Latvia has already been selected by a number of multinationals groups as a location for their shared service centers (finance, IT, back-office functions) due to certain non-tax attributes (location in EU, available English speaking labor), and mainly due to the fact that it is considered as being far-less expensive location in comparison to other more developed countries. To create Latvia’s recognition as a location for Holding Companies, Latvian parliament has passed substantial amendments into corporate tax legislation aiming to compete with other commonly known Holding Companies jurisdictions in Europe.
Holding Company (HC) is usually defined as a company that owns shares in other company or companies. HCs are often used by multinational groups to centralize the management function, to improve the treasury management (e.g. via cash pooling and allocation of profits) or to hold important assets (e.g. trademarks, licenses, and similar property). HC can also be a key component to increase a company’s tax efficiency and, in fact, usually the tax benefits are considered as a decisive factor for creating a HC. Thus the investor’s decision is usually based on the set of tax and other considerations.
A “Wish List” of an attractive location for a HC usually includes the following tax attributes:
- Low corporate income tax rate
- No WHT on dividends, interest and royalties paid to a HC
- No income tax on dividends, interest and royalties received by HC
- No income tax on capital gains
- No WHT on outgoing dividends, interest and royalties paid by HC
- No local stamp duties, capital duties or similar taxes
- Access to strong network of double tax treaties and EU Directives
- No controlled foreign corporation, thin capitalization or anti-haven rules
- Group relief (fiscal unity) available
As from 2013/2014 Latvia’s tax laws provide most of these tax attributes. For example, the relatively low rate of corporate income tax (15%) makes Latvia attractive as a country for setting up a HC as only very few countries in EU provide lower rate.
Also, under the terms of the EU parent/subsidiary directive, if a Latvian HC company owns at least 10% of capital of another EU company, no withholding taxes shall be levied on dividends paid by the subsidiary. Similarly, interest and royalties paid by EU entity to Latvian HC shall be exempt from WHT provided that one company holds directly at least 25% of capital or voting rights in the other company or 25% capital or voting rights in both companies are held by a third EU company. To qualify for the exemptions provided by the EU directives, tax residence in EU is required, companies should be subject to taxation in their jurisdiction and should agree with the legal form as prescribed for each country.
Currently, Latvia has concluded 54 double tax treaties and another 10 are in approval process, which provide favorable WHT rates on payments made by entities outside EU. Most of the DTT ensures that WHT levied by the subsidiary does not exceed 5% on dividend payments provided that Latvian HC company owns at least 25% of capital of another company. The WHT rate on interest payments made to Latvian HC shall not exceed 10% based on provisions of DTT, while WHT on royalties are limited to 10%.
The fact that Latvia is not well-known location for HCs in some cases may considered as advantage, as it may reduce monitoring by the tax authorities in other jurisdictions. Latvian HC regime can be particularly useful for the following activities:
- For holding shares in a company, which intends to be sold without taxation
- As platform for new investments, especially if several investors are involved with minority shareholdings and each having its HC
- For centralizing management and back-office functions to benefit from 15% income tax rate
- For cash pooling and centralizing financing
- As a tax-free platform for trading with or investing in listed securities traded in stock exchange located in EU or European Economic Area
Our company can provide information about the opportunities of HC in Latvia and taxation, assistance in establishment and registration of the HC, as well as provide other advice about HC business in Latvia.