Why Latvian Coporate Income Tax is good for a holding company?
The Latvian Corporate Income Tax is payable only when the profit is distributed as dividends. This creates the opportunity to postpone the payment of tax and reinvest pre-tax profits. The other effect is that the flow-through dividends are not taxed subjet to certain conditions. Furthermore, the capital gains from the sale of shares held for more than 3 years are exempt (except, real estate companies).
This creates the favorable conditions for establishing a holding company in Latvia.
Flow-through dividends
Dividends received by the Latvian company from a foreign company and distributed further, i.e. the so-called flowing dividends are not taxed if they are further distributed. The payer of dividends has to be a corporate income taxpayer in its country and should not be established in a low-tax or tax-free country.
Recommended shareholding layers
To effectively structure a corporate shareholding in Latvia, it’s important to consider multiple levels of organization, each serving distinct purposes to optimize business operations, asset protection, and tax efficiency. Here’s how this could be structured for three participants—Jānis Bērziņš (JB), Aivars Spalis (AS), and Ineta Liepa (IL).
1. Operating Company
The Operating Company is the core of the commercial activity where the production of goods or the provision of services takes place. For example, if JB, AS, and IL are engaged in manufacturing, the Operating Company would handle all aspects related to production, sales, and daily operations. However, it’s often advisable to segregate key business assets from the operating activities. This could involve placing critical assets such as real estate, machinery, trademarks, patents, and other intellectual property into a separate entity. These assets could then be leased or licensed to the Operating Company. This structure offers protection for these vital assets, reducing the risk that they could be impacted by operational liabilities.
2. Holding Company
A Holding Company, owned jointly by JB, AS, and IL, can be established to hold shares in the Operating Company. The Holding Company serves multiple strategic purposes:
- Management and Control: It simplifies the management of the Operating Company and any other potential subsidiaries.
- Financial Flexibility: It can act as a financing hub, facilitating loans and managing group finances, optimizing capital allocation across different business units.
- Tax Considerations: Although dividends distributed from the Operating Company to the Holding Company would still be subject to taxation, the Holding Company can offer benefits such as the consolidation of financial statements, potentially simplifying tax reporting.
- Investor Relations: If additional investors need to be attracted or an existing investor wants to exit, the Holding Company can streamline these processes.
3. Intermediary Holding Companies
Each of the three participants (JB, AS, and IL) may choose to establish their own Intermediary Holding Companies. These entities serve several purposes:
- Personal Investment Vehicles: They allow each participant to hold their shares in the Holding Company, which in turn owns the Operating Company. This structure provides each investor with a personal vehicle for managing other investments outside the shared business.
- Tax Advantages: If a participant decides to sell their shares in the Holding Company after holding them for at least 36 months, the capital gains from the sale would be exempt from Corporate Income Tax under Latvian law.
- Flexibility for Future Ventures: This structure also allows each participant to pursue additional business ventures independently, without affecting the shared enterprise.
Summary
By layering the corporate structure across these levels—Operating Company, Holding Company, and Intermediary Holding Companies—the business can maximize operational efficiency, protect critical assets, and leverage tax advantages. Each participant maintains flexibility for their personal investments while ensuring the shared business operates smoothly and is well-positioned for future growth or restructuring.
How can we help?
We have solid experience in assisting in the creation of tax-effective investment structures:
- Company registration / legal address / corporate legal matter.
- Accounting and tax compliance
- Transaction structuring / agreements / transfer pricing etc.
- Creating holding structures in other popular jurisdictions (Malta, Cyprus, the Netherlands etc) and operational companies all over Europe and beyond.
For more information please contact us at info@taxwise.lv or call +37129274911
