Article "New Tax Rules Approved for PEs of Companies in Tax Havens" for Tax Planning International
The Republic of Latvia is currently aspiring to combat shadow economy with enhanced law provisions. Tax evasion by permanent establishments of foreign companies established in low-tax or tax-free countries is one of the problems to be so addressed as identified in research performed by Finance Ministry of the Republic of Latvia ("Ministry"). The Parliament of the Republic of Latvia passed amendments to Law "On Taxes and Duties" in order to update tax laws in accordance with the proposals made by the Ministry. The Law now is supplemented with a new paragraph that defines the agent of the company registered or established in low-tax or tax-free countries as a tax payer for the purpose of tax laws, provided the agent is entitled and regularly exploits its authority to conclude agreements on behalf of the principal. The practical consequence of the latest amendments is that the dependent agent of the company can be directly held liable for tax payments for the income obtained in the Republic of Latvia.
The annotation of the new amendments indicate that if residents of tax havens perform business activities by exploiting permanent establishment in Latvia, there are difficulties to collect taxes on income obtained in Latvia due to the lack of cooperation with low-tax and tax-free countries or territories. Furthermore, the true owners and legal representatives are not known. In these cases, it is possible to evade taxes on income obtained in Latvia. These companies in tax havens are impossible to influence with coercive methods, they cannot be brought to administrative trial and collect taxes therefrom. These companies therefore have competitive advantage as compared to Latvian residents and non-residents of other countries, with which tax treaties are concluded.
The problematic situation is seen to be most efficiently combated by the new amendments that make more precise the existing tax regime for non-residents. Before the amendments it was considered that a non-resident (foreign merchant) has a permanent establishment in Latvia if it performs in Latvia activities listed in the Law "On Taxes and Duties". One of such activities in accordance with Law "On Taxes and Duties", Section 14 (8) 4) is: "utilisation of the activity of a natural, legal or other person for the benefit of foreign undertaking's entrepreneurial activities (commercial activities) if the person referred to has been granted and regularly exercises (more than once in a taxation period) authorisations to enter into contracts in the name of a foreign undertaking." In general, the taxation period is one year for purpose of calculating corporate income tax.
Further, the permanent establishment of a non-resident (foreign merchant) in Latvia is liable to pay taxes in accordance with the laws of the Republic of Latvia for income obtained in the Republic of Latvia, its territorial waters and air space, for income obtained in foreign states which pertains to this permanent establishment, as well as other taxes in accordance with specific tax laws. Now, in accordance with the new amendments the liability to pay taxes is transferred to the natural, legal or other person that has been granted and regularly exercises authorisations to enter into contracts in the name of a foreign undertaking registered or established in low-tax or tax-free countries or territories. Therefore, Latvian state authorities are now able to collect taxes and impose administrative liability on the authorized person directly without investing large financial and human resources in trying to cooperate with administrative institutions in the low-tax or tax-free countries with the
apparent result of tax evasion.
Valters Gencs,
Tax Attorney & Founding Partner
Gencs Valters Law Firm, Riga