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Significant changes to be introduced in the tax system of the Republic of Latvia as of 2018

Regarding changes in the application of Corporate Income Tax (CIT)

The Parliament of the Republic of Latvia (Saeima) on 28 July 2017 as a matter of urgency adopted for review a bill regarding the Law on Corporate Income Tax drafted by the Ministry of Finance. The aforementioned bill includes a new CIT model, establishing that paying of CIT is attached to the distribution of corporate profit, rather than effected based on the financial results of the company. It means that CIT will not be imposed on the profit earned by the company but instead on the amounts paid in dividends, including on conditional dividends and expenses equivalent to dividends.

The CIT rate is planned to be increased from 15% rate to 20/80 – the effective tax rate will be 25% if the tax is calculated from the net amount of the taxable object, while if the amount of the taxable object is expressed as a gross sum – the rate will be set in the amount of 20%. It is planned that the CIT rate will not be applied to reinvested profit, i.e. if the company invests in equity, the CIT rate will be 0%.

It must be noted that it is planned to change the taxation period to one month, which means that instead of one annual CIT declaration, twelve monthly declarations will have to be prepared. Taking into account the transitional provisions, it is planned that one CIT declaration will have to be prepared for the first six months of 2018, and companies having a reporting period other than the calendar year will be obligated to prepare an interim report as at 31 December 2017.

It is planned that in addition to regulations regarding preparation of CIT declarations, CIT advance payments will not have to be paid, i.e., regular calculation and payment of the CIT advance payments will have to be done until July 2018.

The new legislation will provide for supplementing the range of entities covered by the CIT Law – in addition to companies and branches of foreign companies it will be supplemented with partnerships and cooperatives.

In contrast to the current legislation, the new standards will not provide for the application of CIT to reasonable fines not paid to related parties. It means that, e.g., CIT of 25% will not have to be paid on top of the fines imposed by the State Revenue Service (SRS) and other institutions.

This article prepared by the experts of L2B Management SIA is an overview of the key bullet points of the planned CIT legislation. Please contact the L2B Management experts for more information by making an appointment by e-mail or phone +371 67373020 or +371 67373021. 

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