Latvia as Holding company location
Latvia has already been selected by a number of multinationals groups as a location for their shared service centres (finance, IT, back-office functions) due to certain non-tax attributes (location in EU, available English speaking labour), and mainly due to the fact that it is considered as being far-less expensive location if compared with more developed economies. 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.
Latvian Holding Company regime applies fully as from 2014. It is simple, with low compliance costs, easy to manage and does not require complex planning. This article will summarize the key tax and non-tax attributes that Latvia can provide and which are important when considering potential locations for a Holding Company.
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 centralise 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
- Tax efficient exit
As from 2013/2014 Latvia’s tax laws provide most of these tax attributes as discussed further.
2. Corporate income tax rate
As of 1 January 2018, Latvian companies will apply a conceptually new Latvian corporate income tax. The new Latvian corporate income tax is payable upon the distribution of profits only. Until the Latvian company keeps the profits, 0% tax is payable. In other words, Latvian company does not pay tax on the annual profits until it distributes dividends, deemed dividends or notional profit.
3. WHT dividends, interest and royalties received by Latvian HC
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, with another 10 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%.
Tax credit in Latvia can be claimed on foreign WHT suffered via reduced tax payments in Latvia.
4. Income tax on dividends, interest and royalties received by HC
Since the main purpose of the HC is improvement of capital flow, the most important tax issue is availability of participation exemption (i.e. tax free dividends) rules. As from 1 January 2013 all dividends are exempt from taxation in Latvian HC but with the exception of dividends received from entities in tax haven countries which are subject to 20% corporate income tax. To apply exemption there are no restrictions on minimal shareholding or a holding period or shareholding.
Interest and royalty income received by Latvian HC is subject to corporate income tax at regular rate of 20%. If margin on interest/royalties is retained in a Latvian HC, then only margin will be subject to taxation provided that transfer pricing rules are reasonably complied with. Thus effective tax rate on interest/royalty income may be reduced further.
5. Capital gains
A Latvian company can reduce the tax base by the capital gains the company has earned from the sale of shares, if the Latvian company has held the shares for at least 36 months at the moment of the sale. Of course, if a Latvian holding company sells the shares which it has owned for less than 3 years, the company should not pay tax. However, if the company has held the shares for 3 years, the company can distribute the capital gains as dividends tax-free.
In all other circumstances capital gain on the disposal of a capital asset is treated as ordinary income and is subject to a 20% corporate income tax only if profit is distributed.
Similarly, gains on disposal of securities quoted on the regulated markets of the EU or EEA countries and investment certificates in EU and EEA open-end investment funds are exempt from taxation in Latvia. Thus, Latvian company could be used for trading of such securities as a profit from such activities is exempt from taxation in Latvia.
Gains on the disposal of other investments are taxed at regular corporate income tax rate of 20%. Thus, it is recommended that such assets are disposed via sale of shares.
6. Repatriation of profit
To create an attractive tax regime in Latvia, WHT on payments made by Latvian entities are gradually removed:
- There is no WHT on dividends paid to non-Latvian entities
- 5% WHT on interest and royalties will cease to apply starting from 1 July 2013 if the recipient is qualifying EU-related entity
- As from 2014 WHT will be removed from all interest and royalty payments made to foreign entities
The exemption from WHT on dividends, interest and royalties is not applied on payments made to entities in tax haven countries. These payments will be subject to 20% WHT. According to new corporate income tax if dividends are paid to individuals (residents or non-residents) the personal income tax is not being deducted anymore. However, the interest income is taxed at 20% rate.
7. Local stamp duties, capital duties or similar taxes
Unlike other countries, Latvia charges no stamp duty on share capital payments, apart from small stamp duties to the Enterprise Registry. Sale of real estate however will be subject to 2% stamp duty capped at LVL 30k (approx. EUR 43k). Planning options are available to minimize the amount of stamp duty.
8. Anti-haven rules (applicable to offshore companies)
Historically Latvia has established list of tax-haven countries and territories, which now comprises 25 locations and include most of tax haven countries and locations with certain exceptions. The payments to residents located in these countries and locations are subject to 20% WHT. WHT however does not apply, if specific permission is granted by the tax authorities or if goods of origin of tax haven country have been purchased.
Full list of tax havens is prescribed by the Cabinet of Ministers Regulations of 7 November 2017 No. 655 and is available here.
9. Tax efficient exit
If foreign investor decides to close the Latvian operations, there is no specific exit taxes payable. Sale of Latvian HC is neither subject to Latvian WHT nor capital gains tax. If, however, Latvian real-estate company is sold, 2% WHT may apply if the purchaser is Latvian entity. This WHT may be effectively avoided by prior planning.
If the operations of Latvian entity are transferred to other country, transfer-pricing aspects of the transaction should be considered to eliminate potential disputes with the tax authorities.
10. Tax rulings
Advance rulings and clarifications from the tax authorities could be obtained within a month for free of charge. Advanced transfer pricing agreements are also available from the tax authorities for a fixed fee of EUR 7150.
11. Non-tax attributes
The desired non-tax attributes for a HC location would usually include:
- Sound standing in the international and business community
- Politically and economically stable environment
- Ease of incorporation and closure of operations
- Minimal reporting requirements (accounting, consolidated accounts, audit)
- Minimal substance requirements and administration costs
- Approachable location
- Availability of well qualified and trained workforce at competitive salaries
Below we discuss some of these attributes applicable in Latvia.
12. Political and economical environment
Although Latvia suffered a lot from the global crises, Latvia showed remarkable ability to balance its economy and achieve stable growth. This is accompanied with introduction of euro as from 2014, invitation to join OECD and positive ratings issued by international credit rating agencies (e.g. Standard & Poor’s, Moody’s).
13. Incorporation / closure
Latvian laws do not have specific HC rules, for establishment and operation of the HC the same rules apply as for the regular companies. The activities of the HC are carried out through either limited company (‘Sabiedrība ar ierobežotu atbildību’), which usually is established for business operations or public limited company (‘Akciju sabiedrība’), which are usually established to satisfy specific business requirements (e.g. banks, insurance companies and certain other businesses required to be registered as public companies) or because the entity intends to trade shares publicly.
Setting up a HC in Latvia requires a minimum share capital of EUR 2,800 and no great expense is involved in its ongoing maintenance. Incorporation is easy and can be carried out within a week.
14. Reporting requirements
Latvian companies need to apply local accounting standards, which are generally in line with IFRS. Accounting registers should be maintained in Latvian lats until 2013 and in euros as from 2014. Audit is required only for companies if its securities are publicly traded or if at least the following two criteria are exceeded:
- Balance sheet of EUR 400,000
- Turnover of EUR 800 000
- Average number of employees – 25
As from the above, Latvia can be considered as a reasonable location for a HC due to the attributes discussed above together with minimal substance requirements, availability of advance rulings and advanced pricing agreements, low maintenance costs. The fact that Latvia is not well-known location for HCs in some cases may considered as advantage as may lead to less scrutiny 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
How we can help?
- Advice of their opportunities and taxation
- Advice on supply chain planning
- Establishment and registration of the holding companies (preparation of the documents, registration, assistance with the banks, registration in other public institutions – such as State Revenue Service)
- Accounting services for the holding company, as well as preparation of financial and tax reports and their submission
- Support for the structuring of the transactions (preparation of the documents, consultation)