3 june 2019
Changes in application of tax on dividends introduced by the tax reform in Latvia in 2018 had an impact on the residents from its neighboring countries that conduct business in Latvia.
A citizen of the Republic of Belarus (50%) and a Belarusian legal entity (50%) are the founders of a Latvian company on the general taxation system.
The Latvia company distributes dividends, 20 000 Euro, 10 000 Euro for each.
What tax will be paid in Latvia?
What amount will pay the Belarusian individual and Belarusian legal entity taking into account the Convention for the Avoidance of Double Taxation?
In accordance with the new provisions of the Corporate Income Tax Law (the Law) from 01.01.2018 the corporate income tax (CIT) is payable only when a company pays dividends or makes other payments considered as actual profit distribution. Effective CIT rate from gross profit is 20%. Since the tax is calculated from net amount of the respective payments, in order to calculate CIT to be paid to the budget, the net amount of payable dividends or other payments of actual profit distribution shall be multiplied by 25%.
Important! CIT is not a dividend withholding tax.
Thus, when distributing profit in the form of dividends the Latvian company shall pay CIT regardless of whether a beneficiary of dividends is an individual or legal entity. If the founder wishes to receive net 10 000 Euro, the tax will be 10 000 *25/100 = 2 500 Euro.
As of right now it is supposed that in this case the tax paid in Latvia will not be credited on the ground of the Convention between the Republic of Latvia and the Republic of Belarus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. The matter is that from 2018 in Latvia calculated dividends form the tax base for corporate income tax charged on companies – residents of Latvia, and the object of taxation is company profit.
In the Republic of Belarus the object of taxation are dividends, which will be included in the tax base for income tax of an individual – resident of Belarus or income tax of an entity – resident of Belarus receiving this type of income from Latvia.
In accordance with Article 187 of the Tax Code of the Republic of Belarus profit (income) tax amounts actually paid (withheld) under the laws of a foreign state in relation to the income received in this foreign state, are credited by a Belarusian company when paying profit tax in Belarus in accordance with the procedure and in the amount provided for by this Article. The similar norms are provided for by part 1 clause 1 Article 224 of the Tax Code in relation to individual income tax.
Therefore, taxes in Belarus and Latvia are paid on different types of income, which is the cause to refuse to credit the tax paid in Latvia.
Having regard to the above, if it is found impossible to apply the provisions about avoidance of double taxation, in the Republic of Belarus the owner will additionally pay 12% (a legal entity) and 13% (an individual).
Therefore, taking into account the tax in Latvia, the total tax burden when distributing profit will be:
The owner – legal entity: 10 000 Euro * 37 % = 3 700 Euro.
The owner – individual: 10 000 Euro * 38 % = 3 800 Euro
Prepared on 28/05/2019
The Head of Tax Department of audit firm UHY BusinessCollegia LLC
Tax advisor Yuriy Kardymon firstname.lastname@example.org