One of my favorite singers, Robert Palmer, in his masterpiece album "Drive" had a line: "I got 29 ways to get to my baby's door; and if she need me bad I can find about two or three more." The same story I would say is with the comparably new tax anti-avoidance provisions effective as of June 12, 2007 's there are 29 ways to get around them. Prior to that date there was 2 percent withholding tax payable by a foreign owner (but withheld by the Latvian purchaser) selling real estate located in Latvia, payable on the whole of the sales proceeds. If the seller was not a foreign entity, but a foreign natural person the tax amounts to 25 percent on the capital gains.
Now, in addition to those rules the anti-avoidance provisions extend the application of the above withholdings also to the sale of shares in a company that in the year of sale or the previous year had more than 50 percent of its assets as real estate located in Latvia ("qualifying shares"). The idea, of course, is very good 's make everyone in the real estate market equal, otherwise non-residents selling assets are in a worse position than the ones selling qualifying shares.
However, as George Orvell said in his novel "Animal Farm," the truth is that some are still more equal than others. First of all, it is worth mentioning that still an asset deal vs. a share deal are not equal options in selling real estate because, for example, an asset sale hits 2 percent transfer stamp duty (capped at LVL 30,000), whereas a share deal does not.
Also after talking to the senior officials of the Ministry of Finance who are basically the authors of those anti-avoidance provisions I understand that they have not carefully thought about the round-abouts. Thus, for example the 2 percent withholding tax is not applicable when a non-resident sells Latvian real estate to another non-resident. Buyers therefore often create non-resident SPVs just for this very reason. Another already-seen scenario is artificially "playing" with the "50 percent real estate of all assets" qualification, for instance by decreasing the real estate ratio in all assets.
Businesses may also think about the year in which to sell the property (date of the contract matters), especially if the year changes soon. One of our clients, an American citizen (on the sell side) is now considering creating a non-resident SPV this year in order to change his tax liability from 25 percent to 2 percent. His Latvian company this year does not qualify for the tax at all (real estate 's less than 50 percent of all assets), but does qualify next year. As the deal will be made most likely only next year, creating the SPV already this year will guarantee the reduction.
Finally, there is at least some debate that some of the tax treaties Latvia has concluded (e.g., with the Netherlands) allow one to avoid application of the said 2 percent withholding tax. Thus, prior to a sale one may consider creating a Dutch company, which would not be taxable in Latvia because two non-resident entities being involved, but thereafter 's because of the tax treaty.
Janis Taukacs is a partner at Sorainen's Riga office.
