Tax reform 2018

Amendments to 11 tax laws were adopted by the Parliament on July 28, introducing a wide tax reform in Latvia effective beginning with January 1, 2018.

Here are the most important legislative changes that will affect taxpayers from 2018.

Minimum wage

Personal Income Tax

*         The new CIT regime no longer provides the application of personal income tax (PIT) on distributed profits at the company level. There is a 2-year transitional period for the allocation of accrued profits during which the existing regime is still applicable - 10% of the PIT from the dividends to individuals, for which the CIT has already been calculated and paid in previous years. The dividends received from the foreign companies are not the subject of PIT, unless the company paying out the dividends is CIT or similar income tax payer in their country of residence.

• Maximum non-taxable income applied at the place of employment for monthly income up to EUR 440 will be increased each year: in 2018 it will be EUR 200; in 2019 - EUR 230, but in 2020 it will reach EUR 250. For the income above EUR 440, the non-taxable part of the income will be differentiated and gradually decreasing.
• Non-taxable relief for dependants will increase from EUR 175 this year to EUR 250 in 2018, EUR 270 in 2019, reaching EUR 300 in 2020.

Social contributions

Solidarity tax

The solidarity tax for income above EUR 55 000 that was introduced in 2016, will be diverted also to the pension contributions: 6% to the second pillar and 4% to the 3rd pillar of pension system.

Adopted New Corporate Income Tax Law

Effective from 2018, the new Corporate Income Tax Law introduces a new CIT regime that will radically change the calculation and payment of corporate income tax (CIT). The new CIT regime is based on the cash-flow taxation model, which provides that CIT is payable at the moment of profit distribution, unlike the current regime where the tax is assessed on the results of the taxation year.

• The main principle of the new regime - CIT is payable at the moment of profit distribution, including deemed profit distribution, as well as in other cases that are treated as profit distribution.
• Tax rate – the applicable tax rate from current 15% is increased to 20% of gross profit, i.e. by applying the proportion of 20/80, where 20 is the tax, but 80 is the distributed net profit after the tax. Thus, effective tax rate will be 25% for non-business expenses, representation costs, penalties etc. that will form the base for CIT calculation (costs divided with coefficient 0.8).
• Taxation period – under the new regime the CIT will be payable on monthly bases for profit distribution, non-business expenses or penalties, but for transfer pricing differences or thin capitalization – CIT will be payable on annual bases. The CIT tax return (declaration) shall be submitted only in case there is a CIT taxable base, in all other periods it will be deemed to be submitted as “empty”.
• The new law is applicable to residents of Latvia, as well as permanent establishments and branches of foreign companies.

The existing Law on Corporate Income Tax is applicable for the results of the taxation year 2017. Also, the monthly advance payments are still due until July 2018.

In cases the financial year does not correspond to the calendar year, a mid-term report on account balances and financial results as well as CIT return shall be submitted under the existing Law on Corporate Income Tax for taxation period that ends 31.12.2017.

Under the new CIT regime several tax reliefs are abolished, including depreciation for tax purposes, extra tax allowances for new equipment, support for research and development costs, as well tax relief for large investments.

Existing holding regime is limited with a restriction that the sale of shares will be CIT exempt only in case the period of holding the shares is not less than 3 years.

Several new Cabinet Rules are still pending including provisions on implementation of the new law; rules for reporting and information exchange on transactions with non-residents; the methods and procedures employed to determine the market price (value) of the transactions, as well as others.

Detailed information of the new CIT regime will follow.

Microenterprise tax

The amendments to the Microenterprise Tax Law provide for reduction of the turnover threshold for businesses operating under micro-enterprise tax regime from EUR 100 000 to EUR 40 000 with the tax rate of 15% from the turnover.

The maximum number of employees for such businesses is 5, with a monthly salary of EUR 720. Beginning with 2019 an individual can be employed only by one employer that operates under the micro-enterprise tax regime.

VAT

The amendments to the Value Added Tax Law provide for the reduction of the threshold for registering as a VAT payer from EUR 50 000 to EUR 40 000 to be in line with the micro-enterprise tax regime.

Additional domestic reverse charge mechanism will be applicable to the transactions with gaming consoles, metal deliveries and services related to it, as well as electric household appliances and electronical devices.

Changes have been introduced also to the Cabinet Rules No. 40 regarding the VAT declarations. Starting from the first reporting period in 2018, all the transactions above the threshold of EUR 150 have to be reported separately. Until then, the threshold is EUR 1430.

Other changes

In order to compensate the impact of tax reform on the state budget, it is planned to increase the excise tax on cigarettes, alcohol and fuel. It is intended also to raise taxes for gambling – for gaming tables, gaming machines, and to introduce a tax on online gambling.

As regards the measures for reducing the shadow economy, from 2018 the commercial banks are obliged to report on accounts of individuals with debit or credit turnover in excess of EUR 15 000 per calendar year. The first such report has to be submitted already for the year of 2017.

This newsletter only contains information on anticipated legislation. It does not reflect views of Grant Thornton Baltic and shall not be treated as an advice from Grant Thornton Baltic.

Should you have any questions concerning anticipated tax changes, please contact our tax department via e-mail: tax&legal@lv.gt.com.