There are about 370 companies with offshore investments, according to the enterprise register's database. This is only 0.4 percent out of the 160,000 enterprises registered in Latvia. However, of the 777 million lats ($1.23 billion) invested in the base capital of Latvian enterprises by foreign investors, 110 million lats are invested by offshore companies.
This situation is not unique to Latvia. According to various estimates, 60 percent of the total global investment capital is concentrated in offshores.
"Information on offshore company owners is confidential, so it is not clear whether their investments are real foreign investments or if they are reinvested by Latvian residents via offshores. It is very common that the true offshore company owners are Latvian residents or local enterprises. In some deals, both sides are even represented by the same person,"said Maris Gulbis, chief notary of the Latvian Enterprise Register.
The primary goal of using offshore companies is not just to avoid paying taxes. They are also used to cover up deals, increase costs, launder money, decrease the value of taxable goods and avoid paying debts by re-registering a company as 100 percent offshore owned.
"So such offshore investment can't be regarded as pure direct investment that promotes Latvia's economic development,"Gulbis explained.
However, the activities of offshore companies are not prohibited anywhere in the world. "Therefore it would be wrong to ban them in Latvia. Instead, new regulatory acts are needed to control them,"Gulbis said.
The main condition in achieving this goal is to make information on them more accessible. Current legislative norms say that if a foreign enterprise buys a local one, the new owner has to submit to the register only a copy of the registration document or a note from the foreign registry.
The Latvian Enterprise Register therefore has no possibility to check whether such a foreign company really exists. In some cases, the foreign company has already been liquidated, or its registration papers are counterfeited.
The availability of information is most important if a local company is 100 percent offshore owned. To prevent the registration of fictitious enterprises the register suggests that in such cases an offshore company has to submit a "certificate of good standing"every year, the proposals say.
The new commercial law adopted last November, and currently postponed until Jan. 1, 2002, will also request more information on the branches of offshore companies in Latvia. According to the new law, at least half of the board members of such companies must reside permanently in Latvia, parent companies will have to submit their annual report to a new commercial register, and the register will have to be informed of changes in the parent companies' authorized personnel in Latvia.
However, an offshore branch is an ownership form seldom used in Latvia. A simple purchase of shares is more common. "We cannot control the companies' shareholders by law, that's not real,"Kristine Riekstina, the deputy head of the Enterprise Register, told The Baltic Times.
The working group is suggesting the creation of a new register of proxies at the Enterprise Register to get more information on offshore activities in Latvia.
"Offshore investors are dealing mainly on a basis of authorization, so it would be good to know who their trustees are,"Riekstina said.
The register of proxies would help the State Revenue Service, customs, state police and border guards to get more information on trustees, prevent illegal deals using counterfeited proxies, and ensure that the individuals involved in illegal deals are held accountable and prosecuted in accordance with the law.
The existing legislation on entrepreneurship and foreign investment was adopted in the early 1990s. The tax breaks it provided for foreign investors were tempting enough to lure some local tycoons offshore. It was the Bank of Latvia who declared a crusade against the offshore shareholders of Latvian banks after the country's banking crisis in 1995.
"For us, it was important to see who was controlling the banks and to avoid fictitious investments,"said Janis Brazovskis, deputy chairman of the current regulator, the State Financial and Capital Markets Supervision Commission.
The central bank demanded that a bank's shareholders be identified if a bank wanted to increase its share capital, or if a stake owned by a shareholder increased to at least 10 percent. Brazovskis, who previously worked for the central bank, said that as a result, the number of offshore shareholders in Latvian banks has "significantly decreased."
"Mainly, these shares have been transferred to individuals who owned them before via offshores,"he said.
The largest offshore investors in Latvia come from Hong Kong with 23.8 million lats invested, the Isle of Man with 18.5 million lats, and Jersey with 16.2 million lats, the register reported.
The largest number of joint ventures with offshore capital comes from the U.S. Virgin Islands with 76 companies established in Latvia and 9 million lats invested, the Bahamas with 40 companies and 6.7 million lats, and Cyprus with 40 companies and only 2.7 million lats. Next in line is Liechtenstein with 36 companies and 6.9 million lats invested.
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