Along with other changes regarding tax regulations, certain amendments with respect to Value Added Tax Law have also been adopted. These amendments will enter into force starting January 1, 2018.
One of the most significant change regarding value added tax (VAT) regulation is reduction of the registration threshold from 50 000 EUR to 40 000 EUR, which means that taxpayer will be obliged to register as a VAT payer in case the value of its taxable transactions within 12 months exceeds EUR 40 000.
Starting the next year, the range of transactions to which VAT reverse charge is applied, is expanded. According to reverse charge regime, the recipient of goods or services is responsible for the VAT payment into the budget in case the transaction is carried out between registered VAT payers. The reverse charge further will be applied also to following transactions:
· Supply of game consoles;
· Supply of metal products and related services;
· Supply of household appliances and household electronic equipment;
· Construction services and supply of construction products (building materials).
Originally, construction services which are subject to the reverse charge, were separately defined by the law, while the new amendments stipulate that construction services are any construction work, as well as all type designing under contract of construction services. Besides, supply of construction products must be understood as the supply of any product, which is provided to build into the building, as well as supply of industrially made constrictions.
The most significant amendments of the regulations of the Cabinet of Ministers No. 40 "Regulation regarding Value Added Tax Returns" were adopted with respect to a threshold of transactions to be separately declared.
By continuing to inform about tax changes in 2018, we offer to look at the most significant amendments that will affect the taxation of personal income. Although tax reform mainly focuses on corporate income tax (CIT), there are a number of changes with respect to payroll taxes. Also, such changes enter into force starting January 1, 2018.
Progressive personal income tax
The current personal income tax (PIT) on salaries at rate 23% will be replaced by progressive tax:
· 20% rate will be applied on annual income up to EUR 20 000;
· 23% rate will be applied on annual income over EUR 20 000 to EUR 55 000;
· 31,4% rate will be applied on annual income over EUR 55 000.
A progressive rate 31,4% will be applied according to summary procedures, namely, by submitting an annual income tax return.
Income from capital
The flat 20% rate is set for income from capital and capital gain. (Currently, such income as income from the sale of shares or real estate is taxed at 15% rate, while dividend income or interest income is taxed at 10%).
The procedure of declaration of income from capital has also been changed. According to the current regulation, several income thresholds are set, depending on which taxation period is determined. While starting 2018, one single threshold is set. Namely, in case income from capital gain exceeds EUR 1 000 per quarter, tax return shall be submitted by the 15th day of the month following the quarter. In case such income is less than EUR 1 000 per quarter, tax return shall be submitted by 15 January of the year following the tax year.
With respect to dividends - starting 2018 dividends will be non-taxable income provided that such dividends are taxed at the company level, namely, dividends will be PIT exempt in case one of at the following conditions is met:
· CIT is paid on such dividends in Latvia (under the new regime);
· CIT or equivalent tax is paid in other country, or PIT is withheld from the said dividends.
However, pay attention to the dividends gained by dividing the profit earned up to 31 December 2017. Namely, with respect to profit earned before 2018 the transitional rules are set – distributing such profit in 2018 and 2019 10% PIT will be applied. Accordingly, in case profit earned until December 31, 2017 will be distributed in later periods (2020 and later), the 20% PIT on such dividend income will be applied.
Starting 2018 the amount of eligible expenses regarding education, as well medical services and payments for health insurance has been changed. The amount of such expenses for a taxation year is set EUR 600 (in case individual includes expenses for family members - EUR 600 per each family member).
In addition, the limits are set on eligible expenses, such as contributions in private pension funds and payments for life insurance. Current regulation provides only 10% limit from gross salary on such expenses, while new amendments provides EUR 4 000 threshold per year.
Social security contributions and solidarity tax
Starting next year, the rates for state social insurance contributions (SSC) are increased both for employees and for employers. SSC for employees will be 11% instead of the current 10,5%, while the SSC for employers will be 24,09%, instead of 23,59%. The threshold for social contributions is set at amount EUR 55 000.
Though initially there were discussions to abolish the solidarity tax, however, in 2018, the solidarity tax is kept. It means that by reaching the threshold of SSC, future payments will be transformed into a solidarity tax, namely, income over EUR 55 000 will be taxed with solidarity tax. In addition, the solidarity tax rates will be equal to the rates of SSC – 24,09% for employer and 11% for employees.
