In 2013 Latvia starts to introduce a favorable tax regime for international holding companies. This will bring the Baltic country in a line with such popular European low-tax brands as Cyprus, Malta, Netherlands and Luxembourg. It is expected that businessmen from CIS countries, particularly Russians, will be among the first who do not fail to take advantage of new opportunities.
Tatjana Lutinska, Head of International Tax Planning and Business Structuring at Prime Consulting, Latvian based legal company
Ladies and gentlemen, new holding regime!
In recent years Latvia is becoming ever more attractive for international business and capital. Next year will be marked by new opportunities of using Latvian companies in international investment activity.
In December 2011 along we the documents package related to approval of the state budget the Parliament adopted amendments to the Law on Enterprise Income Tax effective in 2013. These amendments, though remained practically unnoticed by the general public, nevertheless had kind of revolutionary breakthrough in the liberalization of the tax legislation of Latvia.
In fact since 2013 (partly 2014) comprehensive favorable holding regime will become effective in Latvia. Some of its features exist now, in particular tax exemption for some dividends received and payable. However in the near future Latvia will become easily comparable to such traditional centers of global investment activity as Cyprus, Malta, Netherlands, Luxembourg.
Bonuses and preferences for investors
According to changes in legislation, income of Latvian companies from sale of shares and all dividends received will be exempted from tax starting from 2013. Furthermore the dividends payable to other countries will be exempted from withholding tax. Starting from 2014 interests and royalties paid to foreign countries will not be subject to withholding tax as well.
A significant advantage of the Latvian holding regime is the absence of additional requirements. All other European countries with favorable conditions for international holding establishment, such as Cyprus, Malta, Netherlands, Austria, Denmark, Switzerland, Sweden, impose restrictions on one or more parameters, such as participating interest (generally required at least 10%), holding period (not less than a year), nature of business of a subsidiary (should be trading activities) and the taxation level in the country of a subsidiary. In addition almost all the countries, except the most loyal to the international investor Cyprus and Malta, exempt from withholding tax only dividends payable to the European companies or companies from countries having effective double tax agreements.
The only restriction in Latvia is that the holding regime does not apply to income received from and payable to tax-free countries included in the so-called “black list” of the Cabinet of Ministers – such classic offshore jurisdictions like Panama, Belize, British Virgin Islands, the Bahamas and others.
The network of double tax agreements, so essential in investing activities, is wide enough to provide the functionality of Latvian holding regime. There are agreements with 51 countries effective at the moment, including almost all European countries, USA, Canada, China and CIS countries such as Belarus, Ukraine, Kazakhstan, Uzbekistan, Azerbaijan. The long-awaited agreement with Russia shall be ratified by the Duma of the Russian Federation until the end of the year and will come into force in 2013.
Your entrance, Latvia!
Latvia comes out into the arena of international capital with a great competitive advantage. Suppose that in the near future it would be rather difficult to supersede the positions of such holding keepers as Netherlands, Luxembourg, Switzerland, given their distinct advantages – stable legislation that hasn’t been changed for decades and a reputation in the international community.
However serious competition with Cyprus, Malta, Estonia is a “can-do” for Latvia. The terms of taxation are comparable. The registration procedure is very simple and does not require the personal presence of the shareholders. The costs of administration of the company are the same level and significantly lower than for instance in Switzerland, Luxembourg, Denmark or Sweden.
Remarkable that Malta loses in the eastern front, in comparison to Latvia and Cyprus, not having effective double tax agreement with any CIS country. Estonians, in turn, have no tax conventions with such CIS countries like Russia and Uzbekistan. In addition capital gains from sale of shares at the moment of distribution to the shareholders of Estonian company will be taxed by Estonia.
That is not even in Cyprus
Thus in the nearest future Cyprus will remain Latvia’s strongest competitor in the low-tax front. However Latvia has its own distinctive advantages, which its Mediterranean rival doesn’t have. It is geographical position at the crossroads of transport routes, proximity to Russia and to other CIS countries, comfortable living environment, easy procedure of obtaining residence permit for investors.
In addition Latvian banking system offers a comprehensive range of banking products and services, is notable for its loyalty to non-resident clients, and most importantly is more stable if compared with banks in Southern Europe. Finally Latvia is in fact the only European country where virtually the entire population speaks Russian, and financial services in Russian here are not a privilege for the elite, but ordinary situation.
All this together makes Latvia a more attractive country also for set up of real business. One of the lowest rates of corporate tax in Europe is applicable in Latvia, companies may easily register for VAT in order to conduct trade in the EU, there are plenty of skilled labor with Russian and English languages knowledge, and finally European funds are accessible for setting up and development of production and services business.
There is every reason to expect that the forthcoming tax liberalization will be a significant impulse for the development of the Latvian economy. First some of the investors will not only register passive holdings, but start moving actual operations to Latvia, open offices and plants, hire the staff. Secondly the inflow of foreign capital will facilitate development of an entire holding and trading companies servicing industry: lawyers, accountants, auditors, secretaries, etc.
To practically support excellent legislative initiatives, we can only wish to Latvian state authorities and in particular tax administration, to fully adopt the loyal approach, so characteristic for example to Cyprus – a country where international business is one of the pillars of the economy.
It seems that this autumn we will see a surge of interest in Latvia and increased number of registered companies with foreign capital. All the more even before the introduction of the holding regime many clients from Eastern Europe, mostly from Russia and Belarus, have registered Latvian companies for trading activities with European partners.
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