Starting from 2018, Latvia significantly restructures its corporate earnings taxation and introduces 0% corporate tax on reinvested earnings.
With the launch of a new Law on Corporate income tax, Latvia is moving towards the taxation of corporate earnings at the moment when earnings are distributed, or cash flow based taxation. In other words, a tax exemption to reinvested profits will be applied and tax will be payable only when company will pay dividends or make other payments considered as actual profit distribution. Followingly, individuals receiving such dividends will be exempt from personal income tax. The new tax replaces a 15% flat corporate income tax rate, applied on the net taxable income adjusted for non-taxable income and expences, calculated on an annual basis.
New effective CIT rate is 20% from gross profits. But since CIT will be applied to net payments, in order to calculate CIT liability, the net distributed amount of payable dividends or other payments of actual profits will be multiplied by 25%. Corporate income tax = 20%/0.8 * Taxable basis. So, the real CIT rate is increasing from recent 15% to 25%, but the moment it is going to be charged and what is to be used as the taxable basis will differ.
Even though, it is quite welcomed step from a business perspective, there are number of issues to think about before the year end which might have an effect to the future distribution of the equity and tax level.
The most important issues are: capital and equity structure and debt leverage, as a thin capitalization rule will not allow excessive interest expenses, distribution of retained earnings accumulated until 31/12/2017, intergroup companies’ loans and etc.
The new law on corporate tax defines a number of specific rules which must be looked into separately in each individual case.
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