Latvia tax update. December

Just before the year ends I’d like to start a new tradition of summarising the main tax news related to Latvia and our thoughts about it, as has been reported in much more detail in Latvian. So, feel free to forward this to your Latvian-speaking CEOs, CFOs and bookkeepers.

First of all, our Tax Stories podcast has been getting a wider audience worldwide, across all continents, as you can see in the picture below. I’ve heard that many listen to the podcast not only because it’s light on tax matters, but also because it is about the life stories of our guests as human beings, their thoughts and feelings, and their leadership and business development principles. For example, in the latest (20th) episode I have a chat with Edward and Theo, from Kenya and Ghana respectively. They are both partners at the leading tax consulting firms in their countries, and both are also members of the WTS Global tax network, which covers the whole of Africa. In the episode we also cover literature, how the coffin dance originated in Ghana, happiness and motivation, how they both are giving back to their communities, and, of course, the tax incentives to invest there. Why not give it a try while taking a walk over the holidays? By the way, Spotify has introduced the option to rate your favourite podcasts.

In the tax news for December we have four sections – changes in the laws, case law, our comments and comments from the tax authorities.

The main news came yesterday when the Latvian edition of the news was released: the OECD has finally published more details of its so-called Pillar 2 project, which is best known for the plan to set a minimum global corporate tax rate of 15% if a group’s global turnover reaches EUR 750 million. The details of this extensive document are yet to be analysed. However, this leaves a big question mark over the future of the current corporate tax model in Latvia and Estonia over the next 4–5 years. It does not make sense for the Latvian government to keep a system where tax on Latvian-sourced profits is paid to other countries (in the group’s HQ country), when it could have been taxed in Latvia. This kind of situation may be a common one when profits are earned in Latvia but tax is not paid because there is no profit distribution.

Other highlights from the news are as follows:

• Draft corporate tax law amendments trigger bad debts and thin capitalisation rules.
• There is a new EU directive (there are 18 months for it to be implemented) requiring country-by-country reports (for groups with a turnover above EUR 750m) to be made publicly available.
• As of 1 January 2022, stamp duty for registering a title to real estate with the Land Books will be capped at EUR 50,000.
• The social security system for self-employed persons will stay as it is now, and this will continue beyond 2023 (it was in the law that as of 2023 they would be subject to the top social security rates, as is the case for those receiving employment income currently). Furthermore, the system for those receiving author’s fees will not change in 2022: they will not need to be registered as self-employed.
• I was invited as an expert by the Constitutional Court to give an opinion on whether it is acceptable that the self-employed are only able to deduct 80% of their business costs. Of course, I think it’s not, but the question is not black and white. The verdict will be given in January.
• The top non-taxable amount will be increased to EUR 350 a month until 1 July 2022, and to EUR 500 a month thereafter.
• For 2022 Latvia will retain the option for employers to compensate employees up to EUR 30 a month (tax-free) in out-of-pocket expenses for remote work. As has been the case so far, there will be no need to prove the actual expenses, but the employer will need to state the proportion of office work and remote work.
• On 1st January 2022 VAT on books, news websites, etc will be reduced from 12% to 5%, and on e-books from 21% to 5%.
• There will be no VAT applied on rental payments where the ‘marriage’ has been enforced by the law – the land and the building(s) on it belong to different owners.
• The excise tax on soft drinks containing sugar has been increased.
• A two-year transitional period started in December 2021, during which information exchange within the Latvian justice system (between courts, prosecutors, enforcement and parties to the case, etc) moves to complete e-file.
• The EU VAT directive has been amended with an updated list of coins that can be considered investment gold.
• When I scroll through the latest court practice, there are two cases that might be especially relevant for businesses.
  • o First, a court surprisingly confirmed that input VAT paid for services related to an acquisition of shares is deductible, if assets of the purchased companies were later merged with the buying company.
  • o Second, it is obvious that lately the tax authorities have been considering much more whether transfers of business have in fact occurred and so whether the new company should be liable for the tax debts of the old business. Moreover, it seems strange and unfair that the new company (or an existing one) has only seven days to contest a decision by the tax authorities to claim the debt from the successor and thus review whether the transfer has occurred. The review will happen in just one court instance.
  • o Even more aggressively, in a case of a failed business I’ve seen board members convicted in a criminal case and this confirmed by the courts of all instances. It makes me raise an eyebrow that an ordinary business risk cannot be extended to the board – this certainly deserves to be reviewed by the constitutional court.
• Compilations of court practice on inheritance cases and on administrative procedure issues have been released by the Supreme Court (both compilations include tax cases).