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Recent amendments to the Latvian CIT Law will have an impact on foreign real estate investors

2020-02-10

On 30 January 2020 the Latvian Parliament adopted amendments to the CIT Law. The amendments have not been promulgated and, therefore, the exact wording of the adopted amendments is not available yet. The amendments will come into force on the next day after their promulgation, which most likely will happen already this month.

Withholding tax from rent payments to corporate non-residents

By the amendments withholding tax from rent payments to corporate non-residents is re-introduced. Withholding tax from rent payments to corporate non-residents was abolished as of 1 January 2018 when the new CIT regime was introduced. After the amendments will come into force the rent payments to corporate non-residents for the real estate located in Latvia will be subject to withholding tax of 5%. Corporate non-residents being EU residents and residents of the countries with whom Latvia has effective tax treaty may afterwards ask recalculation of the tax at the rate of 20% from the gain taking into account expenses related to such rent income.

Distribution of profit from sale of shares in real estate companies will be taxed

Currently profit from the sale of shares (except shares in companies of low-tax or no tax-jurisdictions) held for 3 years can be distributed in dividends to corporate shareholders without paying CIT.

According to the amendments this exemption will not be applicable to the profit from the sale of shares in real estate companies (company with more than 50% of its assets in the year of the transaction or a year before consisting of Latvian real estate), except publicly circulated shares.

This may have an impact on many investors that acquired real estate in Latvia and used Latvian holding companies for the management of real estate companies. Exit scenarios planned before the amendments might be insufficient to prevent unnecessary tax leakages.