Offshore jurisdictions for years have offered attractive tax optimization possibilities for Latvian business people. In particular, the secrecy of the true identity of the owners of offshore structures has contributed to a controversial attitude towards using offshore vehicles by businesses. Thus, business people are attracted to confidentiality and tax optimization options but Latvian authorities would argue that offshore schemes are used to circumvent tax liabilities.
In this article we would like to address the issue that has been raised by many Latvian corporate clients regarding taxation: is the 15 percent withholding tax applicable when purchasing shares from offshore holding entities?
The Government of Latvia determines the list of countries that are considered to be offshore jurisdictions (approximately 70 jurisdictions are listed). If the seller is registered at an offshore jurisdiction, a major concern for Latvian businesses involved in the share purchase transaction is that under the law almost all payments made to offshore entities are subject to a corporate income tax withholding of 15 percent.
Under the law, Latvian tax authorities are entitled to waive the 15 percent withholding tax if the Latvian company that wants to make a payment to an offshore entity files an application, and is able to prove that the payment to the offshore entity is not aimed at avoiding taxes in Latvia. In fact, when purchasing shares many Latvian companies have been advised to make the aforementioned application to the Latvian tax inspection service and to invest time and significant consulting fees when doing it.
We are of the opinion that the 15 percent withholding tax is not applicable to share transactions, when both the seller and recipient are both registered in an offshore jurisdiction. In this case, the said application to the tax authorities does not need to be filed. The government regulation defines the meaning of "payment to offshore entities" as payments that decrease the taxable income of a taxpayer.
The purchases of shares under accounting standards do not decrease the taxable income of a Latvian company, it just substitutes one asset for another in the balance sheet. Therefore, payment for shares generally does not fall under the concept of payments to offshore entities that trigger the 15 percent withholding tax. Thus, there is no need to file the application with the tax authorities and request a waiver from the withholding tax.
In a recent case upon the client's request we filed an advance ruling to the Latvian tax authorities regarding the applicability of the 15 percent withholding tax in a share purchase transaction where the seller was incorporated in an offshore jurisdiction. The authorities fully supported our argumentation line.
Edgars Koskins is an assistant attorney-at-law, associate at Sorainen Law Offices in Riga