Author: Ina Spridzane, Tax Manager, “Orients Audit & Finance” SIA
The Ministry of Finance has prepared a draft for amendments of the Law on corporate income tax for Latvia (CIT) which have been intended for credit institutions and consumer lending service providers.
Most countries use so – called standard CIT system where the tax is paid on a company’s taxable income, which includes revenue which is reduced for qualifying expenses, for instance, cost of goods sold, general and administrative expenses, selling and marketing, research and development, depreciation, and other operating costs. Thus, the taxpayers pay CIT in the period when the profit was gained.
The system which was introduced in Latvia in 2018 is different the taxation of the profit is postponed until the profit is distributed as dividends or deemed to be distributed. There is no tax if the profit is not distributed at all, for instance, it was invested in the development of the business activities.
Profit distributions includes dividends (including interim dividends), payments equal to dividends (i.e., profit share-outs by cooperative societies) deemed dividends (i.e., the reduced amount of share capital that has been previously increased using part of earnings being added to share capital), non-business expenses, non-qualifying bad debts, excess interest payments, transfer pricing adjustments and other items specified by the Law.
The draft amendments of CIT Law propose to change CIT regime for credit institutions and consumer credit service providers, on the basis that these two categories of taxpayers have been making extra profits, without taking additional risks, as a result of increase interest rates by the European Central Bank. At the same time, the increase of profits does not guarantee an increase of CIT payments to the state budget, if the taxpayers decide do not distribute the profit.
According to the draft, from January 1, 2024, the aforementioned taxpayers will have to pay CIT on the profit made in the previous financial year, regardless of whether or not the profit is distributed as dividends, applying a tax rate of 20%. If the profit of the previous year will be fully or partially distributed as dividends, the tax calculated on the dividends can be reduced by the previously paid tax calculated based on the profit of the previous financial year. CIT calculated on other tax objects (except for dividends, deemed dividends and conditional dividends) cannot be used to reduce this tax liability.
The consumer credit service providers have to submit the tax calculation together with the previous year’s annual report no later than April 1 of the tax year.
The draft law still needs to be reviewed and approved by the Parlament.
About the Author: Ina has 30 years of experience in taxation. Ina has extensive experience in the application of indirect taxes (VAT, excise tax, etc.), as well is she is also knowledgeable in the application of direct taxes. Ina is a certified tax consultant and one of the Latvian Tax Consultants Association (LNKA) founders. She is the author of many publications on tax topics. Ina holds two master’s degrees in economics and business management.
Know more about the author: https://www.linkedin.com/in/ina-spridzane-04839176/?originalSubdomain=lv
Email: [email protected]
See Firm Profile: https://www.integra-international.net/find-an-integra-firm/find-firm-profile/name/sia-orients-audit-finance/
