Changes to dividend taxation driven by Latvia’s corporate tax reform will affect residents of countries with traditional regime (1)
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From 1 January 2018, Latvia’s tax regime has undergone major changes affecting the taxation of personal income, including dividends. This article explores some of the changes to the tax treatment of a Latvian-source dividend and their implications for Latvian, Estonian and Lithuanian tax residents. Written by PwC Baltic teams, this article is based on the tax laws and tax practices applicable at the time of writing.
Tax treatment before 2018
In 2017 and earlier, a Latvian-source dividend was taxed at two levels: first a 15% corporate income tax (CIT) was charged on the Latvian company’s profit for the year, and next a 10% personal income tax (PIT) was withheld by the company on payment to a Latvian or non-Latvian tax resident individual.
For example, an annual profit of EUR 100 attracted a CIT charge of EUR 15, leaving EUR 85 available for distribution by board decision. An individual resident in Latvia, Estonia or Lithuania eventually received EUR 76.5 (EUR 85 less a 10% PIT), so the profit eventually distributed by the Latvian company had attracted an effective tax rate of 23.5%.
Tax treatment of profits made after 2017
The two income taxes payable on dividends under the old rules have now been merged into a single rate of CIT on dividends paid out of profits made after 2017. The CIT charge is 20% of a dividend declared by the board and divided by 0.8, so the effective rate of CIT on the distributed dividend is 25% (an increase of 1.5 percentage points).
Under the PIT Act, dividends are taxed at a rate of 10%, 20%, or 0% if three conditions are met.
The first condition is the year in which a profit is made. Profits arising before 2018 may still be distributed subject to a 10% PIT under the old rules unless the board decision is made after 2019. Profits generated after 2017 (qualifying distributions) may be zero-rated for Latvian PIT unless other conditions apply.
The second condition is the applicability of PIT or CIT in Latvia or elsewhere. If PIT or CIT has been paid on qualifying distributions from a Latvian or an EU/EEA company, they are automatically zero-rated for Latvian PIT. If the paying agent is located elsewhere, distributions may still be zero-rated for PIT if there is documentary evidence that PIT or CIT has been withheld at source.
Exclusions from the two conditions provide that profits distributed by a company based in a tax haven or registered as a microbusiness taxpayer will attract a 20% PIT, which cannot be reduced.
Thirdly, if the tax authorities believe that the company (or the entire arrangement) has been set up for tax evasion purposes, a 20% PIT will apply regardless of the above rules.
Implications for Latvian tax residents
The rules described above result in the following tax treatment for Latvian tax residents:
Dividends out of a Latvian company’s profits made after 2017 may be zero-rated for PIT because the Latvian company has already paid the full income tax charge;
Dividends out of a Latvian company’s pre-2018 profits distributed in 2018 or 2019 will attract a 10% PIT;
Dividends out of a Latvian company’s pre-2018 profits will attract a 20% PIT if they are distributed either after 2019 or by a microbusiness taxpayer;
Dividends from an EU/EEA or a non-tax-haven company may be zero-rated for PIT after 2017 if PIT or CIT has been paid;
Dividends from a tax-haven company will attract a 20% PIT.
(to be continued next week)