Group consolidation is not permitted for tax purposes.Find out more on Transfer pricing, thin capitalisation and controlled foreign companies.

Arm’s-length principle

Latvian law requires related-party transactions to be at arm’s length. In other words, the conditions made or imposed between two related enterprises in their commercial or financial relations must not differ from those that would be agreed between independent enterprises engaging in similar transactions under similar circumstances. The difference between the transfer price and the market price is treated as deemed profit distribution that is taxable at 20% CIT (25% effective).

A tax audit may examine and adjust the price of a transaction in the following circumstances:

• A transaction between related parties.
• A transaction with companies or individuals situated or registered in a tax haven.
• Barters and set offs.
• A price deviation exceeding 20% of prices the taxpayer has applied to similar goods or services over a short period.
• Exports and imports.

Mandatory transfer pricing documentation

According to the new transfer pricing regulation covering financial years starting from 1 January 2018, the transfer pricing documentation elements consists of:

• Country-by-country (CbC) report.
• Master file.
• Local file.
• Simplified transfer pricing documentation.

Country-by-country (CbC) report

A taxpayer within a multinational enterprise group is required to file a CbC report with the SRS 12 months after the end of the financial year or to notify the SRS of the group company filing the CbC report and of its tax residence by the end of the financial year starting with financial year 2016. Conditions that necessitate the filing and notification of the filing, as well as related matters, are determined by the Cabinet of Ministers.

Who is required to prepare and file the CbC report?

Under the Cabinet Regulation, the CbC report filing requirement applies to a Latvian taxpayer who is part of a multinational group with total consolidated revenues exceeding EUR 750 million for the financial year and meets one of the following criteria:

• one is the parent of the group, or
• one is a Latvian tax resident entity within the group that is not its parent if one of the following conditions applies:
  • the parent is not required to prepare or file the CbC report in its chosen country of tax residence
  • there is an effective international agreement with the country where the parent is tax resident, but there is no effective agreement with the competent authority for preparing and filing the CbC report (i.e. the SRS cannot receive the CbC report because Latvia has not entered into an automatic information exchange agreement with the country where the CbC report has been filed)
  • one is the group’s surrogate parent (a company to whom the parent has delegated the task of preparing the CbC report), or
  • the country of tax residence chosen by the parent has suffered a system failure (the SRS has not received the CbC report since the other country has not forwarded it because of an IT system error or any other failure) and the SRS has notified the Latvian taxpayer accordingly.

The deadline for filing the CbC report with the SRS

A Latvian taxpayer meeting the filing criteria is required to file the CbC report within 12 months after the last day of the financial year. The first financial year for CbC report purposes began on 1 January 2016, and so the Latvian taxpayer’s CbC report for the financial year 2016 was due by 31 December 2017.

The Latvian taxpayer is also required to notify the SRS by the last day of the financial year about whether one is the parent, surrogate parent, or entity required to prepare the CbC report. A Latvian taxpayer who is not required to file the CbC report should notify the SRS of the identity and tax residence of the entity filing the CbC report.

Master and Local files in Latvia

The amendments introduce mandatory submission of Master and Local file for financial years starting from 1 January 2018 to the Latvian tax authorities within 12 months after the financial year-end if certain transaction amount threshold(s) set out in the regulation are met. Moreover, significant penalties will also apply in case of late submission and/or non-compliance with the transfer pricing regulation.

Requirements for preparing and filing mandatory transfer pricing documentation

According to previous regulation that covers financial years from 2013 till 2017 (including 2017), the Latvian taxpayer was required to prepare transfer pricing documentation if its net revenue for the financial year exceeds EUR 1,430,000 and if the value of a related-party transaction exceeds EUR 14,300.

For financial periods starting from 1 January 2018, if a taxpayer, resident, or PE enters into a transaction with a:

• related foreign company
• related private individual
• company in offshore country, or
• related Latvian-resident company and the transaction is economically linked to transactions with a related foreign entity or with an entity registered in a tax haven under the single supply chain transaction,

then the requirements may apply, and one should look at the amount of the transaction.

Local file submission requirements

Master file submission requirements

* The transaction has economic relation to the transaction with a related foreign entity or with an entity registered in a tax haven.

** Total amount of the incoming and outgoing related-party transactions within the financial year (i.e. goods purchased + goods sold + services received + services rendered).

Specific requirements to the content of the Local and Master files are outlined in the Cabinet of Ministers rules No. 802 and are aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2017.

Other important information

The new law introduced penalties for late submission and non-compliance with the requirements for preparation of transfer pricing documentation at the amount of 1% from the controlled transaction amount but not exceeding EUR 100,000.

