Latvia – new offshore in Europe

Latvia has become more attractive for international business and capital during past few years. In December 2011 Latvian Parliament adopted amendments to the Law on Enterprise Income Tax effective in 2013 due to which, starting January 2013 new opportunities of using Latvian companies in international investment activity will become available. The amendments have remained practically unnoticed by the general public, but has brought rather revolutionary breakthrough in the liberalization of the tax legislation of Latvia.

In January 2013 Latvia will start to introduce a favourable tax regime for international holding companies. This will bring the country into the club of such low-tax regimes like Cyprus, Malta, Netherlands and Luxembourg. This change is essential to CIS and mostly Russian businessmen who will be the first to benefit from these new opportunities.

Latvia quite soon will become comparable to such traditional centres of global investment activity as Cyprus, Malta, Netherlands, Luxembourg as starting 2013 and partly into 2014 comprehensive favourable holding regime will become effective in Latvia. Some of its features exist now, in particular tax exemption for some dividends received and payable.

Moreover income of Latvian companies from sale of shares and all dividends received will be exempted from tax starting from 2013 and the dividends payable to other countries will be exempted from withholding tax. Furthermore interests and royalties paid to foreign countries will not be subject to withholding tax starting from 2014.

European countries with favourable conditions for international holding establishment, such as Cyprus, Malta, Netherlands, Austria, Denmark, Switzerland, Sweden, impose restrictions on participating interest (generally required at least 10%), holding period (not less than a year), nature of business of a subsidiary (should be trading activities) and the taxation level in the country of a subsidiary while Latvian holding regime does not have any additional requirements, the only restriction being the holding regime does not apply to income received from and payable to tax-free countries included in the so-called “black list” – Panama, Belize, British Virgin Islands, the Bahamas and other classic offshore jurisdictions.

Latvia has effective agreements with 51 country including almost all Europe and CIS countries such as Belarus, Ukraine, Kazakhstan, Uzbekistan, Azerbaijan as wells as USA, Canada, China. Agreement with Russia shall be ratified by the Duma of the Russian Federation until the end of this year and will come into force in 2013.

Regardless it’s many advantages it is understandable that Latvia may not be able to compete with historical holding jurisdictions as Netherlands, Luxembourg, Switzerland with their reputation and decades of stable and unchanged legislation, but it sure can become competition for Malta who clearly loses in the eastern front, Cyprus who does not have effective double tax agreement with any CIS country and Estonia with no tax conventions with Russia and Uzbekistan and capital gains from sale of shares at the moment of distribution to the shareholders being taxed by Estonia. Terms of taxation in all mentioned countries are comparable. Besides the company registration procedure in Latvia is simple with no requirement of personal presence of shareholders, costs of administration significantly lower than in Switzerland, Luxembourg and Denmark.

Strongest competitor in the low-tax area for Latvia is and will be Cyprus, but Latvia is more attractive for setting up of real business due to their many advantages such as geographical location, close distance from Russia and to other CIS countries, centre of transportation between CIS and EU, competitive and comparatively stable banking system offering various products and services for non-resident clients, high-standard living conditions, skilled Russian and English speaking labour force, availability of European funds for setting up and development of production and services business, access to residence permits for investors, one of the lowest rates of corporate tax in Europe and simple VAT registration process.