Persons residing in the country are entitled to relief from double taxes and attractive tax treaties. Foreign tax payable on income in the tax base may be taken as a credit against Personal Income Tax based on proof of income earned and income tax paid as approved by the foreign tax authorities. A tax credit cannot exceed the Latvian tax subject to income earned abroad. Following national legislation, PIT does not apply to employment income made and taxed in other EU/EEA countries or a county with a double tax treaty with the republic.
If you are a business owner interested in learning about taxes in the country and how it applies to your business, or you are simply interested in knowing about double tax treaties in the republic, this article provides detailed information on tax relief and tax treaties taxable entities and individuals may benefit from.
Foreign Tax Credit (FTC)
This is imposed by income tax systems on global income earned by residents to avoid double taxation or in cases where the income has been taxed already. The excess amounts of income tax are usually not refunded. There are 64 countries with double tax agreements with the republic. The treaties usually apply to income tax and withholding tax. Companies from countries with no tax treaty agreement have to pay when doing business within the territory.
Ways of preventing double taxation
As income and profit incurred are subject to taxes, all countries have methods of ensuring taxable persons avoid double taxation. There are three common ways of avoiding paying double taxes:
- Treaty tax relief
- Deducting foreign tax from EU tax (a taxable entity can remove foreign tax from income tax)
- Relief by deduction (a taxable person can remove foreign tax as an expense)
Double tax treaties
The republic has double tax arrangements with over 60 nations and is expanding. Countries with double tax treaties include Albania, Slovenia, Belarus, China, Croatia, Estonia, Georgia, Hungary, Korea, Macedonia, Portugal, Malta, Moldova, Morocco, Netherlands, Norway, Poland, Portugal, Romania, Singapore, Slovakia, Spain, Sweden, Switzerland, Tajikistan, Turkey, Ukraine, United Kingdom, U.S., etc.
Double tax treaties are agreements that remove the double taxation of capital and income in a country of residence and the republic. For the countries listed above, double taxes can be prevented through credit, when the income is taxed, but a credit is received, or through exemption, when the income is taxed in the country of residence only. The treaty agreement must be approved by the ministry of finance and afterward, published in the Latvian Gazette. The provisions of the tax treaties related to corporate tax for corporate bodies with subsidiaries in the country. The standard company tax of 15% or 7% may be credited or avoided. Other laws lower or exempt withholding taxes on royalties, dividends, and interests payable to foreign firms. A treaty country’s tax is 0-15%.
Significance of tax treaties
Tax treaties are negotiated to safeguard not just the interests of taxable individuals but also those of the state. It is required for the continued growth of businesses overseas, the promotion of international cooperation, and the successful combating of tax evasion. Moreover, it is a prerequisite for achieving these goals. Rules concerning the active and passive income of taxable citizens, concerns about investments, double taxation prevention provisions, tax rate provisions, and a variety of other provisions are included in the country’s double tax agreements (DTA). Recently, it signed and approved the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting. This convention aims to prevent base erosion and profit shifting through tax treaty-related measures (MLI). On February 1, 2020, the Multilateral Convention officially began to function as intended.
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