resident. Starting from 1 January 2014 no withholding tax will be applied to payments of royalty.||5% if the true holder of copyrights is Latvian resident.|
The Convention also sets place for taxation of real estate (including companies, where more than 50% of assets are composed of real estate). Just like in other EDSO type conventions income from real estate is taxable in the country where real estate is located.
The Convention also provides that profit derived in international air traffic, from transportation services by sea, rail and road are taxable only in the domicile country of the company. For example, Russian road transportation companies operating in Latvia will be exempt from payment of taxes in Latvia and will be taxable only in Russia. Similar procedure will be applied also to Latvian companies operating in Russia.
The resident’s status defined
Section 4 of the Convention provides definition of resident regarding legal entities and private individuals. The definition is of interest to persons whose residency status according to legislative acts of the Republic of Latvia is not done automatically. Entry into force of the Convention will be facilitated, as private individuals who have become Russian residents will be entitled to request from Russian Tax Administration a residency certificate.
According to international practice a residency certificate is certification of the other country that is considers the person as its resident. In such cases the country, to which the certificate is issued, i.e. Latvia, shall consider the person as non-resident or shall define the person’s residency status upon agreement with tax administration of the other country.
Definition of permanent representation narrowed down
According to Latvian law definition of permanent representation is quite wide therefore restricted operations of foreign companies in Latvia do not create obligation to register and become a corporate income tax payer in Latvia. Along with entry of the Convention into force several exceptions will be introduced, e.g., preparation and ancillary activities will not create permanent representations.
The Convention will be signed according to template set by the Economic Development and Cooperation Organisation, therefore notes to the EDSO model convention will be used in interpretation of provisions of the Convention. Although Latvia is not an EDSO member state subject to direct application of such notes, these are still used by SRS and courts.