Non-Latvian tax residents
The Latvian company paying a dividend will effectively pay a 25% CIT (no PIT), and so a non-Latvian resident will receive the dividend gross. For example, a Latvian company’s board declares a dividend of €10k. The company will pay a CIT charge of €2.5k (€10k / 0.8 x 20%). The full dividend of €10k will be distributed to shareholders free of Latvian PIT.
Lithuanian tax residents
Lithuanian residents are subject to PIT at a flat rate of 15% on their worldwide income (with some exceptions). Although Lithuania is introducing progressive taxation from 2019, the rate of PIT on distributed profit income will remain unchanged regardless of the amount received, resulting in more favourable taxation than the treatment of other income.
The Latvia–Lithuania double tax treaty allows Latvia to tax dividends that a Latvian company pays to a Lithuanian resident, eliminating double taxation in Lithuania, but the national rules should be considered in measuring the ultimate tax burden. Under Lithuanian law, only a foreign PIT (or equivalent tax) that has been actually paid may be credited against the Lithuanian PIT charge, subject to a 15% cap. Under Latvia’s current tax rules (no PIT on dividends), the Lithuanian-resident shareholder will still be subject to a 15% PIT on the gross dividend (€10k x 15% = €1.5k) because no foreign tax such as CIT may be used for a PIT credit in Lithuania.
Under the old rules, a 10% Latvian PIT withheld entitled the individual to a full tax credit in Lithuania, and a further 5% tax was payable on the gross dividend distributed to the Lithuanian-resident shareholder. So the PIT burden on the Lithuanian resident remains unchanged in 2018, but the tax is paid only to the Lithuanian government. Yet the overall tax burden on both the company and the individual is heavier than what was levied under the old rules: a 25% CIT is now due on distributed profits and a further 15% PIT is payable in Lithuania. The €10k dividend declared by the Latvian company will first attract CIT of €2.5k and then Lithuanian PIT of €1.5k, working out at €4k effective.
Estonian tax residents
The gross income of Estonian-resident individuals includes their worldwide income from all sources.
A tax credit will generally be given on any foreign income tax paid by the individual. However, the credit is limited to the Estonian tax (a flat rate of 20%) charged on the same income. Any excess foreign tax credit cannot be carried forward. A foreign dividend distributed to an Estonian-resident individual is generally exempt if the underlying profit has been subject to foreign income tax, or if income tax has been withheld on the dividend under procedures similar to the Latvian tax regime. Estonian tax law includes a general anti-avoidance rule aimed at ignoring any transaction or chain of transactions carried out for the main purpose of obtaining an income tax advantage.
In our example, the €10k dividend will attract a Latvian CIT charge of €2.5k, with no PIT payable by the Estonian-resident individual. While such foreign dividends may eventually be exempt in Estonia, this income should be reported on the Estonian resident’s annual PIT return for information purposes. This filing is generally due by 31 March in the following year.
The individual should be able to provide the Estonian tax authority with documentary evidence that Latvian CIT has been paid on the underlying profit (a certificate issued by the Latvian company will suffice).
With Latvia and Estonia operating similar CIT systems after 2017, the tax burden may be eased by exempting Latvian dividends in the hands of Latvian or Estonian residents. The Latvian CIT charge is final, with no PIT due.
For a Lithuanian resident, however, the exemption from Latvian PIT, which is replaced by a higher CIT charge after 2017, means a further tax to pay in Lithuania, resulting in a heavier tax burden than what is carried by Latvian or Estonian residents.
Thus, if the Latvian company claims no relief under the new CIT regime, this will have the effect of pushing up the tax charge on dividends.