Latvia is signatory to a number of treaties to avoid double taxation in both Latvia and the other treaty country, of income earned in Latvia by a tax resident of the other country. On March 9, 2007 amendments to the regulations controlling the application of these treaties introduced changes as to how foreign taxpayers can prove their right not to be double taxed. The amendments also introduce a new procedure applicable to treaty-country tax residents who have commenced business activities in Latvia but because of the applicable treaty consider they will not have to register a Permanent Establish-ment (PE) in Latvia that will be subject to Latvian income tax.
The reduced rates of tax or tax exemptions provided by a treaty can only be applied if foreigners prove they are tax residents of a treaty country. The reduced taxes payable under these treaties are withheld from the (Latvian-source) income paid by the Latvian payer to the foreign taxpayer.
The March 9 amendments provide that Latvian tax authorities can enter into agreements with tax authorities of other treaty counties for the acceptance in Latvia of tax residence certificates or similar documents in the format prepared by those authorities. The changes also provide for the introduction of a certificate form that will be issued by Latvian taxation authorities to other treaty country authorities confirming a Latvian corporation or individual's Latvian tax resident status.
Whereas Latvian tax law may categorize the activities of a foreign entity within Latvia as requiring it to register a PE and pay Latvian income tax, a foreign entity that is a tax resident of a treaty country may be able to avoid registration in Latvia because the applicable treaty defines the Latvian activities as not constituting a PE subject to Latvian taxation. Treaty provisions have precedence over the local law.
The amended regulations now require a foreign entity commencing activities in Latvia and who because of the application of the applicable Treaty considers the activities do not require it to register a PE, to make an application to the Latvian taxation authorities for confirmation that it need not register a PE. The application must be made within 10 days of commencing activities in Latvia and requires the provision of information that will allow Latvian taxation authorities to determine if a PE need not be registered because the activities comply with the treaty.
There is no apparent requirement that treaty country entities currently operating under the assumption they do not have a PE in Latvia must also apply for confirmation. It is considered that this will not be a straightforward exercise for Latvian authorities as the determination of whether a PE exists under a Double Taxation Treaty is a very complex matter.
Uve Zosars is an Australian attorney at law and CPA at Sorainen Law Offices in Riga