Taking counsel

  • 2005-04-27
  • By Edgars Koskins, an assistant attorney-at-law at Sorainen Law Offices in Riga
Refund of input VAT in Latvia
and other Baltic countries

The purpose of this article is to outline basic principles of and flaws committed in the process of claiming input value-added tax (VAT) refund in Latvia and other Baltic countries by enterprises incorporated in the European Union.

According to unofficial information from Latvian tax authorities, two recent tendencies in the VAT refund process in Latvia have been observed. First, there is a substantial increase in the number of submitted VAT-refund applications. Second, a significant percentage of the refund applications are rejected due to mistakes made in the applications and failure to fulfill the prerequisite requirements for a right to receive VAT refund. Sometimes in complex transactions it may be difficult for the EU enterprise to prove a connection of the goods purchased or services received in Latvia to the enterprise's business abroad.

The current VAT refund procedure in Latvia has been operating since May 1, 2004. The VAT refund for the EU enterprises in Latvia is possible if the following basic requirements are met.

1) The EU enterprise must be registered for business and VAT purposes in the territory of the EU.

2) The EU enterprise may not be involved in business activities in Latvia that would require the relevant enterprise to register its activities in Latvia, which means that the enterprise should be registered neither with the Latvian Commercial Register nor with the tax authorities as a VAT-payer.

3) The purchase of goods and/or the receipt of services has been made with the purpose of supporting its business activities in the EU member state other than Latvia.

4) The EU enterprise has filed a VAT refund application within the deadline provided by law.

In addition, the VAT-refund procedure also stipulates certain basic criteria as to the minimum refundable amount of VAT and timing of refund payments. A general deadline for the submission of the VAT refund application is six months from the end of the calendar year (June 30).

The VAT refund application is a specially designed application form. The application must be filled and submitted to the tax authority with a number of supporting documents like original VAT invoices, notice from a relevant tax authority certifying that the applicant is registered as a tax payer in another EU member state, etc.

After submission of the VAT refund application, the Latvian tax authority inspects the received information and its truthfulness. The tax authority possesses broadly defined rights to request additional information from the enterprise requesting the VAT refund. The Latvian tax authorities are required to make a decision regarding the VAT refund within three months from the day of the receipt of the VAT refund application. If the tax authority makes a positive decision, VAT is refunded within a month from the date of the decision.

If the tax authority has rejected the VAT refund application, it informs the applicant regarding its decision within 15 days from the adoption of the decision and provides grounds for the refusal.

Therefore, if the input VAT payable in Latvia is of significant concern in a business transaction, the VAT refund possibilities should be evaluated beforehand. In complex transactions where it is difficult to trace the connection of purchases that are subject to Latvian VAT to business abroad, it might be recommendable to modify business (contractual) documentation in order to meet the requirements of the input VAT refund procedure.

There are also similar VAT refund procedures in Estonia and Lithuania. Provided that the EU enterprise fulfils the requirements of the relevant VAT legislation, as a general rule it should be possible for the EU enterprise to refund the input VAT paid in all three Baltic countries.