The Corporate Income Tax Law, which went into force on January 1, 2018, and Cabinet Regulation No. 677, titled “Regulations on the Application of Norms of the Corporate Income Tax Law,” are used to assess corporate income tax. Conceptually new company income tax payment options are defined under the Corporate Income Tax Law. The law allows for tax payments to be delayed until profits are transferred or utilized in other ways for costs, but this does not guarantee the continued growth of a taxpayer. This indicates that taxation is applied from the time a profit is earned until the time it is distributed. Therefore, regardless of the amount of income earned throughout the year, the tax will only need to be paid if the taxpayer distributes profits in the form of dividends or payouts equivalent thereto, incurs expenses unrelated to economic activities, pays higher interest rates, disburses loans to relatives, etc.
The value of taxable items is multiplied by the coefficient of 0.8 to determine the tax base. Distributed profit and deemed distributed profit make up the tax base.
Calculated dividends, including exceptional dividends, payouts that are comparable to dividends, and conditional dividends are all regarded as distributed profit.
Deemed conditional profit
The following make up the deemed conditional profit that is subject to tax:
- expenses unrelated to economic activity
- risky debts of debtors
- higher interest payments
- loans to related parties
- Non-residents’ employee perks tied to a permanent establishment in Latvia
- liquidation quota
Relief from CIT
The taxpayer has the right to use the following tax breaks if the tax base that qualifies for them is present: tax breaks for donors, tax breaks for taxpayers who engage in agricultural activity, tax breaks for taxes paid abroad, tax breaks for income from the sale of shares, transfer of prior year’s losses, etc. The Law On Application of Taxes in Freeports and Special Economic Areas grants capital enterprises in special economic zones and freeports the ability to continue applying a tax break. The taxpayer is free to select whether to use tonnage tax policies.
Payers of CIT
Inland firms (including partnerships), organizations supported by State or local government funds, whose revenue from economic activity is not foreseen in the budget, permanent establishments, foreign businesses, and other foreign individuals who make money in Latvia all have to pay taxes. Individual (family) businesses that produce annual reports in compliance with the Law on Annual Reports and Consolidated Annual Reports (including farming and fishing operations) must also pay tax. Natural people, societies, foundations, religious institutions, labor unions, political parties, private pension plans, investment funds, alternative investment funds, etc. do not have to pay taxes.
Rates of CIT
Each taxpayer’s business income tax rate is different. The taxable base is subject to the 20% CIT rate. However, the taxable base should be divided by a coefficient of 0.8 before applying the statutory rate. The effective CIT rate is 25% since the coefficient raises the taxable base. Companies are subject to a 15% tax rate, with both domestic and international taxable income being the taxable object. Permanent representative offices of non-resident enterprises are likewise subject to the 15% rate. Non-residents who get money from economic or related activity in Latvia are subject to taxes at rates ranging from 5% to 15%, depending on the nature of their income.
Decrease in tax
The amount that the taxpayer has paid in the applicable taxes overseas may be deducted from the projected tax, according to the Law “On Corporate Income Tax.” The taxpayer is required to prove that taxes have been paid overseas. Presenting documentation with the taxable income and amount of the tax paid abroad mentioned, which have been validated by the appropriate country’s tax collecting agencies, is one way to achieve this. Reduced tax obligation must be less than the expected amount of Latvian tax due on the foreign income. These rules must be applied individually to each foreign country’s revenue if it was earned during the taxation period in several overseas locations.
For each tax year, corporate income taxpayers are required to make SRS disclosures. Along with the company’s annual report, the annual declaration for the relevant tax year must be filed with the SRS. Companies have until the fifteenth day of every month to make advance payments of the tax into the state budget throughout the taxation year. The SRS applies tax overpayments earned during each taxation period to further tax payments the taxpayer makes to catch up on back taxes. The SRS must return these overpayments upon a taxpayer’s request within 30 days of receiving the request. The State Revenue Service (SRS) will direct the amount of overpaid tax to settle any arrears of State taxes or other debts of payments that the State has demanded from the taxpayer.