Investing in Stocks Through a Latvian Company
If you’re considering where to establish an investment vehicle for stock investments, a Latvian company offers distinct advantages. These benefits cater to various types of investors, including traders, value investors, and those focused on dividend aristocrats.
The Latvian Corporate Tax System for Stock Investments
Since January 1, 2018, Latvia has implemented a unique corporate income tax system where companies only pay taxes when they distribute dividends or similar payouts to shareholders. This defers the tax payment until profits are distributed, allowing a Latvian company to reinvest undistributed profits indefinitely. Additionally, there’s a special tax exemption available for long-term investors.
Utilizing a Latvian Company: Traders, Value Investors, and Dividend Investors
For Stock Traders
For daily traders, the benefits are clear. A Latvian company doesn’t pay tax on trading profits, regardless of the results. Funds can be reinvested without tax implications, and the company only pays a 20% tax when dividends are distributed. This offers an advantage over individual traders, who must pay a 20% capital gains tax each time they profit. Latvian companies, however, only pay tax when gains are distributed or the company is liquidated.
Key Advantages:
- Traders can reinvest gains without immediate tax, increasing available funds for further investment.
- The deferred tax payment allows traders to benefit from the time value of money, potentially reducing the tax burden over time.
For Value Investors
Value stocks are typically undervalued based on fundamental ratios like price-to-book or price-to-earnings, often due to market skepticism. Value investors focus on stocks trading at or below intrinsic value, typically with a long-term investment horizon. Latvia’s corporate tax system is particularly beneficial for long-term investors, offering a capital gains tax exemption if stocks are held for more than 36 months. This allows the Latvian company to distribute these gains as tax-free dividends.
Example:
A trader might buy stocks for $1,000, sell them for $2,000 after a month, and continue trading without triggering tax obligations until profits are distributed. Conversely, if a Latvian company buys stocks for $1,000, holds them for three years, and sells them for $4,000, the resulting $3,000 gain can be distributed tax-free.
For Growth Stock Investors
Growth stocks are from companies expected to outpace their peers, often trading at high valuations due to anticipated rapid growth. Investors typically aim to profit from capital gains rather than dividends. For these investors, Latvia’s long-term capital gains exemption is especially attractive, making it a favorable option for those investing in growth stocks with a long-term perspective.
For Dividend Aristocrat Investors
Investing in dividend-paying stocks (dividend aristocrats) is particularly appealing when the market is stagnant or declining. Under Latvian tax rules, inbound dividends are exempt from corporate income tax, provided the dividend payer has paid corporate tax in its country. When these dividends are redistributed by a Latvian company, they remain tax-free.
Additional Benefits:
- If the individual shareholder becomes a Latvian tax resident, neither the company nor the shareholder pays tax on flow-through dividends.
- Alternatively, shareholders can choose to be tax residents in a country where dividend income is exempt, allowing dividends received by a Latvian company to pass through to the shareholder tax-free.
Conclusion
Investors of all types can leverage the Latvian corporate tax regime, especially those with long-term goals that include not just investing but also residing in Latvia. Even if residency isn’t a consideration, a Latvian company remains a valuable tool for investing in global stocks.
