Effective 1 January 2018 companies in Latvia are subject to Corporate Income Tax (CIT) only on their profits that are distributed (or deemed distributed). The undistributed profits are not taxed. So does it mean that Latvian CIT is 0%? 

Corporate income tax rate is 20%.  However, certain expenses deemed to be taxable similar to profit distributions are subject to CIT at an effective rate of 25%.

It must be observed that profit distributions include not just declared dividends but also payments similar to dividends, hidden profit distributions and deemed profit distributions such as non‑business expenses, excessive interest payments, as well as credits extended to related parties, transfer pricing adjustments, non-qualified bad debt and liquidation proceeds.

The CIT is levied at the time the profits are distributed or deemed distributed. Dividends and other distributions are subject to CIT at the level of the payer.  The CIT applies at the time the dividend is declared, and no further tax is due at the time of payment.

Specific re-distributions of dividends terms and conditions must be obeyed. Attention needs to be paid to entities from the so-called “black-listed jurisdictions”.

Capital gains on sales of property are taxed only when there is a profit distribution.  Capital gains from the sale of shares held for at least 36 months in general are exempt from tax (provided certain conditions are met).  The exemption does not apply to capital gains from sales of shares of companies located in the “black-listed jurisdictions”.

We conclude that Latvia’s Corporate Income Tax regime indeed is an effective cash flow management opportunity for capital intensive industries with additional benefits to group structures using Latvia as one of its points of presence. For other businesses Latvia is a jurisdiction with a relatively low corporate tax regime and a rather limited new CIT application practice.

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Read more:

Latvian State Revenue Service webpage: https://www.vid.gov.lv/en/node/57208

TaxLink webpage: http://www.taxlink.lv/new-corporate-income-tax-in-latvia-starting-from-2018/

Tax conventions: http://www.fm.gov.lv/en/s/taxes/conventions/