From 1 May this year, positive changes are introduced to application of allowances under tax conventions. Amendments to Cabinet Regulations No 178 “Procedure for applying tax allowances specified in international treaties on avoidance of double taxation and prevention of tax evasion” (Cabinet Regulations No 178) require that a Resident’s Certificate – an application to apply tax allowances or a similar document – should be obtained up to the day when the company’s tax returns are to be filed for the reporting period(instead of up to the payment date, as before). Likewise, some editorial specifications have been introduced in the Resident’s Certificate form. The procedure remains the same: the Resident’s Certificate must be submitted to the tax administrations of both countries for approval and is usually valid for five years after approval.
We remind you that corporate income tax is currently withheld from the following payments to non-resident companies:
- income obtained from shareholding in partnerships – 15%,
- profit distributed to members of a cooperative company – 15%,
- compensation for management and consulting services – 10%,
- compensation for use of property located in Latvia – 5%,
- compensation for disposal of real estate or shares in a real estate company located in Latvia – 2%,
- payments to persons who are located, placed or established in low-tax and tax-free countries and territories determined in the Cabinet Regulations – 5% to 30% depending on the type of payment.
The list of payments to non-resident individuals subject to personal income tax is even larger and is available in Section 17(12) of the law On Personal Income Tax.
On concluding an agreement with a non-resident, an assessment should be made of the tax deduction obligations at the moment of payment and what allowances can be applied under the tax conventions, taking into account the transaction partner’s country of registration and their legal status. For example, a transaction partner that is a foreign partnership from country X but is not a taxpayer in country X (a so-called transparent partnership) will have no right to apply the allowances set in the tax convention. That right will be for members who are tax residents of country X. In this situation, information should be obtained about members of the partnership, their respective share of income, their countries of residence, as well as Residence Certificates from their respective tax residence countries. In practice, this is usually limited-access information, so that application of the allowances set in the tax convention will be limited. We have previously written about limitations in applying allowances set in tax conventions with regard to transparent partnerships, with suggestions how to solve them:http://www.ifinanses.lv/lat/nodokli?doc=5885. Unfortunately, the latest amendments to Cabinet Regulations No 178 will not help to solve these situations.
However, timely planning and structuring transactions with non-residents can make these situations and additional tax burdens avoidable. SORAINEN - your partner in planning transactions with non-residents.