Under the new CIT model in force as of 1 January 2018, all undistributed corporate profits are exempt. This exemption covers both active (e.g. trading) and passive (e.g. dividends, interest, royalties) types of income. It also covers capital gains arising on the sale of all types of assets, including shares and securities, except for the sale of immovable property by non-residents. This tax regime is available to Latvian-resident companies and non-resident companies’ permanent establishments (PEs) registered in Latvia.
The taxation of corporate profits is postponed until those profits are distributed as dividends or deemed to be distributed.
The CIT rate is 20% applicable to the taxable base. However, before applying the statutory rate, the taxable base should be divided by a coefficient of 0.8. As the taxable base is increased by the coefficient, the effective CIT rate is 25%.
For non-business expenses, a non-taxable cap on representation expenses and staff sustainability expenses is calculated as 5% of the company’s total gross wages for the past year.
For bad debts, there is no CIT to pay on the allowance if the debt is recovered within 36 months or 60 months for provisions made up to 31 December 2021 and for debtors going through insolvency process. An exemption is also available if several conditions of the CIT Act are satisfied.
The CIT Act provides special provisions for provisions made under IFRS 9. The exceptional conditions a company has to meet before it can take an exemption: the company holds an appropriate auditor’s report; each trade receivable included in the provisions (credit losses) can be traced; and procedures for recognising, recovering and derecognising receivables (financial assets) are in place. However, if a provision made in this way applies to a truly bad debt the company has expensed and which will not have been recovered within 60 months after it arose when the customer was supposed to pay the supplier, and the receivable is ineligible for an exemption under section 9(3) of the CIT Act, then provisions made under IFRS 9, too, will have to be added to the tax base.
For excess interest payments, only one method applies up to 3 million euros (EUR) (i.e. a debt-equity ratio of 4:1). A second method (30% of earnings before interest, taxes, depreciation, and amortisation [EBITDA]) is applicable if interest payments exceed EUR 3 million.
Lending to related parties is considered a profit distribution with several exclusions (e.g. the parent’s loans to a subsidiary; short-term loans for up to 12 months; a loan not exceeding one received from an unrelated party or not exceeding a certain level of registered share capital; if the lender has no retained earnings at year-start, etc).
The definition of 'related party' includes Latvian companies with at least 20% participation.
From a Latvian perspective, this tax is considered a CIT, not a WHT, so the rate is not affected by an applicable double tax treaty (DTT).
In Latvia, resident companies are taxed on profits distributed from their worldwide income, while PEs of non-residents are taxed only on profits distributed from Latvian-source income. Other Latvian-source income derived by non-residents may be subject to a final WHT or CIT by way of assessment.