However, please note that 10,5% of solidarity from employee’s part will be transferred to PIT, thus forming effective 31,4% PIT rate on income over EUR 55 000.
Benefits for employees
Continuing the topic about the new law on corporate income tax law, the following article describes the most specific aspects that have to be taken into account, starting the 1 January 2018 when a new law enters into force.
Accumulated tax losses
Along with the new regulation, the concept of accumulated tax will cease, namely, accumulated tax losses do not occur. However, with respect to tax losses accumulated until 2018, the 5-year transitional period is set.
It means – such losses might be usable to reduce tax payable on dividends. Tax reduction shall be calculated applying 15% tax rate on the total amount of tax losses.
However, reduction of tax of the taxation year shall not exceed 50% of tax to be paid. It means that tax losses which will remain unused after 5 years, further will be no longer usable.
According to the transitional provisions of new CIT law, profit gained until 2018 shall be distributed without application of CIT unlimited period of time.
Bad debts and accruals
According to the new CIT law, in several cases bad debts have to be included in the taxable base:
• Bad debts are written off directly to expenses;
• Debt, on which accrual is made, is not recovered within 3 years.
Besides, such rules do not apply to debts, for which tax payer has carried out all relevant activities with respect to the recovery of debts, and specific criteria are met. Criteria defined in the new law are partly kept from current regulation (Law On corporate income tax, Article 9).
Similar to the current regime, it will be allowed to use donations as tax relief. Principles of donation, as well as recipients are kept the same as in the current regulation. Besides, taxpayers will be allowed to choose the way of the application of tax relief:
Excessive interest expenses
As it is at present, new regulation defines that excessive interest expenses shall be included in taxable base. Criteria, which provides application of interest rate of the Bank of Latvia on loans received from non-financial institutions, is abolished, therefore, determining taxable base the proportion of equity and liabilities has to be taken into account.
Namely, taxable base shall be increased by interest payments proportionally excess of the average amount of the loans in the taxation year over the amount, which equals to four times of equity, which is reduced by the revaluation reserve of long-term investments.
Loans issued to related parties
The new law includes anti-avoidance rules, determining that loans issued to related parties starting the 1 January, 2018 will be treated as deemed profit distribution, which is taxable. Such rules do not refer to loans issued until the end of 2017. As well, such provision does not apply to following loans, which are issued starting the 2018:
a. Loans issued to subsidiaries;
b. Loans are issued in the amount that is received from unrelated parties;
c. Loans issued in the taxation year, if there are no retained earnings from previous periods on the balance sheet at the beginning of taxation year;
d. Loans issued in the volume, which does not exceed the amount of equity at the beginning of the year reduced by amount of loans issued in previous years and which are not repaid;
e. Term of the loan is less than 12 months.
Consequently, loan, which do not comply with some of the criteria above, has to be included in taxable base. However, in case the loan will be repaid in further periods, the taxpayer will be entitled to reduce the taxable base by amount of repaid loan.
Income from sale of shares
Since there is a “holding regime” in Latvia, income from sale of shares is tax exempt. However, according to new regulation such income will be tax exempt only in case at the moment of alienation the holding period of such shares will be not less 36 months. Income from sale of shares of companies registered in blacklisted jurisdiction will be taxable regardless of the holding term.
Income from dividends and dividend pay outs
Since at the end of spring the Government approved the guidelines of Tax reform, the one of the most discussed topic was a new regime of corporate income tax (CIT) in Latvia starting the 1 January 2018. Considering that new so-called Estonian model completely differs from the current regime, active work on the development of the new draft law began.
During development of the draft law, the regulation was amended several times, thus raising lots of questions and worries among the entrepreneurs, as initially it was provided that several positions like tax depreciation, tax losses and holding regime will be abolished.
Despite that within the new law several positions will be abolished, the final version of draft law contained more favorable regulatory comparing to the initial version.
At the end of July, the draft law of Corporate income tax law was approved by Parliament, but at the beginning of August President announced new Corporate income tax law, which enters into force starting 1 January 2018.
The first part of the article describes the general principles of new regulation, as well as procedures to determine tax to be paid.