Will a foreign corporate investor in the Baltic states have a better tax situation after May 1, 2004?
The concept of a "tax situation" is a very broad one. To narrow the question a bit, one can look at the rules governing dividends from the Baltic states to the investor abroad.
The EU rules concerning taxation of dividends from a subsidiary in a member state to a parent company in another member state is found in the so-called parent subsidiary directive. The purpose of the directive is to eliminate the situation in which dividends are subject to taxation in several countries. The main rule states that the parent company should at least own 25 percent of the share capital of the subsidiary. However, the states are free to agree that the ownership requirement shall be based on voting rights instead. Member states may also decide that ownership should be kept during a minimum period of two years.
The directive also has rules prohibiting withholding tax on dividends. The state of the subsidiary is, according to the main rule, prohibited to impose any withholding taxes. From 2005, 20 percent ownership will be enough to prohibit the withholding tax. The percentage will be reduced gradually until it finally reaches 10 percent in 2009.
Estonia does not impose any withholding tax from May 1 on dividends if the parent company has at least 20 percent of the capital in the Estonian subsidiary. There is no minimum time in which the capital must have been held. It is irrelevant whether the parent company is situated within or outside the EU. It must, however, be a legal entity. Moreover, there are special rules governing payments and dividends to so called offshore territories.
In those cases when the 20 percent ownership requirement is not fulfilled, a withholding tax of 26 percent will be imposed. The tax rate may, however, be reduced in a tax treaty between Estonia and the country of the parent company. The reduction will be applicable, for example, when the ownership requirement is not fulfilled. A tax treaty may then state that the maximum withholding tax cannot be higher than 15 percent, regardless of ownership.
Latvia has implemented the directive rules as of May 1. Thus there is no withholding tax if the parent company within the EU holds at least 25 percent of the share capital in the Latvian subsidiary for at least two years. As of Jan. 1, 2005, the requirement will be reduced to 20 percent. If the requirement of the two-year minimum holding period is not fulfilled, one may submit a bank guarantee to the State Revenue Service of 10 percent of the dividends gross amount to avoid withholding tax.
If the requirements are not met, or a guarantee is not submitted, Latvia will impose 10 percent in withholding tax, if not a tax treaty stipulates otherwise. For example, a tax treaty may state that there will be a withholding tax of 5 percent if the parent company holds 25 percent of the capital in the Latvian company. Thus if the capital requirement is fulfilled but not the minimum two-year period, the withholding tax will be 5 percent.
Lithuania does not impose any withholding tax on dividends to parent companies abroad under the following conditions: The parent company must have held more than 10 percent of the voting rights during an uninterrupted period of 12 months; the receiving company cannot be a so-called offshore company; the Lithuanian company must also be liable to the normal corporate income tax rate of 15 percent or 13 percent, otherwise there will be a withholding tax imposed according to internal rules or according to the relevant tax treaty.
The internal withholding tax rate is 15 percent, but a tax treaty may also state that the withholding tax will be 15 percent if the parent company's voting rights are less than 25 percent and will be reduced to 5 percent if the receiving company owns at least 25 percent of the voting rights. Thus, if ownership is 25 percent but the requirement of interrupted ownership is not fulfilled, the withholding tax will be 5 percent.
Christian Axelsson ,
Rodl & Partner, Stockholm