Corporate income tax (CIT) in 2018. Latvia
Corporate income tax

 

We provide a brief review of the new CIT calculation model. From 01.01.2018, the reinvested profit model will be introduced in CIT calculation, meaning that the tax will be payable only if the company pays dividends or makes other payments related to profit distribution.

From 2018, the CIT rate will be 20% from the calculated CIT base – the amount, which should be divided by a coefficient of 0.8 before the application of the rate.

 

 

Example 1

Example 2

Example 3

Profit:

100 EUR

100 EUR

100 EUR

Decided to pay in dividends:

50 EUR

80 EUR

100 EUR

Calculation:

50/0.8 x 20% CIT

80/0.8 x 20% CIT

100/0.8 x 20% CIT

CIT:

12.5 EUR

20 EUR

25 EUR

Total payments:

62.5 EUR

100 EUR

125 EUR*

 

 

 

* paying 100 EUR in dividends out of 100 EUR of profit, the company should reconsider the cash flows, as the total expenditures exceed the profit.

The new CIT calculation model provides for the tax payment in a particular month, when a CIT taxable base is formed (for instance, dividend payments or conditionally distributed profit). The calculations will be included in monthly payments, not the annual financial results.

 

 

CIT should be calculated and paid:

- For distribution of profit:

  • dividends, extraordinary dividends, payments equal to dividends;
  • conditional dividends;

- For conditionally distributed profit:

  • expenses not related to economic activities;
  • loans to related persons;
  • increased interest payments;
  • doubtful debts;
  • liquidation quotas.

 

Dividends

Dividends are taxed with CIT at a company level (20% gross). Dividends received by natural persons will not be taxed with personal income tax.
Dividends will not be taxed with CIT, if :

  • a taxpayer has received the dividends from a foreign company, which is a taxpayer in its country of origin (except dividends received from low- or no-tax countries and territories);
  • CIT on the received dividends has been withheld in the country of origin.

 Payments equal to dividends are:

  • payouts of cooperative company's profit to company members based on the used amount of cooperative company services;
  • undistributed profits of an individual company (as well as farm or fishery) from the financial year and preceding years;
  • a partnership's profit share payouts except the payouts of a profit share by an alternative investment fund established as a partnership;
  • payments of permanent establishments of non-resident companies to a non-resident, if these payments are not considered as non-resident's costs necessary for economic activity of permanent establishments.

 

 Conditional dividends

Conditional dividends – a profit share (a profit share of undistributed profit from this financial year and preceding financial years, including the share, for which a reserve has been established) by which the amount or number of invested shares of a company's or a permanent establishment shareholder's fixed capital or equal capital is increased.

Conditional dividends are included in the taxable base in the tax period, when a taxpayer:

  • reduces the amount of fixed capital;
  • concludes liquidation;
  • is registered as a micro-company taxpayer.

 

Conditionally distributed profit

Expenses not related to economic activities

When identifying expenses not related to economic activities, they are assessed not only according to their legal form, but also according to the economic substance of the transaction. Expenses not related to economic activity include all the expenses, which are not directly related to economic activity of a company:

  • employees' recreational, entertainment events, which are not subject to payroll taxes;
  • reduction of turnover or taxable base on the company's or owner's own initiative;
  • gifts, credits and borrowings in form of gifts;
  • donations (for the exceptions, see below);
  • costs of acquisition and maintenance of assets, which are acquired after 01.01.2018, not related to economic activity;
  • depreciation expenses, impairment expenses and expenses for maintenance of assets acquired before 31.12.2017 and not related to economic activities;
  • representation expenses and employee motivation events, which exceed 5% of total sum of gross salary in the preceding financial year;
  • expenses related to a representative car (representative car – above 50 000 EUR);
  • amounts spent on fines, contractual penalties and penalties;
  • expenses for excess fuel consumption.

 

Loans to the related persons

A loan issued to a related person is considered as a distribution of conditional profit and is subjected to CIT.

This condition is not applicable to the following loans:

  • loans issued by the owner to subsidiary companies;
  • loans issued by the company to its permanent establishment;
  • loans issued for a period not exceeding 12 months;
  • issued loans, the sum of which does not exceed the sum of loans received from related persons;
  • loans issued during the financial year, if at the beginning of that year there was no undistributed profit from the preceding financial years in the balance;
  • issued loans, the sum of which at the beginning of the year does not exceed the fixed capital, from which the total loan sum issued in preceding financial years and unrecovered is deducted.

In tax period, the base applicable with CIT is reduced by the recovered loan sum, if the loan sum in any of pre-tax periods was included in the CIT taxable base or the loan was subject to personal income tax.

 

Doubtful debts

CIT is applicable to the amount of the doubtful debt that:

  • is established as a loan loss provision and the debt has not been recovered within 36 months from the day of the loan loss provision establishment;
  • is included in the losses/ expenditures (if prior to that, the loan loss provision has not been established for the relevant loan).

The company is entitled to reduce the base applicable with CIT by the recovered debt amount that in preceding periods was included in the CIT taxable base.

 

Donations

The company will be able to donate choosing one of three options:

  • Reducing the taxable profit by the donated amount, but not more than 5% of profit received in the preceding reporting period after taxes;
  • Reducing the taxable profit by the donated amount, which does not exceed 2% of the total gross salary paid in the reporting period after deduction of the state mandatory social insurance contributions;
  • Reducing the tax on dividends by 75% of the donated amount, but not more than 20% of the calculated dividend tax amount.

 

 

For more information, please contact Eurocollegia office!

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