Note that the above-mentioned information highlights the main points of the amendments. The changes in the transfer pricing regulations include other specific matters and nuances that have to be taken into account and carefully evaluated by the taxpayers.

Simplified transfer pricing documentation

The amendments in the Tax and Duty Act introduced on 28 November 2018 and information in Cabinet of Ministers Regulations on 18 December 2018 No. 802 permit a taxpayer not to prepare a simplified transfer pricing file for low-value adding services. The taxpayer should prepare a simplified transfer pricing file within 12 months after the end of the financial year and submit it to the SRS within a month after receiving a request. The Cabinet of Ministers prescribe criteria that should be met to qualify for the simplified arm’s-length pricing and documentation as well as details the taxpayer should include in the simplified transfer pricing file.

Requirements for preparing and filing simplified transfer pricing documentation

If a taxpayer (resident or PE) enters into a transaction with a:

• related foreign company
• related private individual
• company in offshore country, or
• related Latvian-resident company and the transaction is economically linked to transactions with a related foreign entity or with an entity registered in a tax haven under the single supply chain transaction,

and the total amount of the related party transactions within the financial year exceeded EUR 250,000, then instead of a Local file the taxpayer may prepare the simplified transfer pricing documentation about transactions to which the simplified approach applies.

In accordance with the Government Regulation 677 paragraph 18.2, services are classified as low-value-adding and could be documented within simplified transfer pricing documentation if they adhere to the following criteria:

• They have supportive nature.
• They do not form a part of the international group’s core business, but this shall not preclude the situation whereby low-value-adding services forms a part of the core business of a multinational corporation that provides such services to other commercial entities of the same multinational enterprise group.
• The provision of services does not require the use of unique and valuable intangible assets, nor does such intangible property result from the provision of services.
• The taxpayer by provision of the services does not assume or control any significant risks associated with the services and the provision of them does not create any such risk for the taxpayer.

If the above criteria have been met, the application of a mark-up of 5% may be appropriate from a tax perspective and a simplified documentation (without separate benchmarking analysis) may be sufficient for transfer pricing compliance purposes.

Advance pricing

Latvian taxpayers can apply to the SRS for an Advance Pricing Arrangement (APA) regulated by the Cabinet of Ministers Regulation No. 802. The APA is an administrative instrument issued by the SRS to address a taxpayer’s request for establishing transfer pricing conditions and methodology in one’s related-party transactions for a maximum period of five years.

This option is available to companies whose annual transactions with foreign related parties are expected to exceed EUR 1,430,000.

An APA application fee of EUR 7,114 is payable to the SRS as follows:

• 20% on submitting the application to the SRS.
• 80% after the SRS issues an official decision to initiate an APA with the taxpayer.

If the SRS refuses to initiate an APA with the taxpayer, the SRS reserves the right not to refund the 20% down payment.

The rules governing the application of the CIT Act state that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations may be used for Latvian transfer pricing purposes.

Thin capitalisation rules apply to interest payments exceeding a specified amount.

Only one method is available for interest payments of up to EUR 3 million: a debt-to-equity ratio of 4:1 (interest in proportion to the excess of the average liability over an amount equal to four times shareholders’ equity at the beginning of the tax year less any revaluation reserve).

A second method (30% of EBITDA) is available for interest payments exceeding EUR 3 million.

The higher amount of interest that exceeds these calculations should be added to the tax base.

The following interest payments are exempt from thin capitalisation rules:

• Interest paid on borrowings from credit institutions resident in Latvia, EEA member states, or countries that have an effective DTT with Latvia.
• Interest paid to the Latvian Treasury, Finance Development Institution, Nordic Investment Bank, European Bank for Reconstruction and Development, European Investment Bank, European Council Development Bank, or the World Bank Group.
• Interest paid on Latvian or EEA debt securities in public trading.
• Interest expenses directly or indirectly paid to government finance, foreign trade, or guarantee organisations in a country that have an effective DTT with Latvia.

A CFC regime currently applies to individual shareholders. Please see the Taxes for Individuals in Latvia section.

The CIT Act prescribes that a Latvian company owning a substantial share in a foreign company (owning more than 50% of a foreign company's shares directly or indirectly or being entitled to more than 50% of its profit) should pay CIT on profit in proportion to that share if the foreign company is a non-genuine (artificial) arrangement established to obtain CIT advantage and no substantial business is carried on by the CFC. If these criteria are met, then any profit made by a CFC that is based or incorporated in a tax haven is taxable in Latvia from the first eurocent, while a CFC registered elsewhere will not attract CIT unless its profits reach EUR 750,000 and passive income exceeds EUR 75,000.