• Two favourable tax measures widely used by groups of companies are abolished from 1 January 2014:
    • transfer of tax losses within a group of companies;
    • deductibility of notional interest calculated on retained profits realized since 1 January 2009.
  • Alternatively, a new tax allowance to facilitate research and development (R&D) is introduced as of 1 July 2014. Under the new provision, taxable income can be reduced by expensesdirectly attributable to personnel and costs of research services purchased from specialised scientific institutions, multiplied by 3. The result of the R&D process may not be disposed of for the following three years. These CIT Act amendments replace the previous regulation that allowed applying a 1.5 coefficient to expenses of activities resulting in registration of a new patent.
  • The option to apply the 1.5 coefficient to the purchase value of new production plants for CIT purposes has been extended until 2020.
  • CIT rebate for investment in supported investment projectshas been extended until 2020, with the minimum investment qualifying for rebate up from LVL 3 million to EUR 10 million.
  • If the 2% withholding tax (WHT) is applied to payment to a Latvian non-resident company for disposal of real estate located in Latvia, an alternative option will be available for tax residents of other European Union (EU) or Double tax treaty (DTT) countries. These qualifying non-resident persons will be allowed to recalculate tax payment as 15% CIT on the profit gained from the transaction, ie income generated from the sale of real estate reduced by related costs incurred, and adjust tax payment accordingly.
  • Amendments are made with regard to WHT on payments to legal persons established in black-listed jurisdictions:
    • custodians will be responsible for withholding tax from dividends paid on shares of publicly traded joint stock companies;
    • payments for acquisition of goods will be exempt from WHT provided that the price in those transactions isarm’s length. The goods do not have to originate from the respective black-listed territory;
    • payments made for acquisition of EU/EEA publicly traded shares will be exempt from WHT provided that the price in those transactions is arm’s length;
    • the right to request a permit from the State Revenue Service (SRS) to exempt interest payments (WHT at 5% or 15% rate) or royalties (15% WHT) to black-listed jurisdictions is abolished. These payments will be subject to WHT without exception;
    • in accordance with planned amendments to the Commercial Law on the option to pay interim dividends,30% WHT should be withheld from interim dividendspaid to legal persons established in black-listed jurisdictions.
  • If a company distributes interim dividends and faces losses at the end of the financial year, the amount of interim dividends is considered non-business expenses for CIT purposes, thus a coefficient of 1.5 will be applied to those expenses.
  • With reference to the amendments to the Personal income tax (PIT) Act (see more information in the section on PIT  below), costs incurred in relation to loans subject to PIT are deductible for CIT purposes.
  • The interest rate used for thin capitalisation calculation has been amended. The average weighted interest rate on loans issued to domestic non-finance companies, published by the Bank of Latvia and multiplied by a rate of 1.57, must be applied to the company’s debt.
  • Income from disposal of securities publicly traded in the EU/EEA including interest income related to bonds publicly traded in the EU/EEA will be exempt from CIT. It remains unclear whether the provision refers both to interest income upon disposal of bonds and to interest received during the holding period until settlement.
  • Passenger motor vehicles worth at least EUR 50,000 (LVL 35,100) without VAT will be considered representative vehicles for CIT purposes.
  • With regard to writing off debts, Section 9 of the CIT Act specifies that these provisions also refer to writing off unrecovered loans with calculated interest and unrecovered VAT amounts. This practice has already existed in relation to unrecovered VAT from previous taxation periods confirmed by SRS in rulings in several cases.
  • In relation to fixed assets transferred and taken over during reorganisation, the parties must calculate depreciation of those assets proportionally to the number of months during which the assets were held.
  • Private higher education institutions will not be taxed on their revenues from study fees, exhibitions, concerts and independent research.
  • If a Latvian company realizes income from publicly traded securities via financial intermediaries and income tax is withheld at source, the tax paid can be verified by documents issued to the intermediaryby the relevant EU or DTT country’s tax authorities.
  • A company will be liable to minimum CIT of EUR 50 if its financial result in 2014 is a loss (except registration and liquidation years) and no PIT and social security contributions (SSC) are paid during the taxation period.  Thus, the minimum PIT is effectively payable as of 2015.