Usually an individual, when buying a real estate inteded for personal use, for example, an apartment, a flat or a private house, will register himself as an owner of the property. Indeed, the mere purchase of the real estate as such, does not create any immediate tax consequences. However, if the buyer has an intention (or at least allows) to sell this property sometime in the future, it is probable that he/she will be liable to pay tax for the sale of the real estate in Latvia and /or in the country where the owner has his/her tax residence.
If an individual or legal entity intends to purchase the real estat in Latvia, for the purpose of carrying out the business activity or to hold it as a passive investment for resale, then the tax consequences should be assessed in advance. The purchase of the real estate via legal entity could be considered also in the situations, if the individual does not wish to be seen as a registered owner, for example, because of pending or probable litigation that may expose it to the property loss risk. In such situations the real estate could be acquired using the company shares in which belongs to a trust or similar foundation, against which no legal claims associated to the individual could be raised.
The purpose of this article is to provide an insight in Latvia taxes that should be considered before purchasing the real estate in Latvia, if the real estate is intended for commercial exploitation and/or is intended for the resale in the nearest future.
Before buying the real estate in Latvia the followign decisions should be made:
- Purchase the real estate directly or use the separate company which owns such property?
- If the real estate is purchased using a real estate company – where this real estate company should be established: in Latvia or abroad?
Should I purchase the Latvian real estate myself of use a special company for such purpoes?
The seller of the property often may be interested to sell not the real estate itself, but the company that owns such real estate. There are a number of reasons for doing that:
- If the real estate is sold by a Latvian company, the profit from the transaction results in the corporate income tax at a rate of 15%. If, however, the shares of the company (Latvian or foreign) are sold, the profit of the transaction is not subject to tax.
- The sale of real estate results in stamp duty of the buyer amounting to 2% of the transaction value for registering the ownership rights with the State Land Registry (maximum is capped at 42,486 EUR). If, however, the shares in the Latvian real estate company are sold, then only stamp duties apply for re-registering the ownership of shares with the Enterpise Registry.
- If the property is sold by the company that has purchased it as “unused real estate” (meaning that it has paid value added tax within the last 10 years) and the purchaser is not a Latvian value added tax payer, then the seller might have a liability to repay at least a part of the input VAT recovered previously. If, however, the shares in the real estate company are sold, there is no such a duty for the seller of the shares. But such duty may arise for the purchaser, if the property is used for the purposes which are exempt from the value added tax (for example, for rented out for residental purposes).
- If the property is sold by a company, the seller still has a right to pay real estate tax for the periond until the end of the taxation year. If, however, the real estate company is sold, the tax obligation is retained by the company which is being sold and therefore undertakes such costs.
/The Article will be completed shortly. Please refer to the version in Russian or contauestions regarding the taxation of the real estate/