TALKING TAX: Playing 'catch me if you can' blindly

  • 2007-08-08
  • by Edgars Koskins [Sorainen Law Offices]
We often see in our practice that a considerable number of foreign businesses operating in Latvia keep following the guideline of the famous Steven Spielberg movie 's "Catch Me If You Can." However, unlike the movie scenario, with its skills detective and wily forger, in real life businesses are often not quite aware that they do not follow the tax rules and the local tax authorities are still slow in identifying potential tax evaders.
By saying this, we mean that quite often we encounter foreign business structures that successfully operate on the local market but do not pay proper regard to income taxes. Usually it happens in two ways: 1) a foreign company either incorporates a representative office or 2) employs or contracts people who help develop local business without real consideration of what is and isn't allowed as regards income taxes in Latvia. The good news is, however, that we still do not see meaningful efforts from tax authorities to identify unregistered business structures and impose income taxes on them.

In brief, the rules you need to know are quite simple. First, if a foreign company conducts part or all of its business in Latvia, especially via management or an office, then it is very likely that the business should pay the Latvian corporate income tax (CIT). In technical terms, this means it is likely that the activities of the foreign company constitute a permanent establishment (PE) in Latvia.
Second, if a foreign company is using a person as a dependent agent to conclude contracts in the name of the company, then it is likely that the time to pay CIT has come since it might be possible to conclude that the foreign company has a PE in Latvia.

For example, pure marketing or market research activities should not be treated as commercial activities and do not warrant a PE in Latvia. However, if interested customers in Latvia approach a representative office of a foreign company and order certain products for a certain price, then it is very likely such activities will be treated as business activities requiring CIT on profits generated. Contracts should also be understood as a process where the dependent agent (e.g., foreign company's employee) is in a position to present to and negotiate with Latvian customers basic terms of contracts, which are then sent for "rubber stamping" to a foreign company.

If there is a likelihood that a PE is warranted then usually there are three possible structures that can be established in Latvia to enable the foreign business to pay CIT in Latvia: subsidiary, branch and permanent establishment (in its essence a permanent establishment is a branch that is not registered with the Latvian commercial register).

Edgars Koskins, senior associate at Sorainen Law Offices in Riga
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