Latvia
Why running your business through a Latvian company is so advantageous?
Latvia is along with Estonia and Lithuania one of the three so-called "Baltic Republics". The country has a low population density which is distributed over an area as wide as Northern Italy, it has just under two million inhabitants concentrated mainly in the capital Riga which is the main logistics and airport hub of the all three Baltic Republics. Latvia has been a member of the European Union since 2004, a member of the Eurozone since 2014 and an OECD member since 2016.
Strengths of the Country are first of all the low cost of skilled labor force mainly thanks to a high quality level of both school and university and professional training. In recent years, the Latvian government has made important investments in the field of high technology, placing it among the most technologically advanced countries in Europe, moreover, many bureaucratic obstacles of the past have been eliminated while the times of civil justice have been reduced in order to attract foreign investments and to make it one most "business friendly" countries of the world.
Enterprise Income Tax (EIT)
Latvian enterprise income tax (EIT) law provides for tax exemption of reinvested profits and the taxation of corporate profits only when they are distributed, this method is called of the “remittance-basis” (or cash-based taxation). In other words, corporate tax is not due anymore on profits as they arise, instead a tax exemption is applied on all reinvested earnings and tax is payable only when the company declares their dividends or when they make other payments equivalent to dividends or when they distributes their earnings in other forms like fringe benefits. Both natural and legal persons who receive such dividends are exempted from Latvian income tax and no withholding tax on distribution is applied either, it follows that corporate profits in Latvia do not suffer any economic double taxation as they are taxed only once at the level of the first entity generating them. For the purposes of Double Tax Treaties, even if the profits are taxable only at the time of distribution, the Latvian EIT is regarded among the Member States of the European Union not as a withholding tax on dividends, but as a real corporate income tax and this is valid also for the purpose of the application of the EU Parent-Subsidiary Directive.
The effective corporate tax rate on distributed profits is 25%
The Enterprise income tax (EIT) is applied on profits only at the time of their distribution. As long as the Latvian company retains them corporate profits are not included into the taxable base for EIT purposes.
The main advantage of cash (or deferral) tax system lays in the possibility to defer the payment of EIT on corporate profits by retaining them or alternatively by reivesting them also in the acquisition of shareholding in other companies both in Latvia and abroad. Also dividends received by individuals both resident and non-resident of Latvia are exempt from tax. The EU principle of free movement of capital together with the principle of "non-discrimination" provides that all shareholders are treated equally, therefore the dividends that Latvian residents receive from foreign companies are also exempt from tax provided that the profits have been taxed in the source country; this condition is commonly called the “subject-to-tax test. This provision represent a significant incentive for foreign investors considering bringing their tax residence to Latvia in order to obtain tax savings on their investments since they pay no tax on dividends they receive from any other foreign country therefore Latvia is a country where it is possible to be shielded from taxation on profits repatriated from foreign investments.
Income from the alienation of stock of shareholding is exempted from capital gains tax where it is held for at least three years
Latvian holding company regime
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Latvian system of tax deferral applies not only to "active income" (income generated by the performance of a commercial activity), but also to "passive income" as income from interest, royalties and distributions from resident and foreign (not black-listed) entities. Dividends distributed to natural persons are exempt from Latvian EIT as they are subject to taxation only at the company level even if these dividends come from another entity, including a foreign one (excluded from "Black List" countries) provided that it has already included those profits in the taxable base tax in the Source Country (subject-to-tax test). The system of exemption from corporate income tax (EIT) of dividends distributed by other subsidiaries takes the name of "flow-through dividends". In order to benefit from the regime, it is required that the profits from which these dividends are generated have been subject to tax at the level of the foreign distributing company in the country of residence or that these dividends have been paid by another Latvian company and that the distributing company does not has undergone recent changes in its corporate structure. Another advantage of the Latvian systems is that, just like the Estonian law, the Latvian law does not provide any withholding tax on interest payments made by the company to other resident and non-resident companies or to non-resident natural persons.
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Latvia
Corporate Income Tax
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